Abstract:
In Preferential Trade Agreements (PTAs), not all firms utilise preferential tariffs, suggesting the presence of fixed costs of using tariff preference. I develop a model where firms can trade in a PTA under the standard Most Favoured Nation regime or, after paying an additional fixed cost, under the Preferential regime. I show that if tariff preferences become uncertain, more firms export under the MFN regime, but with the option to switch to the Preferential regime in the future. The model extends the Handley and Limao one and nests its empirical equation under the restriction of a single trade regime. I apply the model to an excellent natural experiment: the Brexit referendum and UK trade with PTA partners. I find that ignoring the partial uptake of trade agreements understates the impact of uncertainty on trade and can lead to biased empirical results. Brexit uncertainty had a modest negative effect on UK imports from PTA countries. Continuity Agreements signed to replace the existing EU agreements only partly reduced the uncertainty introduced by the referendum.