The Trade Effects of Tariffs and Non-Tariff Changes of Preferential Trade Agreements

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 nontariff 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) nontariff
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.