Chapter 5: Trade Blocs as Determinants of Trade Flows in South American Countries: An Augmented Gravity Model Approach

This paper contains an empirical analysis on the determinants of trade flows in South America through the estimation of an augmented Gravity Model. Using data for countries belonging to the MERCOSUR and the Andean Community (CAN) this research attempts to test the hypotheses of the augmented Gravity Model with regards to trade flows. A panel data analysis provides empirical evidence that weakens some hypotheses of the Gravity Model. The econometric results suggest that the factors that influence the most the flows of trade are geographic factors, followed by income. For the MERCOSUR countries, there is an increase in the trade flows and trade volume. These findings are in line with the importance of this Customs Union in the intra-regional level. However, for the case of the CAN countries, though there is an increase in the total trade flows, it is mainly an increase in the trade flows at the inter-regional level, pointing out to the fact that there is little evidence for a significant effect in the intra-regional trade of this Preferential Agreement.