Are Trade Blocs Building or Stumbling Blocks? New Evidence
The stumbling-block argument asserts that regionalism hinders MFN tariff cutting. If this was of first-order importance over previous decades, we should see a negative relationship between the level of MFN and preferential tariffs, i.e. MFN and PTA tariffs should be substitutes. Using tariff line data for 23 large trading nations (over one million observations) we find exactly the opposite. MFN and PTA tariffs are complements, not substitutes since margins of preferences tend to be low or zero for products where nations apply high MFN tariffs. One interpretation is that regionalism is neither a building nor a stumbling block. Sectoral vested interests are a ‘third factor’ that generates the positive correlation between MFN and PTA tariff levels.
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