Preferential Tariff Formation – The Case of the United States

Abstract

In this article, we address the impact of multilateral trade liberalization (MTL) on the preferential tariffs granted by the United States, which is one of the largest traders and one of the biggest contributors to MTL. We empirically address two important questions. First, if the Most Favoured Nation (MFN) tariff for a product is higher, does it lead to a higher or lower preferential tariff? Second, the US being a large trading partner in such agreements, does reciprocity matter for giving meaningful preferential access? For a given MFN tariff, we model the preferential tariff with a simple linear functional form. We take the US MTL as known to the world by the end of Uruguay Round in 1994 and estimate the impact of MTL on preferential tariff negotiations of the US during 1995 to 2007. Here use a three-dimensional panel data, which takes into account the partner, product and time variation of the data-set. To complete our data-set, we codify eight Preferential Trade Agreement (PTA) legal agreements. We draw three important conclusions. First, the products that are highly protected do not get high preferential access even at the regional level. Second, reciprocity plays only a limited role in granting better preferential access. Third, irrespective of development level of the partner, the non-reciprocal Generalized System of Preference (GSP) preferences always matter.