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Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization

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Author Info
Nuno Limão
Marcelo Olarreaga

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Abstract

The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows multilateral trade liberalization. Recent theoretical and empirical evidence indicates that this is the case even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. This stumbling block effect can be avoided by replacing the unilateral preferences with a fixed import subsidy, which generates a Pareto improvement. More importantly, this paper presents the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. Recent estimates of the stumbling block effect of preferences with data for 170 countries and more than 5,000 products are used to calculate the welfare effects of the European Union, Japan, and the United States switching from unilateral preferences for least developed countries to an import subsidy scheme. In a model with no dynamic gains to trade, the switch produces an annual net welfare gain for the 170 countries that adds about 10 percent to the estimated trade liberalization gains in the Doha Round. It also generates gains for each group: the European Union, Japan, and the United States ($2,934 million), least developed countries ($520 million), and the rest of the world ($900 million). Copyright 2006, Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal The World Bank Economic Review.

Volume (Year): 20 (2006)
Issue (Month): 2 ()
Pages: 217-240
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Handle: RePEc:oup:wbecrv:v:20:y:2006:i:2:p:217-240

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aaditya Mattoo & Arvind Subramanian, 2004. "The WTO and the Poorest Countries: The Stark Reality," IMF Working Papers 04/81, International Monetary Fund. [Downloadable!]
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  2. Panagariya, Arvind & Shah, Shekhar & Mishra, Deepak, 2001. "Demand elasticities in international trade: are they really low?," Journal of Development Economics, Elsevier, vol. 64(2), pages 313-342, April. [Downloadable!] (restricted)
    Other versions:
  3. Carlo Perroni & John Whalley, 2000. "The new regionalism: trade liberalization or insurance?," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 1-24, February. [Downloadable!] (restricted)
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  4. McCulloch, Rachel & Pinera, Jose, 1977. "Trade as Aid: The Political Economy of Tariff Preferences for Developing Countries," American Economic Review, American Economic Association, vol. 67(5), pages 959-67, December. [Downloadable!] (restricted)
  5. Hiau Looi Kee & Nicita, Alessandro & Olarreaga, Marcelo, 2004. "Import demand elasticities and trade distortions," Policy Research Working Paper Series 3452, The World Bank. [Downloadable!]
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  6. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February. [Downloadable!] (restricted)
  7. Won Chang & L. Alan Winters, 2002. "How Regional Blocs Affect Excluded Countries: The Price Effects of MERCOSUR," American Economic Review, American Economic Association, vol. 92(4), pages 889-904, September. [Downloadable!]
  8. Karacaovali, Baybars & Limão, Nuno, 2005. "The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union," CEPR Discussion Papers 4973, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Limão, Nuno, 2005. "Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the US," CEPR Discussion Papers 4884, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. T.N. Srinivasan, 1999. "Developing Countries in the World Trading System: From GATT, 1947, to the Third Ministerial Meeting of WTO, 1999," The World Economy, Blackwell Publishing, vol. 22(8), pages 1047-1064, November. [Downloadable!] (restricted)
  11. Kyle Bagwell & Robert W. Staiger, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March. [Downloadable!] (restricted)
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  12. Kyle Bagwell & Robert W. Staiger, 1997. "Regionalism and Multilateral Tariff Cooperation," NBER Working Papers 5921, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Lim“o, Nuno, 2002. "Are Preferential trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Royal Economic Society Annual Conference 2002 129, Royal Economic Society. [Downloadable!]
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  14. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February. [Downloadable!] (restricted)
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  15. Brown, Drusilla, 1989. "A computational analysis of Japan's generalized system of preferences," Journal of Development Economics, Elsevier, vol. 30(1), pages 103-128, January. [Downloadable!] (restricted)
  16. Hans P. Lankes & Katerina Alexandraki, 2004. "The Impact of Preference Erosion on Middle-Income Developing Countries," IMF Working Papers 04/169, International Monetary Fund. [Downloadable!]
  17. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September. [Downloadable!] (restricted)
  18. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hoekman. Bernard & Prowse, Susan, 2005. "Economic policy responses to preference erosion : from trade as aid toaid for trade," Policy Research Working Paper Series 3721, The World Bank. [Downloadable!]
  2. Karacaovali, Baybars & Limão, Nuno, 2005. "The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union," CEPR Discussion Papers 4973, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Joseph Francois & B. Hoekman & M. Manchin, 2005. "Preference Erosion and Multilateral Trade Liberalization," The Institute for International Integration Studies Discussion Paper Series iiisdp87, IIIS. [Downloadable!]
    Other versions:
  4. Baybars Karacaovali & Nuno Limao, 2008. "The Clash of Liberalizations: Preferential versus Multilateral Trade Liberalization in the European Union," Fordham Economics Discussion Paper Series dp2008-02, Fordham University, Department of Economics. [Downloadable!]
    Other versions:
  5. Anderson, Kym & Martin, Will, 2005. "Agricultural trade reform and the Doha development agenda," Policy Research Working Paper Series 3607, The World Bank. [Downloadable!]
    Other versions:
  6. Jean-Christophe Bureau & Raja Chakir & Jacques Gallezot, 2007. "The Utilisation of EU and US Trade Preferences for Developing Countries in the Agri-Food Sector," The Institute for International Integration Studies Discussion Paper Series iiisdp193, IIIS. [Downloadable!]
    Other versions:
  7. Bchir, Mohamed Hedi & Karingi, Stephen N. & Mold, Andrew & Osakwe, Patrick N. & Jallab, Mustapha Sadni, 2006. "The Doha Development Round and Africa: Partial and General Equilibrium Analyses of Tariff Preference Erosion," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25240, International Association of Agricultural Economists. [Downloadable!]
    Other versions:
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