Geography, Policy, or Productivity? Regional Trade in five South American Countries, 1910-1950

Regional trade in South America since independence has long been much smaller than would be expected if geography were the only constraint on trade. Several potential explanations exist: low technological and demand complementarities; low productivity; high barriers to trade. We first argue that none of these are mutually exclusive and different explanations may be valid at different times. Whatever the causes of low trade, such limits to market access likely hampered economic growth in the region. To address this issue, policy makers have long advocated a South American/Southern Cone Free Trade Area--proposed as early as 1889. Would reductions in trade costs have been sufficient to significantly raise trade? We study bilateral trade between 1910 and 1950, when large external shocks altered global supply and demand. These shocks help us identify the determinants of low intra-regional trade. We find evidence that both low productivity and high trade barriers decreased trade. South American regional trade might have expanded with less restrictive trade policy or improved productivity. Regional trade in textiles, which took off from the 1930s, supports our argument that trade improved when relative productivity and quality improved and when trade costs fell.