Preferential Trade Liberalization: The Traditional Theory and New Developments
(Published: JEL 38, June 2000, 287-331). This paper begins by systematically developing the “static” theory of preferential trade areas (PTAs) and showing that neither a large volume of initial intra-union trade nor geographical proximity can serve as a guide to welfare enhancing PTAs. The paper then discusses the modern literature addressing the welfare effects of a simultaneous division of the world into many PTAs, the impact of a PTA on external tariffs and the “dynamic” time-path question of whether PTAs are building blocks or stumbling blocks towards multilateral freeing of trade. A final substantive section discusses some key theoretical considerations in the empirical evaluation of PTAs.