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

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  • Nuno Limão
  • Marcelo Olarreaga

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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  • Nuno Limão & 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.
  • Handle: RePEc:oup:wbecrv:v:20:y:2006:i:2:p:217-240
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    Cited by:

    1. Persson, Maria, 2011. "From trade preferences to trade facilitation: Taking stock of the issues," Economics Discussion Papers 2011-23, Kiel Institute for the World Economy (IfW).
    2. Persson, Maria, 2012. "From trade preferences to trade facilitation: Taking stock of the issues," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 6, pages 1-33.
    3. Joseph Francois & Bernard Hoekman & Miriam Manchin, 2006. "Preference Erosion and Multilateral Trade Liberalization," World Bank Economic Review, World Bank Group, pages 197-216.
    4. Estevadeordal, Antoni & Shearer, Matthew & Suominen, Kati, 2011. "Regional Integration in the Americas: State of Play, Lessons, and Ways Forward," ADBI Working Papers 277, Asian Development Bank Institute.
    5. Ketterer, Tobias D. & Bernhofen, Daniel M. & Milner, Chris, 2015. "The impact of trade preferences on multilateral tariff cuts: Evidence for Japan," Journal of the Japanese and International Economies, Elsevier, pages 31-51.
    6. Karacaovali, Baybars & Limão, Nuno, 2008. "The clash of liberalizations: Preferential vs. multilateral trade liberalization in the European Union," Journal of International Economics, Elsevier, pages 299-327.
    7. Silva, Peri, 2011. "The role of importers and exporters in the determination of the U.S. tariff preferences granted to Latin America," Journal of Development Economics, Elsevier, pages 207-219.
    8. 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.
    9. Matthew Shearer & Kati Suominen & Antoni Estevadeordal, 2009. "Multilateralising RTAs in the Americas: State of Play and Ways Forward," IDB Publications (Working Papers) 2522, Inter-American Development Bank.
    10. Will Martin & Kym Anderson, 2006. "Agricultural Trade Reform and the Doha Development Agenda," World Bank Publications, The World Bank, number 6889.
    11. Will Martin & Kym Anderson, 2006. "Agricultural Trade Reform and the Doha Development Agenda," World Bank Publications, The World Bank, number 6889.
    12. Persson, Maria, 2013. "Trade Preferences from a Policy Perspective," Working Papers 2013:3, Lund University, Department of Economics.
    13. Robert Z. Lawrence & Tatiana Rosito, 2006. "A New Compensation Mechanism for Preference Erosion in the Doha Round," IDB Publications (Working Papers) 2408, Inter-American Development Bank.
    14. Mohamed Hedi Bchir & Stephen N. Karingi & Andrew Mold & Patrick N. Osakwe & Mustapha Sadni Jallab, 2007. "The Doha development round and Africa: partial and general equilibrium analyses of tariff preference erosion," Agricultural Economics, International Association of Agricultural Economists, pages 287-295.
    15. Lawrence, Robert Z. & Rosito, Tatiana, 2006. "A New Compensation Mechanism for Preference Erosion in the Doha Round," Working Paper Series rwp06-044, Harvard University, John F. Kennedy School of Government.
    16. Karacaovali, Baybars & Limao, Nuno, 2005. "The clash of liberalizations : preferential versus multilateral trade liberalization in the European Union," Policy Research Working Paper Series 3493, The World Bank.
    17. Lawrence, Robert Z. & Rosito, Tatiana, 2006. "A New Compensation Mechanism for Preference Erosion in the Doha Round," Working Paper Series rwp06-044, Harvard University, John F. Kennedy School of Government.
    18. Bureau, Jean-Christophe & Chakir, Raja & Gallezot, Jacques, 2006. "The Utilisation of EU and US Trade Preferences for Developing Countries in the Agri-Food Sector," Working Papers 18867, TRADEAG - Agricultural Trade Agreements.
    19. 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.
    20. Matthew Shearer & Kati Suominen & Antoni Estevadeordal, 2009. "Multilateralising RTAs in the Americas: State of Play and Ways Forward," IDB Publications (Working Papers) 9300, Inter-American Development Bank.
    21. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    22. Bernard Hoekman & Will Martin & Carlos A. Primo Braga, 2009. "Trade Preference Erosion : Measurement and Policy Response," World Bank Publications, The World Bank, number 9437.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation 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

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