North-South technology diffusion, regional integration, and the dynamics of the “natural trading partners” hypothesis

Based on static analysis, a number of studies argue that forming a regional trade agreement (RTA) is more likely to raise welfare if member countries are ?natural trading partners,? while other studies claim the opposite. This paper considers the argument from a dynamic viewpoint by examining the impact of trade with Japan, North America and the EU on technology diffusion and total factor productivity (TFP) in Jordan, Korea and Mexico. Using industry-level data, we show that: i) technology diffusion and productivity gains tend to be regional: Jordan, Korea, and Mexico tend to benefit mainly from trade with the EU, Japan, and North America respectively; and ii) the dynamic version of the ?natural trading partners? hypothesis seems to hold. JEL Classification: F02, F13, F15, F43, O39