theoretical analysis but makes the predictions nearly impossible to test because multilateral rounds are so infrequent—eight since GATT was signed in 1947. Moreover, countries can choose to conclude a multilateral round with either considerable or little liberalization. Thus, the focus should be on whether PTAs affect the change in multilateral tariffs and not simply the probability of concluding any given multilateral round.<sup>4</sup> The model that we develop, which builds on Limão (2002), captures key features of the multilateral system and of recent PTAs and generates several speci fi c predictions that we test. The main prediction is that multilateral tariffs are higher on products that a country imports duty-free from preferential partners than on an otherwise similar good. The basic intuition for this result is the following. Suppose the European Union (EU) offers duty-free access in a set of products to some North African countries. The latter bene fi t from facing a lower tariff than their competitors; the fact that the EU signs the PTA indicates that its member governments value it at given multilateral tariffs. If the EU eliminated its multilateral tariff on that same set of products, it would effectively eliminate the PTA that it valued. We show that this additional cost of MTL is only present for the subset of PTA goods and affects multilateral tariff levels only when the preferential tariff is already zero since otherwise, the preferential tariff can be reduced to maintain the preferential margin. The model also predicts that if there is a common external tariff and the ability for direct cash transfers, that is generally present when there is a common tariff, then no stumbling block effect is present. This occurs because the EU can now offset any reduction in preferential margins due to MTL through a direct transfer to the preferential partner.

We estimate the model’s structural equation for the equilibrium trade policy using detailed product level data for the EU. There are several compelling reasons for focusing on the EU to analyze whether there is a clash of liberalizations. First, a key concern with PTAs is their potential to harm nonmembers. Given that the EU is the world’s largest trader, its trade policy surely affects non-members. Second, as we discuss below, the EU’s preferential agreements are quite diverse, which allows us to theoretically derive and test a rich set of predictions. Finally, although the EU accounts for a fi fth of world trade, there is hardly any empirical evidence on the formation of the EU’s trade policy in general and none that analyzes how its PTAs affect its MTL.<sup>5</sup>

> 4 Bagwell and Staiger (1998) analyze two opposing effects of PTAs on the equilibrium multilateral tariff level in a self-enforcing model. They show that PTAs are a stumbling block if countries are very patient and a building block otherwise. Winters (1999) surveys this literature and Panagariya (2000) the broader issue of regionalism. Another approach to the PTA vs. MTL issue is due to Krugman (1991) who analyzes the welfare path for exogenously expanding trading blocs.

> 5 Constantopoulos (1974) and Riedel (1977) examine determinants of industry level protection of individual members before accession to the EU. Tavares (2001) is an exception in that she analyzes the determinants of the EU’s common external tariff, also at the industry level. We are not aware of any paper that either estimates the determinants of

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