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Small is beautiful : preferential trade agreements and the impact of country size, market share, efficiency, and trade policy

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  • Schiff, Maurice

Abstract

There has been a resurgence of preferential trade agreements (PTAs). This has led to renewed debate about how PTAs affect both welfare and the multilateral system. The author examines two ideas: the welfare impact of PTAs and the effect of structural and policy changes on PTAs. He asks how the PTA's effect on home-country welfare is affected by higher imports demand; the production efficiency of the partner or rest of the world; the share imported from the other partner; and the initial protection on imports from the partner. There are several findings. An individual country benefits more from a PTA if it imports less from its partner countries. A small home country loses from forming a free trade agreement with a small partner country, but gains from forming one with the rest of the world. In other words, the home country is better off as a small member of a large bloc than as a large member of a small bloc. This result need not hold if smuggling is a factor. Home country welfare after formation of a free trade agreement (FTA) is higher when imports from the partner country are smaller, whether the partner country is large or small. Welfare worsens as imports from the partner country increase. In general a PTA is more beneficial for a country with lower import demand. A PTA is also more beneficial for a country with an efficient import-substituting sector. A small country may gain from forming a PTA when smuggling is a factor.

Suggested Citation

  • Schiff, Maurice, 1996. "Small is beautiful : preferential trade agreements and the impact of country size, market share, efficiency, and trade policy," Policy Research Working Paper Series 1668, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1668
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    Cited by:

    1. Hoekman, Bernard & Konan, Denise Eby, 1999. "Deep integration, nondiscrimination, and Euro-Mediterranean free trade," Policy Research Working Paper Series 2130, The World Bank.
    2. Getachew, Asgedom Tessema & Tadele, Ferede & Arega, Hailu & Fantu, Guta, 2005. "The Impact of Regional Economic Cooperation on the Ethiopian Manufacturing Sector: the Case of Common Market for Southern and Eastern Free Trade Area (COMESA-FTA)," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 10(1), pages 1-98, May.
    3. Volpe Martincus, Christian & Siedschlag, Iulia, 2010. "The Impact of South-South Preferential Trade Agreements on Industrial Development: An Empirical Test," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 69-104.
    4. Schiff, Maurice, 2001. "Will the Real “Natural Trading Partner” Please Stand Up?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 16, pages 245-261.
    5. Andriamananjara, Soamiely & Schiff, Maurice, 1998. "Regional groupings among microstates," Policy Research Working Paper Series 1922, The World Bank.
    6. Lucian Cernat, 2001. "ASSESSING REGIONAL TRADE ARRANGEMENTS: ARE SOUTH–SOUTH RTAs MORE TRADE DIVERTING?," International Trade 0109001, University Library of Munich, Germany.
    7. Schiff, Maurice, 2002. "Regional integration and development in small states," Policy Research Working Paper Series 2797, The World Bank.
    8. Volpe Martincus, Christian & Siedschlag, Iulia, 2010. "The Impact of South-South Preferential Trade Agreements on Industrial Development: An Empirical Test," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 69-104.
    9. Osman, Rehab Osman Mohamed, 2012. "The EU Economic Partnership Agreements with Southern Africa: a computable general equilibrium analysis," Economics PhD Theses 0412, Department of Economics, University of Sussex Business School.
    10. Neil Foster & Robert Stehrer, 2011. "Preferential trade agreements and the structure of international trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(3), pages 385-409, September.
    11. Luca Brandi, 2004. "The Economy of Small States," Rivista di Politica Economica, SIPI Spa, vol. 94(6), pages 145-173, November-.
    12. Waldkirch, Andreas, 2006. "The ‘New Regionalism’: Integration as a Commitment Device for Developing Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 397-425.
    13. Justyna Wieloch, 2015. "Kraje rozwijające się w ugrupowaniach integracyjnych / Developing Countries in Economic Agreements," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 9, pages 40-49, March.
    14. Moelders, Florian, 2011. "Trade Persistence and the Limits of Trade Agreements," Proceedings of the German Development Economics Conference, Berlin 2011 58, Verein für Socialpolitik, Research Committee Development Economics.
    15. Kaminski, Bartlomiej & de la Rocha, Manuel, 2003. "Stabilization and association process in the Banlkans : integration options and their assessment," Policy Research Working Paper Series 3108, The World Bank.
    16. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.
    17. Denise Eby Konan & Keith E Maskus, 2000. "Bilateral Trade Patterns and Welfare: An Egypt-EU Preferential Trade Agreement," Working Papers 200001, University of Hawaii at Manoa, Department of Economics.
    18. Bergschmidt, Angela & Hartmann, Monika, 1998. "Agricultural trade policies and trade relations in transition economies," IAMO Discussion Papers 12, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    19. Lucio Castro, 2005. "Regional Trade Integration in East Africa: Trade and Revenue Impacts of the Planned East African Community Customs Union," International Trade 0509005, University Library of Munich, Germany.
    20. Bergschmidt, Angela & Hartmann, Monika, 1998. "Agricultural Trade Policies And Trade Relations In Transition Economies," IAMO Discussion Papers 14896, Institute of Agricultural Development in Transition Economies (IAMO).
    21. Burfisher, Mary E. & Robinson, Sherman & Thierfelder, Karen, 2000. "Small countries and the case for regionalism vs. multilateralism," TMD discussion papers 54, International Food Policy Research Institute (IFPRI).

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