The Clash of Liberalizations: Preferential Versus Multilateral Trade Liberalization in the European Union

56 Pages Posted: 18 Jan 2005

See all articles by Baybars Karacaovali

Baybars Karacaovali

Hawaii Department of Taxation

Nuno Limão

University of Maryland - Department of Economics

Date Written: January 2005

Abstract

There has been an explosion in the number of preferential trade agreements in the past decade. Preferential trade agreements are characterized by liberalization with respect to only a few partners and thus they can potentially clash with and retard multilateral trade liberalization. Despite this important concern with preferential trade agreements, there is almost no systematic evidence on whether they actually affect multilateral trade liberalization. Karacaoval and Limao model the effect of preferential trade agreements on multilateral trade liberalization and show that preferential trade agreements slow down multilateral trade liberalization unless they have a common external tariff and allow for internal transfers. Next, they use detailed data on product-level tariffs negotiated by the European Union in the past two multilateral trade rounds to structurally estimate their model. The authors confirm the main prediction - the European Union's preferential trade agreements have clashed with its multilateral trade liberalization - and find that the effect is quantitatively significant. Moreover, they also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of multilateral liberalization in the European Union.

This paper - a product of the Trade Team, Development Research Group - is part of a larger effort in the group to understand the interaction between preferential and multilateral liberalization.

Keywords: Preferential trade agreements, customs unions, multilateral trade negotiations, MFN

JEL Classification: D78, F13, F14, F15

Suggested Citation

Karacaovali, Baybars and Limão, Nuno, The Clash of Liberalizations: Preferential Versus Multilateral Trade Liberalization in the European Union (January 2005). World Bank Policy Research Working Paper No. 3493. Available at SSRN: https://ssrn.com/abstract=650223

Baybars Karacaovali

Hawaii Department of Taxation

830 Punchbowl St
Honolulu, HI 96813
United States

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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