REGIONALISM AS INDUSTRIAL POLICY IN DEVELOPING COUNTRIES THE CASE OF MERCOSUR # Pedro Moncarz † Marcelo Olarreaga ‡ Marcel Vaillant § September 2009 Work in progress (do not quote without permission) This paper empirically explores whether trade preferences can be used as a substitute for industrial policy and help countries achieve their industrialization objectives, at the expense of other regional members. It illustrates the heterogeneity that may exist in terms of reaching industrialization objectives with the help of preferential trade between small and large members of these agreements. Results show that MERCOSUR preferences obtained by Brazilian exporters have led to an increase in exports of relatively sophisticated products where Brazil does not enjoys a global comparative advantage. Smaller members of MERCOSUR also exports to the region products in which they have strong comparative advantages and relatively low level of sophistication. Thus, MERCOSUR contributes to large members, in particular Brazil and to a less extent Argentina, to achieve their industrialization objective. JEL classification numbers: F10, F11, F13 Keywords: Preferential trade agreements, industrial policy, Brazil. # We are grateful to the UNCTAD Virtual Institute's joint research project on regional integration and cooperation in Latin America for their support. † Facultad de Ciencias Económicas, Universidad Nacional de Córdoba, Córdoba, Argentina, Av. Valparaiso s/n. CP 5000. Tel. (+54)351-4437300. e-mail: pedro.moncarz@gmail.com . ‡ University of Geneva, 40 bd Pont d'Arve, 1211 Geneva 4, Switzerland, and CEPR, London, UK; Tel. (+41-22)379-8286; e-mail: marcelo.olarreaga@unige.ch § Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República, Montevideo, Uruguay; Tel. (+598-2)410-6449 int 678; e-mail: marcel@decon.edu.uy