Will the Real "Natural Trading Partner" Please Stand Up?

Abstract

Adherents to the ``natural trading partner'' hypothesis argue that forming a PTA is more likely to raise welfare if member countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare is likely to be higher if member countries trade less with each other. This paper shows that neither analysis is correct and that the ``natural trading partner'' hypothesis can be rescued if it is redefined in terms of complementarity or substitutability rather than in terms of volume of trade.