The Economics and Politics of Preferential Trade Agreements

Abstract

The proliferation of preferential trade agreements (PTAs) is a key feature of this current wave of globalization. This chapter surveys the literature related to determinants of PTAs and their consequences. The key findings of the literature are two-fold. First, the expansion of global value chains is the main driver of the formation of PTAs. Second, PTAs generate stark distributional consequences among firms with large productive firms reaping the lion’s share of the gains from trade. Given that the welfare effect of preferential liberalization is generally small, forming PTAs is likely to remain a controversial trade policy among politicians and voters.