ABSTRACT
In a series of papers, Bhagwati and Panagariya (1996), Bhagwati, Greenaway and Panagariya (1998) and Panagariya (1996, 1997a, 1998) have argued forcefully that a tariff preference by a country is likely to hurt itself and benefit its union partner. If the union members are small in relation to the rest of the world and the country giving the tariff preference imports the good from the partner as well as the rest of the world, the tariff preference has no impact on the country’s internal price and hence the allocation of resources. Instead, to the extent of the tariff preference, the tariff revenue collected previously on the imports from the partner is transferred to the latter’s exporting firms as additional profit. If the union members are large in relation to the rest of the world, the tariff preference leads to a deterioration of the country’s terms of trade. In either case, the presumption is that the country loses from its own preferential trade liberalization.
