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Intra-bloc tariffs and preferential margins in trade agreements

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  • Ornelas, Emanuel
  • Tovar, Patricia

Abstract

We study how countries choose intra-bloc tariffs and preferential margins in Preferential Trade Agreements (PTAs). Our model indicates that countries should set systematically lower preferential margins when the bloc takes the form of a free trade area, relative to a customs union. Moreover, in customs unions (but not necessarily in free trade areas) preferential margins should increase with the supply of partner countries and decrease with the level of preferential imports. These relationships reflect, respectively, the internalization of political-economy goals within the bloc and the desire to curb trade diversion. Using a sample that covers most PTAs formed by Latin American countries in the 1990s, we find empirical support for each of those predictions. These findings rationalize why governments often keep intra-bloc duties strictly positive. We show that this tends to worsen the welfare consequences of PTAs, and that requiring the elimination of internal tariffs would be socially desirable.

Suggested Citation

  • Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
  • Handle: RePEc:eee:inecon:v:138:y:2022:i:c:s0022199622000757
    DOI: 10.1016/j.jinteco.2022.103643
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    More about this item

    Keywords

    Regionalism; Free trade agreements; Customs unions; Tariff complementarity; Latin America; GATT; Article XXIV;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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