A well-established theoretical literature examines the link between preferential trading arrangements and multilateral liberalization. Depending on the underlying model, however, theory predicts that preferential liberalization could act as either a stumbling block or a building block to further multilateral liberalization. Research has focused mostly on tariff measures of import protection. In this working paper, Bown and Tovar develop more comprehensive trade policy measures that include the temporary trade barrier (TTB) policies of antidumping and safeguards, which other studies have shown can erode the trade liberalization gains that appear to occur from tariff measures alone. The authors examine the experiences of Argentina and Brazil during the formation of the Mercosur customs union (1990–2001) and find that an exclusive focus on applied tariffs may mischaracterize the relationship between preferential liberalization and liberalization toward nonmember countries. Any “building block” evidence associated with a focus on tariffs during the period in which Mercosur was a free trade area can disappear once changes in import protection from TTBs are included. Furthermore, there is evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which Mercosur became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, the authors provide the first empirical examination of whether market power motives can help explain the patterns of changes in import protection.
The data underlying this analysis are available here.