Small is Beautiful: Preferential Trade Agreements and The Impact of Country Size, Market Share, Efficiency, And Trade Policy

Abstract

This paper examines two issues: 1) the welfare impact of preferential trade agreements (PTAs), and 2) the effect of structural and policy changes on the welfare impact of PTAs. It is shown that, on the import side, the home country loses from a PTA between small countries (and the PTA as a whole loses as well); and the impact of a PTA on home country welfare is worse the higher the level (and share) of imports from the partner country. The latter result holds both in the small-country and the large-country case. The paper also examines the effects on the welfare impact of PTAs of changes in efficiency, trade policy, smuggling and rules of origin. It is shown that the impact of forming a PTA between small countries in the case of smuggling is ambiguous in general.

JEL Classification: F13, F15