Preferential Trading Arrangement: Endogenous Response of the Excluded Country (original) (raw)
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Preferential Trade Agreements: Endogenous Response of the Third Country
2004
In most of the current debate on regionalism versus multilateralism, the countries excluded from a Preferential Trading Agreement (PTA) are assumed to be passive players with exogenously fixed trade policies. In reality however, non−members do react to the creation of a trading bloc and relaxing this assumption can provide useful insights. Using a political economy model, this paper explore the case where those excluded countries can adjust their commercial policies in order to minimize the negative effects of the PTA. It is shown that the creation of a PTA can lead the excluded countries to increase their trade barriers with respect to the PTA members.
Preferential Trade Agreements and Rules of the Multilateral Trading System
2017
Preferential trade agreement (PTA) members have to eliminate internal tariffs with each other but are allowed to discriminate against non-members. This can be in potential conflict with the WTO's overall non-discrimination clause. Using a competing exporters model of endogenous trade agreement formation, we study the central rules that govern PTAs. We find that the free trade agreements' (FTAs) requirement to eliminate internal tariffs increases total welfare when circumstances are such that global free trade is infeasible. However, it also reduces the likelihood of reaching global free trade. We also find that the MFN constraint does not just contribute to the achievement of global free trade but also delivers a welfare-superior outcome when global free trade is not possible. Finally, we show that the MFN constraint complements the PTA rules in achieving global free trade for only FTAs but not customs unions (CUs). However, when global free trade is infeasible, the MFN cons...
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.
External trade diversion, exclusion incentives and the nature of preferential trade agreements
Journal of International Economics, 2016
We examine whether the pursuit of free trade agreements (FTAs) a¤ects the prospects of global free trade di¤erently than the pursuit of Customs Unions (CUs). Our analysis is driven by a fundamental di¤erence between these two types of preferential trade agreements (PTAs): while CU members impose jointly optimal common tari¤s on non-members, members of an FTA adopt individually optimal external tar-i¤s. This implies that (a) FTAs are relatively more ‡exible than CUs since an FTA member is free to undertake further trade liberalization with respect to non-members whereas a CU member can do so only if all CU members wish to do the same and (b) coordination during tari¤ setting allows CU members to pool their market power. In our comparative advantage based three country framework, the formation of either type of PTA induces the non-member to lower its external tari¤s due to the reduction in the volume of exports ‡owing from members to the non-member (we call this external trade diversion). While the pursuit of CUs prevents free trade from emerging in equilibrium, the pursuit of FTAs does not. This key result is driven by the relative ‡exibility of FTAs; the higher market power of CUs by itself does not undermine the objective of reaching global free trade. Even if CUs are prohibited from raising their tari¤s above pre-existing levels, free trade still fails to obtain if the pursuit of PTAs takes the form of CUs.
Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?
Regionalism in Trade Policy, 1999
The focus of our paper will be on Article XXIV-sanctioned PTAs, rather than on every kind of preferential arrangement among any subset of WTO members. PTAs, often grouped together into a single category, actually fall into three different WTO categories: Article XXIV arrangements involving FTAs and CUs, Enabling Clause arrangements limited to developing countries and permitting partial preferences, and Generalized System of Preferences (GSP) arrangements permitted via a grant of an exception to Article I. The appendix to this chapter provides a complete list of PTAs reported to WTO to date according to the WTO category within which they fall. 2 The reasons why these did not succeed are discussed in Bhagwati (1991). 3 These different approaches, as also the later new approaches to the static theory of preferential trading areas such as by Kemp and Wan (1976) and by Brecher and Bhagwati (1981), have been distinguished and discussed in the graduate textbook by Bhagwati and Srinivasan (1983). The Cooper-Massell-Johnson-Bhagwati argument has also been formalized recently, using the Kemp-Wan approach and combining it with the theory of non-economic objectives, by Krishna and Bhagwati (1994). 1/2/77 Article XXIV Interim Cooperation Agreement between che. European Communities and the Arab Republic of Egypt EEC-EOYPT INTERIM AGREEMENT" OF 1977" 1/7/77 Article XXIV Agreement between the European Economic Community and Jordan • EMC-JORDAN INTERIM AGREEMENT OF 1977 1/7/77 ArtteUXXXV Agreement between the European Economic Community snd Lebanon E£C-LEBANON INTERIM 1/7/77 Article XXIV AGREEMENT OF 1977 Agreement between the European Economic Community and Syria AGREEMENT OF 1977 1/7/77 Article XXIV Agreement bccw««a che Republic of Finlind spd th«
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.
American Economic Journal: Microeconomics, 2013
This paper analyzes a game of trade policy (called Bilateralism) between three countries in which each country chooses whether to liberalize trade preferentially in the form of a Customs Union (CU), multilaterally, or not at all. We also analyze a restricted version of this game (called Multilateralism) under which countries do not have the option to form CUs. The analysis sheds light on the relationship between multilateral and preferential trade liberalization as sanctioned by GATT Article XXIV. We …nd that when countries have symmetric endowments, global free trade can be achieved without permitting CUs. Allowing for asymmetry, we isolate circumstances where Article XXIV helps further the cause of multilateral liberalization as well as when it does not. Furthermore, we show that Article XXIV's stipulation -that countries forming a CU not raise tari¤s on outsiders -fails to make multilateral liberalization any more attractive to countries. However, such a tari¤ restriction does lower the adverse impact of a CU on the non-member. . Parts of this paper were written during my visit to the Stanford Center for International Development (SCID), Stanford University, Palo Alto, CA. I am grateful to SCID researchers and its administrative sta¤ for providing me with an excellent research environment.
The Three Faces of Trade Liberalization: Unilateral, Preferential, and Multilateral
There is a growing number of studies that investigate the effect of trade liberalization on productivity and nearly all assume that trade policy is independently determined of productivity, hence it is exogenous. I show that this assumption is generally invalid both theoretically and empirically. In Chapter 1, I demonstrate that under a standard political economy model of trade protection, productivity directly influences tariffs. Moreover, this productivity-tariff relationship partly determines the extent of liberalization across sectors even in the presence of a large exogenous unilateral liberalization shock that affects all sectors. In Chapter 2, I examine total factor productivity (TFP) estimates obtained at the firm level for Colombia between 1983 and 1998 and find that more productive sectors receive more protection within this period. In estimating the effect of productivity on tariffs, I control for the endogeneity of the inverse import penetration to import demand elasticity ratio and productivity. Finally, I use a system of equations to illustrate that the positive impact of liberalization on productivity grows somewhat stronger when corrected for the endogeneity bias.