Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization

Posted: 29 Feb 2008

See all articles by Nuno Limão

Nuno Limão

University of Maryland - Department of Economics

Marcelo Olarreaga

University of Geneva; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: 2006

Abstract

The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows multilateral trade liberalization. Recent theoretical and empirical evidence indicates that this is the case even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. This stumbling block effect can be avoided by replacing the unilateral preferences with a fixed import subsidy, which generates a Pareto improvement. More importantly, this paper presents the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. Recent estimates of the stumbling block effect of preferences with data for 170 countries and more than 5,000 products are used to calculate the welfare effects of the European Union, Japan, and the United States switching from unilateral preferences for least developed countries to an import subsidy scheme. In a model with no dynamic gains to trade, the switch produces an annual net welfare gain for the 170 countries that adds about 10 percent to the estimated trade liberalization gains in the Doha Round. It also generates gains for each group: the European Union, Japan, and the United States ($2,934 million), least developed countries ($520 million), and the rest of the world ($900 million).

Suggested Citation

Limão, Nuno and Olarreaga, Marcelo, Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization ( 2006). The World Bank Economic Review, Vol. 20, Issue 2, pp. 217-240, 2006. Available at SSRN: https://ssrn.com/abstract=1095626 or http://dx.doi.org/10.1093/wber/lhj013

Nuno Limão (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

Marcelo Olarreaga

University of Geneva ( email )

40 Boulevard du Pont-d'Arve
Genève, CH - 1205
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Abstract Views
262
PlumX Metrics