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Transportation infrastructure investments and regional trade liberalization

Author

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  • Bond,Eric W.
Abstract
The author examines whether trade liberalization should create a greater incentive for countries to invest in transportation infrastructure. He pays special attention to the case of preferential trade liberalization between neighboring countries, where investments in roads or railroads are specific to the partner country and will thus have spillover effects. The existence of spillovers will lead to gains from cooperative agreements about investment levels. The author shows that in a small country the incentive to invest in infrastructure depends on the level of the tariff when demand is linear. If protection is in the form of a quota, on the other hand, trade liberalization will increase the optimal infrastructure investment. He shows that in a two-country model with spillovers between countries, the cooperative equilibrium may involve either more or less investment than the noncooperative equilibrium, depending on the pattern of trade between the two countries and the degree of substitutability between investments in the two countries. For a relatively small country, for example, there would be more underinvestment in railroad and highway infrastructure to neighboring countries than there would be in airport and harbor infrastructure. The first type of investment is specific to certain markets and is likely to affect the relative price of goods in those markets. The second type of investment, on the other hand, will send goods to world markets generally, where prices are likely to be relatively unaffected by the investments. The author examines the desirability of linking regional trade and infrastructure agreements. The prediction generated by his model is that in the absence of cooperative agreements between countries, there will be underinvestment in those forms of transportation in which the investments will have spillover effects to other countries. The author identifies two forms of gains from infrastructure agreements: internalizing the terms-of-trade effects and thus avoiding the inefficient investment levels that arise in noncooperative choices of investment levels; and internalizing the effects of the infrastructure investment in the tariff negotiations process, in cases where countries cannot commit to future tariff rates.

Suggested Citation

  • Bond,Eric W., 1997. "Transportation infrastructure investments and regional trade liberalization," Policy Research Working Paper Series 1851, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1851
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    References listed on IDEAS

    as
    1. Panagariya, A., 1997. "Preferential trading and the myth of natural trading partners," Japan and the World Economy, Elsevier, vol. 9(4), pages 471-489, December.
    2. Bond, Eric W. & Syropoulos, Constantinos & Winters, L. Alan, 2001. "Deepening of regional integration and multilateral trade agreements," Journal of International Economics, Elsevier, vol. 53(2), pages 335-361, April.
    3. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    4. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
    5. Wonnacott, Paul & Wonnacott, Ronald, 1981. "Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs," American Economic Review, American Economic Association, vol. 71(4), pages 704-714, September.
    6. Winters, L. Alan & Amjadi, Azita, 1999. "Transport Costs and “Natural” Integration in Mercosur," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 497-521.
    7. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, vol. 87(3), pages 400-420, June.
    8. repec:bla:econom:v:61:y:1994:i:243:p:319-29 is not listed on IDEAS
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    Cited by:

    1. L. Alan Winters, 2000. "Regionalism and Multilateralism in the Twenty-First Century," IDB Publications (Working Papers) 8749, Inter-American Development Bank.
    2. Spiros Bougheas & Panicos Demetriades & Edgar Morgenroth, 2003. "International aspects of public infrastructure investment," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 884-910, November.

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