The Economics and Politics of Preferential Trade Agreements

Abstract

The number of preferential trade agreements (PTAs) has skyrocketed over the past 20 years. In addition to reducing barriers at the border, modern PTAs remove many behind-the-border barriers by regulating foreign direct investment (FDI), liberalizing services, and protecting intellectual property rights. This article surveys the literature explaining the formation of PTAs and their consequences. Regarding the formation of PTAs, studies have gradually moved from exploring the macro-foundation of preferential liberalization to focusing on the micro-foundation of PTAs, relying on industry- and firm-level data. Regarding the effect of PTAs, there is robust evidence that PTAs substantively increase trade flows and FDI and are associated with economic reforms in developing countries, though the general welfare effect of preferential liberalization remains largely unexplored. I make some concrete suggestions on avenues toward which to push the research on PTAs. In particular, I argue that scholars interested in PTAs would benefit from engaging in debate about the distributional consequences of trade liberalization, which not only informs much of the current academic and policy research but also features in political debates taking place in democratic polities.