Tariff Adjustments in Preferential Trade Agreements (original) (raw)
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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...
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.
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...
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.
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.
Optimal tariffs of preferential trade agreements and the tariff complementarity effect
Indian Growth and Development Review, 2009
Purpose -The purpose of this paper is to evaluate and contrast the welfare e¤ects of free trade agreements (FTAs) and customs unions (CUs) on member and non-member countries when tari¤s of both members and non-members are endogenously determined. It also aims to provide su¢ cient conditions under which both types of preferential trade agreement (PTA) are likely to lower tari¤s on non-members relative to that under MFN.
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 AGREEMENTS AND MULTILATERAL TARIFF COOPERATION*
International Economic Review, 2006
Are preferential trade agreements (PTAs) building or stumbling blocks for multilateral trade liberalization? I address this question in an infinitely repeated tariff game between three countries engaged in intraindustry trade under oligopoly. The central result is that when countries are symmetric, a free trade agreement (FTA) undermines multilateral tariff cooperation by adversely affecting the cooperation incentive of the nonmember whereas a customs union (CU) does so via its effect on the cooperation incentives of members. However, when countries are asymmetric with respect to either market size or cost, there exist circumstances where PTAs facilitate multilateral tariff cooperation. *
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.