Do Free Trade Agreements Affect Tariffs of Nonmember Countries? A Theoretical and Empirical Investigation

Abstract

In this paper, we investigate both theoretically and empirically the e¤ects of free trade agreements (FTAs) on the tari¤s of non-member countries. Our theoretical framework draws on the comparative advantage based trade model of Horn, Maggi, and Staiger (2010). In this model, since marginal costs of production are increasing with output, if a few countries form an FTA and start trading more with each other, they simultaneously become less willing to export to rest of the world-a phenomenon we call external trade diversion. Such diversion reduces the ability and the incentive of non-member countries to manipulate their terms of trade, a mechanism that induces them to lower their tari¤s on FTA members. We provide an empirical con…rmation of this insight using industrylevel bilateral trade data for 192 importing and 253 exporting countries, along with the information on all FTAs formed in the world during 1989-2011. Our analysis provides a rather convincing veri…cation of the terms of trade theory since the formation of an FTA between a few countries can be reasonably interpreted as an exogenous event from the perspective of the rest of the world.

Skills, population aging, and the pattern of international trade

“…The measures of intensity in age‐dependent cognitive skills and physical ability at the industry level, as well as the intensities in capital and skilled labor, are obtained from Cai and Stoyanov (2016). All geographic variables are from the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII), and information on the presence of a free trade agreement or a customs union between each country‐pair is from Saggi, Yildiz, and Stoyanov (2018).…”

Determinants of global coffee trade: Do RTAs matter? Gravity model analysis

“…As pointed out by Nsabimana and TafesseTirkaso (2019), the traditional gravity modeling approach associates trade flow to different economic indicators and distances such as the national income of trading countries and the physical distances between the trading countries. Meanwhile, recent studies have rigorously expanded the model by incorporating other economically meaningful variables such as potential markets (proxy for population size), trading barriers, country integration, community membership and other sets of dummies representing shared cultural and historical characteristics (see, Melitz 2003;Martínez-Zarzoso 2013;Dal Bianco et al, 2015;Saggi et al, 2018).…”

Essays on the interaction between multilateral tariff bindings and the formation of preferential trade agreements

“…If two countries form a CU, they remove tariffs on each other and impose jointly optimal external tariffs (denoted by t u i and t u j ) on the non-member country. 13 The 12 See Missios et al (2016) and Saggi et al (2018) for details of tariff setting behaviour in a competing importers model. 13 Our simple formulation of a CU's tariff choice problem is intuitively appealing and in line with much of existing literature.…”

“…Ultimately, multilateralism acts as a stumbling bloc to 5 Bagwell et al (2016) made an excellent survey of economic literature addressing various trade agreements (including WTO and PTAs) and their relative role in trade liberalization from the "terms-of-trade" theory perspective. 6 Prominent examples in this strand of literature include papers by Krugman (1991), Bhagwati (1991), Yi (1996), Bagwell and Staiger (1997a, 1997b, 2005a, 2005b, Krishna (1998), Riezamn (1999), Bond et al (2004), Goyal and Joshi (2006), Furusawa and Konishi (2007), Aghion et al (2007), Missios et al (2016), Ornelas (2005Ornelas ( , 2007, Saggi (2006), Saggi andYildiz (2010, 2011), Saggi et al (2013Saggi et al ( , 2018, Stoyanov and Yildiz (2015) and Lake (2017).…”