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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.

Access --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Export Diversification --- Export Performance --- Finance and Financial Sector Development --- Free Trade --- Free Trade Agreements --- Global Trade --- International Economics & Trade --- International Trade --- Law and Development --- Liberalization Of Trade --- Macroeconomics and Economic Growth --- Multilateral Liberalization --- Multilateral Trade Liberalization --- Preferential Access --- Private Sector Development --- Public Sector Development --- Reciprocal Basis --- Reciprocity --- Tariff --- Tariff Reductions --- Tariffs --- Trade --- Trade and Regional Integration --- Trade Law --- Trade Negotiations --- Trade Policies --- Trade Policy --- Trade Preferences

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May 2000 - Two theories are combined to explain why free trade areas (FTAs) have proliferated more than customs unions (CUs) have, and why FTAs are found more in North-South agreements and CUs in South-South agreements. Schiff combines two theories - one about how multilateral trade liberalization affects regional integration, the other about how it affects political disintegration - to explain why the ratio of free trade areas to customs unions has increased over time, and why it is larger in North-South than in South-South agreements. Ethier (1998, 1999) argues that multilateral trade liberalization led to the recent wave of regional integration arrangements. Alesina and others (1997), in discussing the number and size of countries, argue that multilateral trade liberalization leads to political disintegration, with an increase in the number of countries. Combining the two arguments, Schiff hypothesizes that as multilateral trade liberalization proceeds and the number of regional integration arrangements increases, the ratio of free trade areas to customs unions also increases. The same arguments are also used to show why that ratio is larger in North-South than in South-South agreements. The data, which show that ratio increasing in the 1990s and larger for North-South agreements, are consistent with the hypotheses. Finally, a number of voluntary and involuntary customs unions are examined where weaker members lose and conflict does or does not take place, and where free trade agreements are superior. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study regional integration. The author may be contacted at mschiff@worldbank.org.

Andean Pact --- Bloc Welfare --- Customs Union Formation --- Customs Unions --- Economic Dominance --- Economic Theory and Research --- Emerging Markets --- External Tariff --- Free Trade --- Free Trade Agreements --- Free Trade Area --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Market Size --- Multilateral Liberalization --- Multilateral System --- Multilateral Trade Liberalization --- Open Regionalism --- Preferential Market Access --- Private Sector Development --- Public Sector Development --- Regional Integration --- Regionalism --- Rules of Origin --- Tariffs --- Trade --- Trade and Regional Integration --- Trade Diversion --- Trade Law --- Trade Policy

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The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicates 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. To avoid this stumbling block effect we suggest replacing unilateral preferences by a fixed import subsidy. We argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a Pareto improvement. More importantly, we provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5,000 products we calculate the welfare effects of the United States, European Union and Japan switching from unilateral preferences to Least Developed Countries to the import subsidy scheme. Even in a model with no dynamic gains to trade we find that the switch produces an annual net welfare gain for the 170 countries (USD 4,354 million) and for each group: the United States, European Union and Japan (USD 2,934 million), Least Developed Countries (USD 520 million) and the rest of the world (USD 900 million).

Balance Of Payments --- Competitive Position --- Currencies and Exchange Rates --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Export Markets --- Finance and Financial Sector Development --- Free Trade --- International Economics & Trade --- International Trade and Trade Rules --- Law and Development --- Macroeconomics and Economic Growth --- Market Access --- Multilateral Liberalization --- Multilateral Trade Liberalization --- Political Economy --- Preferential Access --- Preferential Tariff --- Preferential Trade --- Preferential Trade Agreements --- Preferential Trade Liberalization --- Private Sector Development --- Public Sector Development --- Tariff --- Tariff Concessions --- Tariffs --- Tax Law --- Trade --- Trade and Regional Integration --- Trade Negotiations --- Trade Policy --- Trade Preferences --- Unilateral Trade --- World Markets --- World Trade