Sources of welfare gains and losses in forming a protective trade area

The conventional approach to the welfare analysis of preferential trade areas (PTAs) often focuses exclusively on the import side and ignores the export side. Together with the homogenous product assumption, this tends to bias the assessment of the terms of trade impact of PTAs and omit their general equilibrium effect. In this paper, the GTAP global general equilibrium model is used to address these shortcomings. Decomposition is undertaken to reveal the sources of welfare changes. By taking advantage of the rich details of economic structure and trade policy underlying the model, this approach to the analysis of PTAs provides some useful insights into the determinants of their welfare effects, including potentially important second-best outcomes