We investigate the effects of trade policy uncertainty on the entry decisions of exporters into Arab League markets.Using a product-level dataset on World Trade Organization members exporting to Arab League countries for the years 1998-2015, we provide empirical evidence that trade policy uncertainty, a result of significant gaps between tariff bindings and applied tariffs ("tariff water"), led to the reduced entry of exporters into Arab League markets. We then extend our analysis to investigate the effects of policy uncertainty combined with additional uncertainty related to falling incomes associated with the 2007-2010 worldwide economic downturn. Our results suggest that this macroeconomic shock contributed to a considerably more uncertain economic environment, thereby affecting the decision to enter these markets. We also analyze exporters' decisions to enter new markets, while controlling for the level of market power displayed by the Arab League importing country.We find empirical evidence confirming that the effects of uncertainty on entry magnify in the presence of high levels of market power.

Our paper examines the effects of various features of the Arab League's trade policy (different preferential trade agreements, presence of tariff water, and market power) on the multilateral tariffs applied by its member countries. To carry out our study, we collected product‐level data from 1998 to 2015 with information on applied most‐favoured nations (MFN) tariffs, preferential tariffs, bound tariffs, import trade values, and market power for eleven members of the Arab League countries. Overall, our results suggest that preferential agreements have a building block effect on multilateral tariffs because Arab League members tend to lower their applied MFN tariffs as they grant enhanced preferential access to their partners. Moreover, we find that forming a customs union (CU) among Arab League members led to a lower degree of external trade liberalisation than forming a free trade area (FTA). Importantly, we find that a high degree of importer market power strengthens the building block effect of forming preferential trade agreements.