Regionalism as Industrial Policy: Evidence from MERCOSUR

This paper empirically explores whether trade preferences can be used as a substitute for industrial policy and help countries achieve their industrialization objectives at the expense of other regional members. Results show that Mercado Comun del Sur (MERCOSUR) preferences obtained by Brazilian exporters have led to an increase in exports of relatively sophisticated products in which Brazil does not enjoy a global comparative advantage. On the contrary, smaller members of MERCOSUR export to the region products in which they have strong comparative advantages and with relatively low levels of sophistication. This suggests that MERCOSUR has helped Brazil achieve its industrialization objectives, but has not contributed to the industrialization of its smaller members.