Proliferation of Preferential Trade Agreements: Quantifying its Welfare Impact and Preference Erosion (original) (raw)

Understanding the Welfare Implications of Preferential Trade Agreementsa

2016

Abstract: This paper examines various implications of Preferential Trade Agreements (PTAs), namely Customs Unions (CUs) and Free Trade Areas (FTAs), in the context of a multi-country general equilibrium model based on comparative advantage considerations. We calibrate the model to represent countries with symmetric endowments, and compare the impact of those agreements with free trade and a non-cooperative Nash equilibria. Utilizing aggregate and dis ggregate welfare change measures, we quantify the welfare effects of trade arrangements. In particular, we develop a numerical approximation procedure to decompose the welfare changes into two components associated with the variations in terms of trade and volume of trade. The results of our analysis indicate that FTAs r bet er than CUs on welfare grounds for the world as a whole since both member and nonmember economies enjoy welfare benefits in an FTA. Further, we show that, for certain endowment distributions, upon formation of an FT...

Understanding the Welfare Implications of Preferential Trade Agreements

Review of International Economics, 2000

This paper examines various implications of preferential trade agreements, namely customs unions and free trade areas, in the context of a multicountry general equilibrium model. The model is calibrated to represent countries with symmetric endowments, and aggregate and disaggregate welfare change measures are used to quantify the welfare effects of preferential trade agreements. It is found that free trade areas are better than customs unions on welfare grounds for the world as a whole. Welfare decompositions suggest that a significant fraction of the welfare changes is explained by the volume-of-trade effect for both types of preferential trade agreements.

Proliferation of preferential trade agreements: an empirical analysis

RePEc: Research Papers in Economics, 2010

The creation of a preferential trade area (PTA) or the deepening of an existing one can affect adversely excluded countries and induce them to join or create a new PTA (Baldwin, 1993). One such adverse effect is trade diversion, the shift of imports from countries outside the preferential trade area toward member countries. This paper investigates empirically whether countries whose exports are more likely to suffer from trade diversion exhibit a higher likelihood of forming a PTA. I derive a measure of the potential of trade diversion from the trade complementarity index of Michaely (1962) and estimate a dynamic probit model of new PTAs formed between 1961 and 2005. The results show that countries facing a larger potential of trade diversion are more likely to form a PTA in the future. The results also support the natural trading partner hypothesis according to which preferential trade agreements are more likely to be formed among countries that are predisposed to trade a lot.

On the Trade and Price Effects of Preferential Trade Agreements

2013

In this paper we extend recent work using the Gravity Model to estimate the trade and price effects of Preferential Trading Agreements (PTAs), by explicitly taking into account the extent of the preferential access being provided by the importer. This involves specifying a trade model, deriving appropriate PTA variables, appending them to a gravity-type equation and estimating it. We find that relying on the estimated coefficient on a PTA dummy variable overestimates the trade creating effects of PTAs. We also use average tariff and estimated trade cost data to calculate the effects of the PTAs in force in 2006 on trade flows. We show that ignoring the general equilibrium effects of PTA membership greatly distorts the distribution of outcomes.

Preferential Trade Liberalization: The Traditional Theory and New Developments

Journal of Economic Literature, 2000

This paper begins by systematically developing the “static” theory of preferential trade areas (PTAs) and showing that neither a large volume of initial intra-union trade nor geographical proximity can serve as a guide to welfare enhancing PTAs. The paper then discusses the modern literature addressing welfare effects of simultaneous division of the world into many PTAs, the impact of the decision to form a PTA on external tariffs and the “dynamic” time-path question of whether PTAs are building blocks or stumbling blocks towards multilateral freeing of trade. A final section discusses key theoretical considerations in the empirical evaluation of PTAs.

Trade effects of continental and intercontinental preferential trade agreements

… de Trabajo FUNCAS, 2009

The specialised literature calls preferential trade agreements (PTAs) that are drawn along continental lines natural, to distinguish them from intercontinental PTAs, which are called unnatural. The central statement of the hypothesis of "natural" trading partners is that to the extent that trade follows the natural lines dictated by proximity the formation of regional trading blocs is good. Such natural blocs are contrasted with unnatural blocs, PTAs between countries on different continents, which are less likely to be welfare improving through their impact on trade. The goal of this paper is to determine the effect on trade of continental and intercontinental PTAs. To this end, using the gravity equation we estimate trade creation and trade diversion effects of both kinds of PTAs on a sample of 182 countries over the period 1980-2007. The results indicate that trade creation forces prevail over trade diverting ones in continental PTAs whereas this is not the case for intercontinental preferential agreements.

A Structural Model for Evaluating the Sector-specific Impacts of Preferential Trade Agreements

Journal of Industry, Competition and Trade, 2008

This paper develops and estimates a structural model of imperfect competition in international markets. The model incorporates a flexible non-linear demand framework with structural price equations. A general Conjectural Variation approach is developed to characterize strategic interaction. This allows the simultaneous evaluation of the sectorspecific terms of trade effects of a Preferential Trade Agreement (PTA), and the extent of international competition in the sector under consideration. The model is then used to evaluate the impact of the Lebanese-Egyptian PTA on the iron and steel import sector in Lebanon. Results confirm the need for a structural approach in the empirical assessment of PTAs.