Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization
Nuno Limão and Marcelo Olarreaga ,
( 20 )
World Bank Economic Review

The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows multilateral trade liberalization. Recent theoretical and empirical evidence indicates that this is the case even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. This stumbling block effect can be avoided by replacing the unilateral preferences with a fixed import subsidy, which generates a Pareto improvement.

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