Negotiating exclusion: Regulatory barriers in preferential trade agreements

Abstract

Trade negotiations now center on regulations. This paper argues that these negotiations can raise uncertainty over fixed costs. We develop a simple model of exporter competition to show how uncertainty generated by negotiations redistributes profits across firms. We show that regulatory uncertainty reduces competition by deterring entry on the part of less productive firms and shifting market share toward top producers. Empirically, we show that this negotiation-driven uncertainty can help explain the economically concentrating effects of preferential agreements. Preferential trade agreements combine tariff concessions with regulatory changes that ensure the benefits of the agreement are limited to member states. Using novel data covering firm-level export activity and public investment decisions in the automotive and automotive parts sectors during NAFTA, we find that negotiation-driven uncertainty deterred non-North American producers while benefiting the top American auto manufacturers.