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Who captures the price rent? The impact of European Union trade preferences on export prices

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Abstract

Preferential trade agreements (PTAs) aim at increasing trade flows via the incentives created by preference margins; this is the difference between the preferential tariff and the tariff of the main competitors. However, an additional impact that is often omitted in PTAs evaluations is the possibility that the wedge between preferential and most favoured nation (MFN) tariffs may induce a preference rent that translates into larger prices for preferential exporters. This paper analyses empirically whether preferential exporters capture this preference rent using a unique dataset of imports in the European Union at a highly disaggregated level linked to information on the preferential regime used and the tariff applied. Our main findings suggest that on average an exporter obtains a larger price margin under a preferential regime than under MFN. However, this preference rent is only partially appropriated by exporters with a pass-through coefficient from preference to price margins that oscillates between 0.17 and 0.8, depending on the size of the margin and the type of product.

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Notes

  1. Within the GSP system, the EU provides preferential access to the EU market to 176 developing countries in the form of reduced tariffs for their goods. Under EBA, part of the GSP system, 49 LDCs have duty free quota free access to the EU to all products excluding weapons since 2001. In addition to weapons, banana and rice were excluded from EBA between 2006 and 2009, and sugar is being transitioned until 2012 with minimum prices.

  2. The main assumption here is that the tariff reduction is not passed to the consumer. For example, in a monopolistic competition setting with Dixit–Stiglitz preferences, the exporter price would remain unchanged and the price for consumers would be lower, increasing the demand for that variety.

  3. Some ad valorem conversions have not been possible when there was the need for reference prices. The total loss of observations represents around 5 % of the value of imports.

  4. Both identification variables have very low correlations with price margins. We also regress price margins on this specification and the two identification variables are not statistically significant.

  5. It is not possible to obtain convergence with variety fixed effects since it would impose too large parameterization of the model. HS-2 sector dummies, however, capture the impact of RoOs since for many products these are defined at the sector level.

  6. We use the command selmlog available in STATA and developed by Bourguignon et al. (2007).

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Acknowledgments

A reduced version of this paper was produced as part of the “Mid-term Evaluation of the EU’s Generalized System of Preferences” funded by the European Commission. I would like to thank the European Commission for financial support and access to the data. Thanks to Michael Gasiorek, Alan Winters and Marcelo Olarreaga for extensive comments in earlier drafts, to Javier Lopez Gonzalez and Maximiliano Mendez Parra for assistance with the tariff data, and two anonymous referees for comments on this draft.

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  1. Institute of Development Studies and Centre for the Analysis of Regional Integration at Sussex (CARIS), University of Sussex, Library Road, Brighton, BN1 9RE, UK

    Xavier Cirera

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  1. Xavier Cirera
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Correspondence to Xavier Cirera.

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Average number of flows per country and year

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Cirera, X. Who captures the price rent? The impact of European Union trade preferences on export prices. Rev World Econ 150, 507–527 (2014). https://doi.org/10.1007/s10290-014-0186-5

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