Who captures the price rent? The impact of European Union trade preferences on export prices

Preferential trade agreements (PTAs) aim at increasing trade flows via the incentives created by preference margins; this is the difference between the preferential tariff and the tariff of the main competitors. However, an additional impact that is often omitted in PTAs evaluations is the possibility that the wedge between preferential and most favoured nation (MFN) tariffs may induce a preference rent that translates into larger prices for preferential exporters. This paper analyses empirically whether preferential exporters capture this preference rent using a unique dataset of imports in the European Union at a highly disaggregated level linked to information on the preferential regime used and the tariff applied. Our main findings suggest that on average an exporter obtains a larger price margin under a preferential regime than under MFN. However, this preference rent is only partially appropriated by exporters with a pass-through coefficient from preference to price margins that oscillates between 0.17 and 0.8, depending on the size of the margin and the type of product. Copyright Kiel Institute 2014