tween partners, real-world PTAs do not always lead to zero tari¤s on all intra-PTA goods trade. Empirically, the many negotiated exceptions within PTAs have resulted in a signi...cant number of PTA tari¤s remaining at levels above zero, including eight percent of tari¤s for the major PTAs of the US, Canada, EU, and Japan (Damuri, 2012). Indeed, in an analysis of the PTAs involving 85 countries and 90 percent of world trade in 2007, the WTO (2011, pp. 124-125) ...nds that roughly 66 percent of tari¤ lines with MFN tari¤ “peaks”(MFN rates de...ned as greater than 15 percent) have not been reduced at all through PTAs. Hence, while existing PTAs should be viewed as a signi...cant force in eliminating (roughly one third of, and on a discriminatory basis) the tari¤ peaks that remain among WTO members, a majority of these tari¤ peaks are nevertheless still in place.

Second, while a large and increasing share of world trade takes place between PTA members, this share substantially overstates the amount of preferential trade between members. In many instances there is no preference margin because the MFN tari¤s are also zero. Furthermore, even where positive preference margins exist, exporters may not utilize available preferences because of both the resource costs (to sourcing inputs from less e¢ cient suppliers in PTA markets) and bureaucratic costs (to proving legal compliance) due to rules of origin and local value-added requirements needed to gain access to the lower preferential rates.<sup>13</sup> How much trade really takes place under preferential tari¤s? First, between 49 percent (including intra-EU trade) and 65 percent (excluding intra-EU trade) of world trade takes place between countries that are not part of a common PTA.<sup>14</sup> Second, excluding intra-EU trade, the WTO estimates that only 16 percent of global trade is eligible for any preferential tari¤s and less than 2 percent is eligible to receive preferences with margins above 10 percentage points. Including intraEU trade in these statistics implies that 30 percent of global trade is eligible for any preferential tari¤s and 4 percent is eligible for margins over 10 percentage points. Despite the explosive increase in PTA adoption, the WTO estimates that overall, excluding (including) intra-EU trade, 84 percent (70 percent) of world merchandise trade still takes place on an MFN basis.

These numbers can help put the impact of existing PTAs in perspective. PTAs have served as the primary conduit for tari¤ discrimination in the WTO system. And they have led to discriminatory tari¤ reductions below MFN levels that are far from insigni...cant. But it would appear that to date PTAs have not delivered discriminatory tari¤ liberalization on a wide enough scale to cause widespread “trade diversion”(the reduction in imports from third countries; see Viner, 1950).<sup>15</sup> Finally, an increasingly important characteristic of many of the current PTA negotiations is

> 13 See, however, Keck and Lendle (2014) for a recent challenge to the position that preferences often go unutilized.

> 14 Considering these ...gures with and without intra-EU trade ‡ows may be important depending on the context, given that the EU is a unique PTA in that it is not only a customs union but has undertaken deeper integration along many dimensions - including factor markets and monetary integration for a substantial subset of member countries - and also steps toward political integration.

> 15 A potentially important caveat to this last observation, however, is suggested by the results of Handley (2014) and Handley and Limão (forthcoming) which we discuss further below: in the presence of policy uncertainty there can be large di¤erences between the trade e¤ects of an applied MFN tari¤ of zero that is bound at a much higher level in the WTO and a PTA tari¤ that is both applied and bound at zero. Such di¤erences are missed by a focus on preference margins relating to applied tari¤s alone, and inferences about the degree of trade diversion caused by existing PTAs which adopt this focus could be signi...cantly understated as a result. See also the discussion in Bhagwati (2008) and the survey in Panagariya (2000).

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