Free trade and transportation infrastructure in Brazil: Towards an integrated approach

modeling the welfare gains associated with the development of free trade agreements, little attention has been paid to the mechanism by which the projected increased flows of goods and services will be moved between the countries. For the most part, the models have implicitly assumed an acceptable transportation infrastructure with enough capacity to absorb increased demand on the highway systems. However, in developing economies, these assumptions are less tenable; in the euphoria surrounding the creation of MERCOSUL, the free trade agreement between Brazil, Argentina, Paraguay and Uruguay, the promise of enhanced trade was not measured against some fundamental realities. For example, it was noted that three-quarters of all terrestrial trade between Brazil and Argentina (with some additional trade with Chile) uses a single bridge across the Uruguay River (The Economist 1996). In fact there are only two other bridges linking these two countries; obviously, increased trade will face significant transportation and transfer costs, and these have not been prominent features of most general equilibrium models that have explored MERCOSUL to date.