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. Karacaovali and Limô 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"--World Bank web site.

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. The authors 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.

Because of concern that OECD tariff reductions will translate into worsening export performance for the least developed countries, trade preferences have proven a stumbling block to developing country support for multilateral liberalization. The authors examine the actual scope for preference erosion, including an econometric assessment of the actual utilization and the scope for erosion estimated by modeling full elimination of OECD tariffs, and hence full most-favored-nation liberalization-based preference erosion. Preferences are underutilized due to administrative burden-estimated to be at least 4 percent on average-reducing the magnitude of erosion costs significantly. For those products where preferences are used (are of value), the primary negative impact follows from erosion of EU preferences. This suggests the erosion problem is primarily bilateral rather than a WTO-based concern.

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).

The book Policy Externalities and International Trade Agreements is a selection of published articles examining how policy externalities motivate and can be addressed by international trading institutions. The studies provide groundbreaking evidence of the role of international market power and policy uncertainty as motives for trade agreements and on the potential clash between preferential trade liberalization (e.g. European Union, NAFTA) and multilateral agreements (WTO). The studies presented in this book not only identify and estimate how different policies interact with each other and across agreements, but also examine how international trading institutions can be used to limit redistribution towards special interest groups and enforce better cooperation across issues, such as labor and the environment, and between developing and developed countries.

Along with its painful economic costs, the financial crisis of 2008 raised concerns over the future of international policy making. As in recessions past, new policy initiatives emerged, approaches that placed greater importance on protecting national interests than promoting international economic cooperation. Whether in fiscal or monetary policies, the control of currencies and capital flows, the regulation of finance, or the implementation of protectionist policies and barriers to trade, there has been an almost worldwide trend toward the prioritizing of national economic security. But what are the underlying economic causes of this trend, and what can economic research reveal about the possible consequences? Prompted by these questions, Robert C. Feenstra and Alan M. Taylor have brought together top researchers with policy makers and practitioners whose contributions consider the ways in which the global economic order might address the challenges of globalization that have arisen over the last two decades and that have been intensified by the recent crisis. Chapters in this volume consider the critical linkages between issues, including exchange rates, global imbalances, and financial regulation, and plumb the political and economic outcomes of past policies for what they might tell us about the future of the global economic cooperation.