Preference Areas and Intra-Product Specialization

It is well-known that preferential trade agreements involving final products may raise or lower welfare, depending upon whether the trade-creating elements dominate or not. The object of this paper is to examine the effects of preference arrangements covering trade in goods as well as components and allowing for the liberalization of foreign direct investment. It is shown that component specialization raises wages in both the importing and exporting country. It also raises industry output and employment in both countries. This finding is at odds with the predictions of critics of NAFTA