Preferential Liberalization and Self-Enforcing Multilateral Cooperation: Evidence from Latin America’s Use of Tariffs, Antidumping and Safeguards.

Abstract

I test the predictions of Bagwell and Staiger´s (1999) theory of the effects of preferential liberalization on import protection imposed against non-member countries. In contrast to the existing literature, which has (for the most part) focused on investigating whether external tariffs rise or fall due to preferential trade liberalization, by testing the predictions of a specific model in a way that closely follows the theory, I am able to examine the channels through which those effects take place. Importantly, and unlike most existing studies, I analyze not only tariffs but also the temporary trade barrier (TTB) policies of antidumping and safeguards. I focus on Latin America and find strong support for the theoretical predictions of Bagwell and Staiger (1999). First, there is evidence of tariff complementarity: i) a larger reduction in the preferential import protection leads to a larger reduction in protection against non-members; ii) the more consumption increases, the more external protection decreases with the fall in preferential protection; and iii) the more imports from the rest of the world fall, the more external protection decreases with a preferential protection cut. Furthermore, I also find evidence of the punishment effect and the tariff discrimination effect, which arise when enforcement difficulties are incorporated into the theory. To my knowledge, this is also the first paper to test theoretical predictions that specifically arise from introducing multilateral enforcement issues. Finally, the overall results point toward a building block effect of preferential liberalization.