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Trade preferences to small developing countries and the welfare costs of lost multilateral liberalization

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  • Limao, Nuno
  • Olarreaga, Marcelo

Abstract

The 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 Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3565.

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Date of creation: 01 Apr 2005
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Handle: RePEc:wbk:wbrwps:3565

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Keywords: TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Environmental Economics&Policies; Economic Theory&Research; Trade and Regional Integration; Export Competitiveness;

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  1. André Sapir & Richard Baldwin & Daniel Cohen & Anthony Venables, 1999. "Market integration, regionalism and the global economy," ULB Institutional Repository 2013/8074, ULB -- Universite Libre de Bruxelles.
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  14. 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.
  15. Nuno Limão, 2002. "Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Bloc for Multilateral Liberalization?," International Trade 0206001, EconWPA.
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  17. 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, Wiley Blackwell, vol. 22(8), pages 1047-1064, November.
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  20. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
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