Preferential Trade Agreements

Abstract

A large and growing number of countries participate in multiple preferential trade agreements (PTAs), which increasingly entail broad cooperation over policies extending far beyond trade barriers. I review the traditional and non-traditional motives for PTAs and their empirical determinants as well as their impacts on trade and on multilateral liberalization. I argue that the broad nature of modern PTAs, their substantial creation of bilateral trade and their modest effects on members' tariffs, require us to augment the economic and policy structure of traditional models of PTAs as a static preferential tariff reduction. Throughout I draw lessons from the existing literature and point towards many interesting paths for future research, to advance our understanding of the causes of modern PTAs and their impacts on trade related outcomes and beyond. Nuno Limão Department of Economics University of Maryland 3105 Tydings HallCollege Park, MD 20742 and NBER limao@econ.umd.edu A data appendix is available at http://www.nber.org/data-appendix/w22138 A Online data and programs is available at http://terpconnect.umd.edu/~limao/handbook_pta 1 IntroductionIn 2010 the number of preferential trade agreements (PTAs) in force was four times higher than in 1990. The participation in PTAs is widespread: in 2010 each member of the World Trade Organization also participated in an average of 13 PTAs, up from only 2 in 1990 (WTO, 2011). This trend, the negotiation of mega-agreements by the U.S. and Europe and the evidence discussed below, indicate that PTAs are the most important source of trade policy reform in the last 20 years for most countries.In figure 1 we see that the proliferation of PTAs has continued after the creation of the World Trade Organization (WTO) in a period when non-preferential MFN tariffs were declining. Some of the largest growth has occurred in the last five years even though average MFN tariffs are at their lowest, averaging less than 8% in 2009. The traditional Vinerian view of PTAs, and most of the economic analysis, treats them as a static reduction in tariffs with respect to a preferential partner. But if the initial tariffs are already low then so is the preferential tariff margin, which raises two basic questions. What explains the formation and proliferation of so many PTAs and what are their basic trade and welfare effects on members? Figure 1: Preferential and Multilateral LiberalizationTo answer these two questions I first provide some stylized facts about the importance and evolution of trade between PTA members. Their share of world trade almost tripled between 1965-2010, with "deeper" PTAs becoming increasingly more important. A detailed examination of the provisions of modern PTAs in 2011 reveals policy cooperation far beyond reductions in applied tariffs. I provide a taxonomy of PTAs in terms of policy depth and breadth, where the latter includes economic and noneconomic provisions. Some of these provisions also evolved over time in the context of the GATT/WTO and others go far beyon...

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