Plurilateral trade agreements : a complementary margin to preferential liberalization

We show that plurilateral agreements facilitate global tariff liberalization by creating an MFN-based margin of cooperation that leaves preferential access via preferential trade agreements (PTAs) unchanged. In a model of endogenous trade agreement formation with farsighted governments, PTAs become rigid once exclusion or free-riding incentives bind, constraining further PTA expansion. Plurilateral agreements relax these constraints by allowing countries to liberalize selectively in a differentiated-goods sector without altering existing PTAs. As a result, the stable equilibrium trade network consists of the PTAs that would arise absent plurilaterals, augmented---but not replaced---by plurilateral MFN liberalization. This mechanism provides an explanation for the growing role of sectoral plurilateral agreements within the WTO as preferential liberalization becomes increasingly constrained.