Measuring The Relative Strength Of Preferential Market Access

In the past 20 years, tariffs imposed on international trade have been decreasing both in virtue of multilateral agreements under the auspices of the World Trade Organization (WTO) and of the proliferation of preferential trade agreements (PTAs) at the regional and bilateral level. The consequence of the large number of PTAs is that an increasing share of international trade is not subject to the most favoured nation tariffs, but enters markets through preferential access. Preferential access can be thought of as a policy given comparative advantage where countries discriminate across trading partners by providing some countries with a relative advantage. As the number of PTAs increases, it becomes more difficult to assess the tariff advantage originating from an existing or future trade agreement. This paper proposes two new indices aimed at assessing the value of the preferential margin. The first index measures the relative value of preferential regimes on actual exports flows. It provides the tariff advantage to the exports originating from a given country relative to similar exports originating elsewhere. The second index measures the potential value of the preferential regime and it is calculated not on observed but on “potential” export flows. These indices are useful for calculating both the strength of existing or future trade agreements as well as the preference erosion that a third-parties trade agreement may cause.