Bilateral Trade Patterns and Welfare: An Egypt-EU Preferential Trade Agreement
This paper considers the welfare implications of a discriminatory preferential trading arrangement in a general equilibrium model where imports are differentiated by region of origin and terms of trade are fixed. The relationship between the initial (pre-reform) relative volume of trade with the potential partner and welfare changes is theoretically ambiguous. Applied general equilibrium analysis of Egyptian trade illustrates that potential Egyptian welfare gains from a European PTA are modest. Experiments altering the composition of Egyptian trading patterns show that trade creation and diversion are non-monotonic, concave functions of the benchmark share of trade with the PTA partner. Nonetheless, aggregate welfare gains rise with the initial partner trade share. Thus, in the particular case considered here, the more focused Egypt's trade patterns are on the EU, the more the country would gain from a preferential trading arrangement.
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