The Impact of trade preferences on export prices in the European Union - who captures the preference rent?

Preferential Trade Agreements (PTAs) aim at increasing trade flows via reductions on applied tariffs and the incentives created by the difference between the applied and the most favoured nation (MFN) tariff, the preference margin. An often omitted element in PTAs evaluation is the possibility that the wedge between preferential and MFN tariffs may induce a preference rent. This paper analyses empirically who captures the preference rent by exploiting a unique dataset of imports in the European Union at a highly disaggregated level (CN-10) linked to information on the preferential regime used and the tariff applied. In order to remove potential bias and measurement errors from comparing preferential prices from specific countries and products with average MFN prices, this paper uses the prices from the same country, product and year. This is possible since we observe in the database a large number of cases where in the same year a preferential regime is both utilised and non-utilised. Our main findings suggest that on average an exporter obtain a larger price margin under a preferential regime than under MFN. However, this preference rent is only partially appropriated by exporters with a pass-through coefficient from preference to price margins that oscillates between 0.16 and 0.5.