IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/76330.html
   My bibliography  Save this paper

Preferential Trade Agreements and Rules of the Multilateral Trading System

Author

Listed:
  • Saggi, Kamal
  • Wong, Woan Foong
  • Yildiz, Halis Murat

Abstract

Preferential trade agreement (PTA) members have to eliminate internal tariffs with each other but are allowed to discriminate against non-members. This can be in potential conflict with the WTO's overall non-discrimination clause. Using a competing exporters model of endogenous trade agreement formation, we study the central rules that govern PTAs. We find that the free trade agreements' (FTAs) requirement to eliminate internal tariffs increases total welfare when circumstances are such that global free trade is infeasible. However, it also reduces the likelihood of reaching global free trade. We also find that the MFN constraint does not just contribute to the achievement of global free trade but also delivers a welfare-superior outcome when global free trade is not possible. Finally, we show that the MFN constraint complements the PTA rules in achieving global free trade for only FTAs but not customs unions (CUs). However, when global free trade is infeasible, the MFN constraint is welfare improving for both types of PTAs. We conclude that while the likelihood of global free trade within the WTO requirements depends on the nature of PTAs, these requirements are necessarily welfare improving in a tariff-ridden world.

Suggested Citation

  • Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," MPRA Paper 76330, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76330
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/76330/1/MPRA_paper_76330.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 8, pages 168-185, World Scientific Publishing Co. Pte. Ltd..
    2. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
    3. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    4. Caroline Freund & Emanuel Ornelas, 2010. "Regional Trade Agreements," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 139-166, September.
    5. Kamal Saggi, 2018. "The MFN clause, welfare, and multilateral cooperation between countries of unequal size," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 14, pages 312-323, World Scientific Publishing Co. Pte. Ltd..
    6. Pravin Krishna, 1998. "Regionalism and Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 227-251.
    7. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    8. Kamal Saggi, 2018. "Tariffs and the most favored nation clause," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    9. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
    10. Ludema, Rodney D. & Mayda, Anna Maria, 2009. "Do countries free ride on MFN?," Journal of International Economics, Elsevier, vol. 77(2), pages 137-150, April.
    11. Caroline Freund & Emanuel Ornelas, 2010. "Regional trade agreements: blessing or burden?," CentrePiece - The magazine for economic performance 313, Centre for Economic Performance, LSE.
    12. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    13. Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2018. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 10, pages 223-237, World Scientific Publishing Co. Pte. Ltd..
    14. Olarreaga, Marcelo & Soloaga, Isidro, 1998. "Endogenous Tariff Formation: The Case of Mercosur," The World Bank Economic Review, World Bank, vol. 12(2), pages 297-320, May.
    15. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 5, pages 53-66, World Scientific Publishing Co. Pte. Ltd..
    16. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    17. Horn, Henrik & Mavroidis, Petros C., 2001. "Economic and legal aspects of the Most-Favored-Nation clause," European Journal of Political Economy, Elsevier, vol. 17(2), pages 233-279, June.
    18. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2018. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 9, pages 186-222, World Scientific Publishing Co. Pte. Ltd..
    19. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
    20. Xuepeng Liu, 2010. "Testing Conflicting Political Economy Theories: Full-Fledged versus Partial-Scope Regional Trade Agreements," Southern Economic Journal, John Wiley & Sons, vol. 77(1), pages 78-103, July.
    21. Cadot, Olivier & de Melo, Jaime & Olarraga, Marcelo, 1999. "Regional Integration and Lobbying for Tariffs against Nonmembers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 635-657, August.
    22. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, August.
    23. Rodney D. Ludema & Anna Maria Mayda, 2013. "Do terms-of-trade effects matter for trade agreements? Theory and evidence from WTO Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1837-1893.
    24. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    25. Martin Richardson, 2017. "Tariff Revenue Competition in a Free Trade Area," World Scientific Book Chapters, in: Dimensions of Trade Policy, chapter 8, pages 171-181, World Scientific Publishing Co. Pte. Ltd..
    26. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73(3), pages 256-256.
    27. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateralism, multilateralism, and the quest for global free trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 7, pages 156-167, World Scientific Publishing Co. Pte. Ltd..
    28. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
    29. Caroline Freund, 2010. "Third‐country Effects of Regional Trade Agreements," The World Economy, Wiley Blackwell, vol. 33(11), pages 1589-1605, November.
    30. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
    31. Bagwell, Kyle & Staiger, Robert W., 2010. "Backward stealing and forward manipulation in the WTO," Journal of International Economics, Elsevier, vol. 82(1), pages 49-62, September.
    32. Martin Richardson, 2017. "Endogenous Protection and Trade Diversion," World Scientific Book Chapters, in: Dimensions of Trade Policy, chapter 5, pages 107-127, World Scientific Publishing Co. Pte. Ltd..
    33. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1475-1506.
    34. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    35. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
    36. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, vol. 42(1), pages 13-29, June.
    37. Oecd & Nea, 2011. "Bilateral and Multilateral Agreements," Nuclear Law Bulletin, OECD Publishing, vol. 2010(2), pages 93-106.
    38. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, vol. 57(1), pages 151-176, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Elie Appelbaum & Mark Melatos, 2018. "Are Customs Unions Really So Scarce?," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 391-404, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.
    2. Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2022. "The role of non‐discrimination in a world of discriminatory preferential trade agreements," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 174-212, February.
    3. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    4. Moïse Nken & Halis Murat Yildiz, 2022. "Implications of multilateral tariff bindings on the extent of preferential trade agreement formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 301-347, February.
    5. Moise Nken & Halis Murat Yildiz, 2017. "Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade," Working Papers 068, Ryerson University, Department of Economics.
    6. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    7. Staiger, Robert & Bagwell, Kyle & Bown, Chad, 2015. "Is the WTO Passé?," CEPR Discussion Papers 10672, C.E.P.R. Discussion Papers.
    8. Hinnerk Gnutzmann & Arevik Gnutzmann‐Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 178-224, February.
    9. Hinnerk Gnutzmann & Arevik Gnutzmann-Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 178-224, February.
    10. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    11. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    12. Kuenzel, David J. & Sharma, Rishi R., 2021. "Preferential trade agreements and MFN tariffs: Global evidence," European Economic Review, Elsevier, vol. 138(C).
    13. Eric Conglin Chi & Halis Murat Yildiz, 2024. "Dynamic preferential trade agreement formation and the role of political economy," Economic Inquiry, Western Economic Association International, vol. 62(2), pages 748-781, April.
    14. Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2018. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 10, pages 223-237, World Scientific Publishing Co. Pte. Ltd..
    15. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
    16. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    17. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2018. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 9, pages 186-222, World Scientific Publishing Co. Pte. Ltd..
    18. James Lake, 2019. "Dynamic formation of preferential trade agreements: The role of flexibility," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 132-177, February.
    19. Facchini, Giovanni & Silva, Peri & Willmann, Gerald, 2013. "The customs union issue: Why do we observe so few of them?," Journal of International Economics, Elsevier, vol. 90(1), pages 136-147.
    20. Emanuel Ornelas, 2012. "Preferential Trade Agreements and the Labor Market," CEP Discussion Papers dp1117, Centre for Economic Performance, LSE.

    More about this item

    Keywords

    WTO; Coalition proof Nash equilibrium; Free Trade Agreement; Customs Union;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:76330. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.