Trade preferences to small developing countries and the welfare costs of lost multilateral liberalization
AbstractThe proliferation of preferential trade liberalization over the past 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that industrial countries provide to small and poor countries but there is no estimate of the resulting welfare costs. To avoid this stumbling block effect the authors suggest replacing unilateral preferences by a fixed import subsidy. They argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a Pareto improvement. More important, the authors provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5,000 products they calculate the welfare effects of the United States, European Union, and Japan switching from unilateral preferences to the developing countries to the import subsidy scheme. Even in a model with no dynamic gains to trade the authors find that the switch produces an annual net welfare gain for the 170 countries ($4,354 million) and for each group: the United States, European Union, and Japan ($2,934 million), the developing countries ($520 million), and the rest of the world ($900 million).
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3565.
Date of creation: 01 Apr 2005
Date of revision:
TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Environmental Economics&Policies; Economic Theory&Research; Trade and Regional Integration; Export Competitiveness;
Other versions of this item:
- Nuno Lim�o & Marcelo Olarreaga, 2006. "Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization," World Bank Economic Review, World Bank Group, vol. 20(2), pages 217-240.
- Limão, Nuno & Olarreaga, Marcelo, 2005. "Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization," CEPR Discussion Papers 5045, C.E.P.R. Discussion Papers.
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F15 - International Economics - - Trade - - - Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-14 (All new papers)
- NEP-DEV-2005-12-14 (Development)
- NEP-INT-2005-12-14 (International Trade)
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