DP4973 The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union

Author(s): Baybars Karacaovali , Nuno Limão

Publication Date: March 2005

Keyword(s): preferential trade agreements , multilateral trade negotiations , MFN tariff concessions

JEL(s): D78 , F13 , F14 , F15

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP4973.asp

There has been an explosion in the number of preferential trade agreements (PTAs) in the last decade. PTAs are characterized by liberalization with respect to only a few partners and thus, they can potentially clash with and retard multilateral trade liberalization (MTL). Despite this important concern with PTAs, there is almost no systematic evidence on whether they actually affect MTL or not. We model the effect of PTAs on MTL and show that PTAs slow down MTL unless they have a common external tariff and allow for internal transfers. Next, we use detailed data on product-level tariffs negotiated by the European Union in the last two multilateral trade rounds to structurally estimate our model. We confirm the main prediction – the European Union's PTAs have clashed with its MTL – and find that the effect is quantitatively significant. Moreover, we also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of MTL in the European Union.