Proliferation of Preferential Trade Agreements: Quantifying its Welfare Impact and Preference Erosion

Abstract

Literature has frequently evaluated the proliferation of preferential trade agreement (PTAs) by counting the number of PTAs or the share of international trade covered by these agreements. But these indicators have been recently criticized. This article, using a Computable General Equilibrium (CGE) model, attempts to quantify the economic impact (measured by its welfare effect) of the proliferation of PTAs. Results show that the welfare impact is limited and often vanishes quickly because preferences are eroded by the proliferation of PTAs. This contrasts with the gains from non–discriminatory liberalization. Therefore, proliferation of PTAs is unlikely to continue. This article also has methodological implications for CGE modelling: ignoring the proliferation of PTA significantly bias the results; and the bias is not only potentially large but also its direction is a priori uncertain.