Abstract: This paper provides direct empirical evidence that preferential trade agreements (PTAs) are consistent with the terms-of-trade theory. In other words, PTAs internalize the temptation to increase tariffs when countries possess importer market power. Using PTAs that occur between 2001-2015, I study the formation of PTAs and the structure of first year PTA tariff cuts. I first show the likelihood of a PTA increases when both countries have more importer market power. This suggests countries form PTAs in a way that internalizes the terms-of-trade externality by agreeing to mutual tariff decreases. Second, using recently available tariff data for 39 bilateral PTAs, I show high importer market power leads to tariff cuts that are 103 percent larger in magnitude when PTAs enter into force. Thus, countries target tariffs they have a strong temptation to raise in the absence of an agreement, as predicted by the terms-of-trade theory. These results provide a rationale for why PTAs are allowed under the World Trade Organization’s rules.
“The Effects of Domestic Labor Mobility on Trade Agreements: Empirical Evidence” – Revise and Resubmit, The World Economy
Abstract: This paper examines the empirical relationship between trade agreements and domestic labor mobility. The domestic-commitment motive from Maggi and Rodriquez-Clare (2007) and standard trade models with labor frictions predict that trade liberalization should occur when labor is more mobile. I find support for this prediction. Using preferential trade agreements (PTAs) covering 56 countries in 2015, I show labor mobility is a strong predictor of trade liberalization. The probability of a PTA increases when the country pair’s average domestic labor market is less rigid. When the average labor mobility increases by 1 standard deviation from the mean, the probability of a PTA increases by 14 to 26 percent. These results are also consistent with the bound tariffs negotiated under the World Trade Organization, where less rigid labor markets are associated with lower bound tariffs.
Work in Progress
“The Effect of Phase-In Tariffs on Import Growth: A Worldwide Perspective”
Abstract: This paper examines the effect of free trade agreement (FTA) phase-in tariffs on import growth for a wide set of countries. Using recently available FTA tariff data, I extend the work of Besedes, Kohl, and Lake (2020), who use a difference-in-difference-in-differences strategy to show import growth for the United States after joining the North American Free Trade Agreement (NAFTA) is not consistent with the “phase-in hypothesis”. Specifically, they find products that are immediately cut to zero and phase-in tariffs lasting 5-10 years, do not yield different patterns of delayed import growth as suggested by Baier and Bergstrand (2007). Studying other FTAs is important for three reasons. First, NAFTA is a unique trade agreement, and it is unclear whether the results will generalize to other FTAs. Second, there exists a wide range of heterogeneity in how different FTAs implement phase-in tariffs, since the WTO has only vague guidance on how to proceed with phase-ins. Finally, the gravity literature, which is the first to document the stylized fact of delayed import growth and FTA implementation, uses a wide variety of countries spanning many FTAs and does not focus on one agreement. Thus, it is plausible the tariff phase-in hypothesis is correct, but requires a worldwide perspective.