The trade effect of regional trade agreements in the presence of duty drawbacks

Before regional trade agreements (RTAs) come into force, some firms enjoy duty-free imports using other tariff regimes such as a duty drawback (DD) regime. For such firms, the use of RTA tariff regimes will not provide additional benefits in terms of duty exemption. In this study, we examine the trade effects of RTAs in the presence of a DD regime. We theoretically demonstrate that firms that switch from a DD to an RTA regime will either increase or decrease their imports. Subsequently, we empirically analyse the effect of this switching on imports using firm-level trade data from Thailand. The empirical results show that switching firms either increase or do not change their imports. Our data also suggest that this increase in imported inputs is used to produce goods for the domestic market, not the export market. We also reveal that relatively small-sized firms tend to switch to the RTA regime, while relatively large-sized firms continue importing under the DD regime even after the entry of RTAs into force. With these results, we discuss the implication for the magnitude of trade creation effects of RTAs under the presence of DD regimes.