Regional Trade Agreements and Excluded Countries

Abstract

This article investigates the impact of regional trade agreements (RTAs) on excluded countries' protection for agricultural producers. Specifically, this article quantifies the causal impact of an average trading partner's import share from its RTA members, that is preferential import share, on excluded countries' nominal rate of assistance (NRA) to agricultural producers. The empirical analysis is based on a panel dataset that covers fifty-four agricultural commodities across eighty-eight countries from 1986 to 2018. Based on an instrumental variables approach that instruments average trading partners' preferential import share with predicted average trading partners' preferential import share constructed from gravity models that assume time-varying impacts of air and sea distances on trade, I find that a one-percentage-point increase in an average trading partner's preferential import share decreases excluded countries' NRA by 0.298 percentage points. The impacts are larger and more significant for net-importing countries than for net-exporting countries. Heterogeneity analysis shows that developed countries reduce protection for more protected and subsidized producers, and developing countries reduce protection for less protected and taxed producers. These findings suggest that it's important to provide farmers in developing countries with complementary mitigation strategies to counteract the reduced protection resulted from their partners' RTA formation.