this question in mind.<sup>100</sup> Finally, while a reduction in the external MFN tari¤s of PTA members triggered by the formation of the PTA might be viewed as partially solving the terms-of-trade problem and thereby making the remaining task easier for the GATT/WTO, Bagwell and Staiger (1999a, 2001a) show that the introduction of PTAs and the violation of MFN that this implies can change (does change for FTAs, can but need not change for CUs) the nature of the problem that a trade agreement must solve, from a simple terms-of-trade problem to a more complicated problem in which international externalities also travel through local prices. Bagwell and Staiger thus argue that PTAs are inherently at odds with the GATT/WTO’s approach to multilateral trade liberalization, which seems best-suited to address simple terms-of-trade problems.

In any case, with these various e¤ects identi...ed and pointing in di¤erent directions, it is clear that theory alone cannot resolve the issue of the impact of PTA formation on the external MFN tari¤s of member countries.<sup>101</sup> We therefore turn to the empirical literature on this question.

What is the impact of PTA tari¤ liberalization on subsequent e¤orts toward multilateral tari¤ liberalization?<sup>102</sup> Limão (2006) provides a ...rst product-level investigation into whether PTAs are stumbling blocks or building blocks for multilateral liberalization. His approach involves a comparison of two di¤erent types of products – those for which a country has positive imports from PTA partners and those for which it only imports from PTA non-partners. An examination of subsequent US multilateral tari¤ changes made as a result of the Uruguay Round provides evidence that the US granted smaller MFN tari¤ reductions in products with positive US imports from PTA partners. The evidence applies not only to products imported from large PTA partners, such as the countries in NAFTA, but also to imports from smaller PTA partners. Given that even those smaller US PTA partners export in nearly 15 percent of product lines, and that these products also have positive levels of imports from non-PTA partners, a further implication is that even small US PTAs were a stumbling block to the multilateral liberalization taking place under the Uruguay Round (consistent with the model of FTAs with non-trade objectives in Limão, 2007).

In addition to the US, another important environment to conduct such an exercise is the EU. Karacaovali and Limão (2008) ...rst con...rm the evidence found for the US by showing that the EU cut MFN tari¤s on products not imported from PTA partners by nearly twice as much as it cut tari¤s on products imported from partners during the Uruguay Round. Furthermore, the size of the EU stumbling block e¤ect is larger for the products that are exported by more PTA partners. Second, they exploit additional margins of the data on the EU PTAs by grouping PTA partners based on whether they eventually acceded to the EU between the ends of the Tokyo Round and Uruguay Round of negotiations. They ...nd evidence consistent with theoretical predictions that accession countries should not trigger stumbling block e¤ects,<sup>103</sup> and that the stumbling block e¤ect

> 100 For example, the rent destruction e¤ect identi...ed by Ornelas (2005a,b,c 2008) does not have a clear prediction related to this question.

> 101 Bagwell and Staiger (1998) and Freund and Ornelas (2010) reach a similar conclusion.

> 102 See Freund and Ornelas (2010) for a more extensive survey of this empirical literature.

> 103 According to the theoretical model of Karacaovali and Limão (2008), EU accession countries would be eligible to receive a transfer or revenue collected under the common external tari¤ which o¤sets the potential loss in intra-PTA trade that they would su¤er as a result of additional multilateral tari¤ reduction.

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