Preferential trade agreements and MFN tariffs: Global evidence

We study the effects of countries' import composition on multilateral liberalization using a global tariff database that covers the 2000-2011 period. Employing a theoretically motivated empirical approach and instrumental variable strategy, we provide evidence that greater preferential trade agreement (PTA) import shares induce tariff cuts on non-member countries. Our baseline estimates imply that a 10 percentage point increase in the share of imports from PTA partners, or alternatively a 1 percentage point PTA-induced decline in applied tariffs, lowers most-favored nation (MFN) tariff rates by about 0.4 percentage points. This effect is driven by countries that negotiate deeper preferential trade deals. PTAs that span more policy fields are prone to lead to more inefficient trade diversion, which creates a stronger incentive to subsequently cut MFN tariffs. At the same time, our results are remarkably consistent across other subsamples emphasized in the literature, including high-and low-tariff importers, poorer and richer economies as well as large and small countries.