Shifting Armington trade preferences: A re-examination of the Mercosur-EU negotiations

This paper examines the 'small share' problem inherent within the constant elasticity of substitution Armington specification. As a de facto research tool in the quantitative trade literature, this structural bias plagues the results of numerous multi-region CGE studies. Kuiper and van Tongeren (2006) proposed a fusion of gravity and CGE specifications to remedy said bias, which the current paper further develops. With a pervasiveness of 'small-share' examples on Mercosur-European Union trade owing to the latter's restrictive tariff regime, the results reveal that significant additional trade led gains to Mercosur under a potential preferential trade agreement when compared with the standard Armington treatment.