Are Preferential Trade Agreements with Non-Trade Objectives a Stumbling Block for Multilateral Liberalization

University of Maryland Center for International Economics Working Paper No. 02-02

46 Pages Posted: 18 Oct 2002

See all articles by Nuno Limão

Nuno Limão

University of Maryland - Department of Economics

Date Written: June 2002

Abstract

Increasingly, in regional agreements, large economies, e.g. U.S. and E.U., offer lower trade barriers in exchange for cooperation by small economies in environmental, intellectual property and other issues. What is the effect of such agreements on multilateral trade liberalization? We show that, even in the absence of trade creation or diversion, such preferential agreements increase the cost of multilateral tariff reductions for the goods exported from small to large countries. This occurs because multilateral tariff reductions decrease the threat that large countries can use in preferential agreements causing a loss in their bargaining power. The result is due to current exceptions in the WTO to the most-favorite-nation rule which allow for lower than MFN tariffs, e.g. art. XXIV and GSP. By explicitly modeling the interaction between preferential and multilateral negotiations we analyze the effects on multilateral tariffs and welfare of strengthening the MFN rule and show that large and small countries may not prefer the same regime of rules.

Keywords: Multilateral trade negotiations, most-favorite-nation, regional integration, cross-border externalities, environment, labor standards, bargaining, repeated games.

JEL Classification: F13, F15, F18, F42, H77

Suggested Citation

Limão, Nuno, Are Preferential Trade Agreements with Non-Trade Objectives a Stumbling Block for Multilateral Liberalization (June 2002). University of Maryland Center for International Economics Working Paper No. 02-02. Available at SSRN: https://ssrn.com/abstract=322061 or http://dx.doi.org/10.2139/ssrn.322061

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)

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