How preferential is preferential trade?

In a paper on “How preferential is preferential trade?” we assess a central aspect of these preferential trade agreements: tariff preferences, using a new dataset on preferential and non-preferential applied tariffs, constructed by the International Trade Center and the World Bank. The dataset covers a total of 5,203 products at the HS6-digit level, 199 reporters and 239 partners, representing approximately 97 percent of world imports in 2016.

 Three main findings arise from this analysis.

1.     PTAs have significantly widened the scope of tariff-free trade. Whereas 42 percent of the total value of trade traded free under MFN rates in 2016, PTAs have fully liberalized an additional 28 percent of global trade (table 1).

Table 1: Trade-Weighted National Most-Favored Nation (MFN) and Applied Tariff Rates


 Source: Espitia et al. 2018.

Notes: Tariff information is not available for 4 percent of 2016 global trade from or to unspecified countries.

2.     The extent of preferential liberalization varies significantly across countries and sectors. Around 70 percent of countries have reduced trade-weighted average preferential tariffs to less than 5 percent (see figure 1), but PTAs have not been able to eliminate the high levels of protection in some low-income countries and in agricultural products, textiles, and footwear (see figure 2).

Figure 1: Preferential liberalization has reduced trade-weighted average tariffs rates to less than 5 percent for more than two-thirds of countries


Source: Espitia et al. 2018.


Figure 2: Although preferential liberalization has targeted highly protected sectors (MFN tariffs greater than 15%), agricultural products, textiles and footwear remain pockets of protection

Figure 2.png

Source: Espitia et al. 2018.

3.     While the average preferential margin for trade covered by PTAs is low because one-fifth of world trade under preferential agreements is already duty free, more than a quarter of world trade is subject to an average preference margin of 7.4 percent. Considering competition from preferential and non-preferential sources, however, only 5.2 percent of global exports benefited from a preferential advantage of over 5 percent and only 3.3 percent of global exports suffered from a preferential disadvantage higher than 5 percent.

These findings are based on potentially applied tariffs. In practice, preferential duties are not granted automatically to all potentially eligible products. An assessment of the scope of preference utilization for the sub-sample of EU imports from its trading partners suggests that not all eligible imports take advantage of preferences, because of impediments such as restrictive rules of origin, and therefore actual preference margins are generally lower than potential margins.

The full paper can be downloaded here