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

34 Pages Posted: 28 Jul 2005

See all articles by Baybars Karacaovali

Baybars Karacaovali

Hawaii Department of Taxation

Nuno Limão

University of Maryland - Department of Economics

Date Written: March 2005

Abstract

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.

Keywords: Preferential trade agreements, multilateral trade negotiations, MFN tariff concessions

JEL Classification: D78, F13, F14, F15

Suggested Citation

Karacaovali, Baybars and Limão, Nuno, The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union (March 2005). CEPR Discussion Paper No. 4973. Available at SSRN: https://ssrn.com/abstract=771644

Baybars Karacaovali (Contact Author)

Hawaii Department of Taxation

830 Punchbowl St
Honolulu, HI 96813
United States

Nuno Limão

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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