Abstract Recent theoretical work on bilateral trade preferences stresses their dependence on but also their consequences for the multilateral trading system. In particular, a country's choice of participating in a preferential trade agreement (PTA) depends on the choice of other economies to participate therein. However, recent empirical work on the determinants of PTA formation assumes that countries are independent in that regard. This paper lays out an empirical analysis to study the role of interdependencies in PTA membership in a large data-set of 15, 753 country-pairs. Applying modern econometric techniques, a PTA membership is found to create an incentive for other country-pairs to participate in a PTA as well. Especially, countries have an incentive to participate in the same PTA if their neighbors are members already.

Chad Bown, Penny Goldberg, Nuno Limao, and seminar participants at UC-Berkeley, UC-San Diego and the NBER 2006 Summer Institute. We thank Hiau Looi Kee for providing us with access to the detailed estimates of ad valorem equivalent NTB measures generated in Kee, Nicita and Olarreaga (2006), Robert Feenstra for making available to us his data on processing versus ordinary trade for China, and Cato Adrian of the WTO Secretariat for help with many data questions. Finally, we thank Alan Spearot for outstanding research assistance, Chia Hui Lu for early help with the data, and the NSF (SES-0518802) for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the

This paper presents a theory of dynamic trade agreements in which exter- nal institutions, such as the WTO, play a central role in supporting credible enforcement. In our model, countries engage in ongoing negotiations, and as a consequence cooperative agreements become unsustainable in the absence of external enforcement institutions. By using mechanisms such as delays in dispute resolution and direct penalties, enforcement institutions can restore incentives for cooperation, despite the lack of any coercive power. The occur- rence of costly trade disputes, and the feasibility of mechanisms such as escape clauses, depend on the adaptability of enforcement institutions in their use of information.

Using detailed data on trade and tariffs from 1992-2007, we examine how the ASEAN Free Trade Agreement has affected trade with non-members and external tariffs facing non-members. First, we examine the effect of preferential and external tariff reduction on import growth from ASEAN insiders and outsiders across HS 6-digit industries. We find no evidence that preferential liberalization has led to lower import growth from non-members. Second, we examine the relationship between preferential tariff reduction and MFN tariff reduction. We find that preferential liberalization tends to precede external tariff liberalization. To examine whether this tariff complementarity is a result of simultaneous decision making, we use the scheduled future preferential tariff reductions (agreed to in 1992) as instruments for actual preferential tariff changes after the Asia crisis. The results remain unchanged, suggesting that there is a causal relationship between preferential and MFN tariff reduction. We also find that external liberalization was relatively sharper in the products where preferences are likely to be most damaging, proving further support for a causal effect. Overall, our results imply that the ASEAN agreement has been a force for broader liberalization.

China’s deepening engagement in the global trading system and the threat of its export capacity have affected the negotiation, formation, and rules of international trade agreements. Among other changes, China’s 2001 accession to the World Trade Organization (WTO) intro-duced new allowances for existing members to deviate from core WTO principles of reciprocity and most-favored-nation (MFN) treatment by giving existing members access to a discriminatory, import-restricting China safeguard based on the threat of “trade deflection. ” This paper asks whether there is historical evidence that imposing discriminatory trade restrictions against China during its pre-accession period led to Chinese exports surging to alternative markets. To examine this question, we use a newly constructed data set of product-level, discriminatory trade policy actions imposed on Chinese exports to two of its largest destination markets over the 1992-2001 period. Perhaps surprisingly, we find no systematic evidence that either U.S. or EU imposition of such import restrictions during this period deflected Chinese exports to alternative destina-tions. To the contrary, we provide evidence that such import restrictions may have a chilling effect on China’s exports of these products to secondary markets- i.e., the conditional mean U.S.

How large are optimal tariffs? What tariffs would prevail in a world-wide trade war? How costly would a breakdown of international trade policy cooperation be? And what is the scope for future mul-tilateral trade negotiations? I address these and other questions using a unified framework which nests traditional, new trade, and political economy motives for protection. I find that optimal tariffs average 62 percent, world trade war tariffs average 63 percent, the government welfare losses from a breakdown of international trade policy cooperation average 2.9 percent, and the possible government welfare gains from future multilateral trade negotiations average 0.5 percent. (JEL F12, F13, O19) I propose a flexible framework for the quantitative analysis of noncooperative and cooperative trade policy. It is based on a multi-country multi-industry general equilibrium model of international trade featuring inter-industry trade as in Ricardo (1817), intra-industry trade as in Krugman (1980), and special interest politics as

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What do trade negotiators negotiate about? There are two distinct theoretical approaches in the economics literature that offer an answer to this question: the terms-of-trade theory and the commitment theory. The termsof-trade theory holds that trade agreements are useful to governments as a means of helping them escape from a terms-of-trade-driven Prisoners ’ Dilemma. The commitment theory holds that trade agreements are useful to governments as a means of helping them make commitments to the private sector. These theories are not mutually exclusive, but there is little direct evidence on the empirical relevance of either. We attempt to investigate empirically the purpose served by market access commitments negotiated in the World Trade Organization. We find broad support for the terms-of-trade theory in the data. We claim more tentatively to find support in the data for the commitment theory as well.

forthcoming in Journal of International Economics The recent proliferation of free trade agreements (FTAs) has resulted in an in-creasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the par-ticipating countrieseconomic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also cru-cially dependent on the participating countries existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a signi cant fraction of FTA formations that would not otherwise be predicted by countrieseconomic characteristics. Key words: free trade agreements, third-country e¤ect, loss sharing, concession erosion

Produced by the Research Support Team The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 4960 Using detailed data on trade and tariffs from 1992–2007, the authors examine how the ASEAN Free Trade Agreement has affected trade with nonmembers and external tariffs facing nonmembers. First, the paper examines the effect of preferential and external tariff reduction on import growth from ASEAN insiders and outsiders across HS 6-digit industries. The analysis finds no evidence that preferential liberalization has led to lower import growth from nonmembers. Second, it examines the relationship between preferential tariff reduction and MFN tariff reduction. The analysis finds that preferential liberalization tends to precede external tariff liberalization. To examine whether this tariff This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the department to