The Three Faces of Trade Liberalization: Unilateral, Preferential, and Multilateral

Abstract

There is a growing number of studies that investigate the effect of trade liberalization on productivity and nearly all assume that trade policy is independently determined of productivity, hence it is exogenous. I show that this assumption is generally invalid both theoretically and empirically. In Chapter 1, I demonstrate that under a standard political economy model of trade protection, productivity directly influences tariffs. Moreover, this productivity-tariff relationship partly determines the extent of liberalization across sectors even in the presence of a large exogenous unilateral liberalization shock that affects all sectors. In Chapter 2, I examine total factor productivity (TFP) estimates obtained at the firm level for Colombia between 1983 and 1998 and find that more productive sectors receive more protection within this period. In estimating the effect of productivity on tariffs, I control for the endogeneity of the inverse import penetration to import demand elasticity ratio and productivity. Finally, I use a system of equations to illustrate that the positive impact of liberalization on productivity grows somewhat stronger when corrected for the endogeneity bias. In Chapter 3, which is joint with Nuno Limão, we analyze the effect of preferential trade agreements (PTAs) on multilateral trade liberalization (MTL). PTAs are characterized by liberalization with respect to only a few partners and thus can potentially retard multilateral trade liberalization (MTL). Despite this important concern, there is almost no systematic evidence as to whether PTAs actually affect MTL or not. We model the effect of PTAs on MTL and show that PTAs slow down MTL unless they involve a common external tariff and allow for internal transfers. Next, we use detailed data on product-level tariffs negotiated by the European Union (EU) in the last two multilateral trade rounds to structurally estimate our model. We confirm the main prediction-the EU's PTAs have clashed with its MTL-and find that the effect is quantitatively significant. Moreover, we also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of MTL in the EU.