Maurice Schiff , joint with Won Chang Market Presence , Contestability , and the Terms - of - Trade Effects of Regional Integraion

How firms react to a given shock depends on whether rivals are present and potential entrants to that market exist (i.e., whether the market is contestable). This paper attempts to measure these effects in an international context by examining the price behavior of US exporters in Brazil's market when MERCOSUR and MFN trade liberalization take place. Using very detailed panel data on trade and tariff rates, we find that both the preferred supplier's market presence and threat of entry lower (raise) the US price reaction to MFN (preferential) trade liberalization. Moreover, the quantitative effects of market presence and threat of entry are not significantly different from each other. It follows from these results that presence in, or threat of entry into, partners' markets implies lower optimal MFN tariffs, and regional agreements can have pro-competitive effects in contestable markets. The " symmetry " hypothesis between the effect of tariffs and exchange rates is examined as well. and participants at the April 2000 Yale University " Leitner Conference on Political and Economic Aspects of Regional Integration " and at a World Bank seminar for their useful comments. The views expressed in this paper are those of the authors and should not be attributed to their respective institutions.