Learning to Use Trade Agreements

Abstract

Free trade or preferential trade areas (PTAs) allow importers who belong to the area to export to each other while paying zero or preferential tariffs as long as Rules of Origin (ROOs) are met. Meeting them is costly not only in terms of production costs but also in terms of documentation costs. We ask if these fixed costs of documentation change over time with the experience of the firm in obtaining preferential tariffs. We explore this using a unique importer-exporter matched transaction-level customs data set on a group of Latin American countries. Our estimating equation is model-based and shows that these fixed costs depend on the history of preference utilization. Most of the effect comes from experience in the same product and same partner, with some spillover to other partners buying the same product. There is little learning from experience in other products and other partners. When considering products that have been under preferences for a while, some learning might have occurred prior to the start of our data. Using a natural experiment in Argentina, where some products were newly brought under preferences, we show that learning is indeed larger for such products. As facilitating preference use today also makes it easier to use preferences in the future, interventions early on in the life of the FTA to reduce such costs would be more effective.