The trade effects of tariffs and non-tariff changes of preferential trade agreements

Abstract

The recent literature on preferential trade agreements (PTAs) emphasizes the distinction between the extensive and intensive margins. What has been missing is the distinction between tariff and non-tariff changes under PTAs. Tariff reduction is a quintessential feature of PTAs. But member countries of a PTA often pursue deeper integration through agreements on non-tariff matters as well. Some member countries, however, may want to use non-tariff barriers to compensate for tariff cuts. The current study isolates the effects of tariff and non-tariff changes under PTAs. It involves the construction of a new dataset of bilateral tariff rates for 90 importing and 149 exporting countries over 1996-2010, covering the Harmonized System 2-digit level of product varieties. Given the complexity of non-tariff arrangements, we allow for heterogeneity across three different types of PTAs, namely custom unions (CUs), free trade agreements (FTAs), and partial scope agreements (PSAs). We further consider heterogeneity within each of these three PTAs regarding responding time, partner type, and product type. The key findings are: (i) non-tariff changes under PTAs on average increase both the intensive and extensive margins of trade; (ii) PSAs do not have discernible trade impacts unlike FTAs and CUs; (iii) CUs have a stronger trade impact than FTAs; (iv) the impact of CUs comes mostly from non-tariff changes, while that of FTAs comes from both tariff and non-tariff changes; (v) non-tariff changes associated with CUs have a stronger trade effect than those associated with FTAs, which in turn are stronger than those associated with PSAs; (vi) non-tariff changes take a longer time than tariff changes to impact on the intensive margin; (vii) non-tariff changes under FTAs and CUs between industrial and developing countries increase the exports from the former to the latter more than the other way around; and (viii) there is substantial heterogeneity across sectors in their response to trade liberalization.