Transaction costs and trade liberalization: An empirical perspective from the MERCOSUR agreement

Studies investigating the effect of trade liberalization policies on transaction costs in agricultural markets are scarce. The objective of our paper is to determine whether Brazil became more integrated with reduced transaction costs after the introduction of MERCOSUR with respect to its main agricultural trade partners, Argentina (a MERCOSUR member) and the United States (a non-MERCOSUR member).Using a threshold vector error correction model (TVECM), we estimate the transaction cost, price transmission elasticity and half-life adjustments for the most traded agricultural products between Brazil/Argentina and Brazil/United States from January 1980 to December 2012. Our findings suggest a strong MERCOSUR effect, with lower transaction costs and higher price transmission elasticity when compared to a non-agreement scenario. Moreover, the variations of both parameters are highly heterogeneous across products, depending mainly on their degree of differentiation. From a policy perspective, elements such as the sources of comparative and competitive advantages together with investment policies, specific market regulations and agricultural subsidies, among others, are mainly what influence the extent of transaction cost and market integration. Our results show that Brazil has made progress but still has considerable room for improvement in reducing barriers to agricultural products and, as a consequence, to achieving the full benefits of the MERCOSUR agreement.