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Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?

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  • NUNO LIMAO

Abstract

In many preferential trade agreements (PTAs), countries exchange not only reductions in trade barriers but also cooperation in non-trade issues such as labour and environmental standards, intellectual property, etc. We provide a model of PTAs motivated by cooperation in non-trade issues and analyse its implications for global free trade and welfare. We find that such PTAs increase the cost of multilateral tariff reductions and thus cause a stumbling block to global free trade. This occurs because multilateral tariff reductions decrease the threat that can be used in PTAs and thus the surplus that can be extracted from them. By explicitly modelling the interaction between preferential and multilateral negotiations, we derive a testable prediction and provide novel econometric evidence that supports the model's key prediction. The welfare analysis shows that the current World Trade Organization rules allowing this type of PTAs may be optimal for economically large countries, thus the model can predict the rules we observe. We also analyse alternative rules that constitute a Pareto improvement. Copyright 2007 The Review of Economic Studies Limited.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 74 (2007)
Issue (Month): 3 (07)
Pages: 821-855

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Handle: RePEc:bla:restud:v:74:y:2007:i:3:p:821-855

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  1. Madanmohan Ghosh & Carlo Perroni & John Whalley, 1998. "The Value of MFN Treatment," NBER Working Papers 6461, National Bureau of Economic Research, Inc.
  2. Horn, Henrik & Mavroidis, Petros C, 2001. "Economic and Legal Aspects of the Most Favoured Nation Clause," CEPR Discussion Papers 2859, C.E.P.R. Discussion Papers.
  3. Bond, Eric W & Syropoulos, Costas & Winters, L. Alan, 1996. "Deepening of Regional Integration and Multilateral Trade Agreements," CEPR Discussion Papers 1317, C.E.P.R. Discussion Papers.
  4. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
  5. Carlo Perroni & John Whalley, 1994. "The New Regionalism: Trade Liberalization or Insurance?," NBER Working Papers 4626, National Bureau of Economic Research, Inc.
  6. Fernandez, Raquel & Portes, Jonathan, 1998. "Returns to Regionalism: An Analysis of Nontraditional Gains from Regional Trade Agreements," World Bank Economic Review, World Bank Group, vol. 12(2), pages 197-220, May.
  7. Lisandro Abrego & Carlo Perroni & John Whalley & Randall M. Wigle, 1997. "Trade and Environment: Bargaining Outcomes from Linked Negotiations," NBER Working Papers 6216, National Bureau of Economic Research, Inc.
  8. Cebi, Pinar & Ludema, Rodney, 2002. "The Rise and Fall of the Most-Favored-Nation Clause," Working Papers 15853, United States International Trade Commission, Office of Economics.
  9. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  10. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
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