Regionalism and Falling External Protection in High and Low Tariff Members

This paper provides evidence that the reduction in applied most-favored nation (MFN) tariffs resulting from a decrease in preferential tariffs is restricted to (or significantly larger in) high-tariff members of preferential trade agreements (PTAs). This heterogeneous impact is observed only when the share of preferential imports increases, leading to a decline in tariff revenue. This makes countries which tend to heavily depend on tariff revenue as a source of government funding more likely to reduce their MFN tariffs, which is also observed in the data. These results lend support to the “building bloc†view of regionalism, in particular for countries applying high external tariffs before the agreement. They are also consistent with a mechanism operating through trade deflection and the associated loss of tariff revenue.