Working Paper: CEPR ID: DP4973
Authors: Baybars Karacaovali; Nuno Limo
Abstract: There has been an explosion in the number of preferential trade agreements (PTAs) in the last decade. PTAs are characterized by liberalization with respect to only a few partners and thus, they can potentially clash with and retard multilateral trade liberalization (MTL). Despite this important concern with PTAs, there is almost no systematic evidence on whether they actually affect MTL or not. We model the effect of PTAs on MTL and show that PTAs slow down MTL unless they have a common external tariff and allow for internal transfers. Next, we use detailed data on product-level tariffs negotiated by the European Union in the last two multilateral trade rounds to structurally estimate our model. We confirm the main prediction ? the European Union's PTAs have clashed with its MTL ? and find that the effect is quantitatively significant. Moreover, we also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of MTL in the European Union.
Keywords: MFN; tariff concessions; multilateral trade negotiations; preferential trade agreements
JEL Codes: D78; F13; F14; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PTAs (J44) | MTL (Y60) |
| PTAs (without common external tariff and internal transfers) (F29) | MTL (Y60) |
| EU reduced multilateral tariffs on goods not imported under PTAs (F13) | EU reduced multilateral tariffs on PTA goods (F13) |
| PTAs (for goods exported by all of the EU's PTA partners) (F10) | Stumbling block effect (C92) |
| Positive preferential tariff or common external tariff and transfers (F16) | No stumbling block effect (Y70) |