Salvador Gil-Pareja, Ph.D1, Rafael Llorca-Vivero, Ph.D.1, and Jose A. Martinez-Serrano, Ph.D2. (1) Departamento de Estructura Economica, Universidad de Valencia, Universidad de Valencia, Av. de los Naranjos s/n, Valencia, 46022, Spain, (2) Departmento de Estructura Economica, Universidad de Valencia, Universidad de Valencia, Av. de los Naranjos s/n, Valencia, 46022, Spain
The specialised literature calls preferential trade agreements (PTAs) that are drawn along continental lines natural, to distinguish them from intercontinental PTAS, which are called unnatural. The central statement of the hypothesis of "natural" trading partners is that to the extent that trade follows the natural lines dictated by proximity the formation of regional trading blocs is good. Such natural blocs are contrasted with unnatural blocs, PTAs between countries on different continents, which are less likely to be welfare improving. The goal of this paper is to determine the effect on trade of natural and unnatural PTAs. To this end, using the gravity equation we estimate trade creation and trade diversion effects of both kinds of PTAs on a sample of 182 countries over the period 1990-2006. The results indicate that natural FTAs are welfare superior to unnatural FTAs.