Many new exporters give up exporting very shortly, despite substantial entry costs; others shoot up foreign sales and expand to new destinations. We develop a model based on experimentation to rationalize these and other dynamic patterns of exporting firms. We posit that individual export profitability, while initially uncertain, is positively correlated over time and across destinations. This leads to "sequential exporting," where the possibility of profitable expansion at the intensive and extensive margins makes initial entry costs worthwhile despite high failure rates. Firm-level evidence from Argentina's customs, which would be difficult to reconcile with existing models, strongly supports this mechanism. Sequential exporting also has important and novel policy implications: a reduction in trade barriers has delayed effects, while also promoting entry in third markets. This trade externality poses challenges for the quantification of the effects of trade liberalization programs and implies that the consequences of international trade agreements are significantly richer than traditional models suggest. JEL Codes: F10; D21; F13 Keywords: Export dynamics, experimentation, uncertainty, learning, trade liberalization * We thank Costas Arkolakis, David Atkin, Sami Berlinski, Jordi Blanes-i-Vidal, John Bluedorn, Holger Breinlich, Svetlana Demidova, Nic de Roos, Peter Egger, Robert Elliott, Daniel Ferreira, Rodrigo Fuentes, Martin Gervais, Juan Carlos Hallak, James Harrigan, Beata Javorcik, Marc-Andreas Muendler, Peter Neary, Brent Neiman, Dimitra Petropoulou, Horst Raff, Steve Redding, Frédéric Robert-Nicoud, Mark Roberts, Ina Simonovska, Thierry Verdier, Zhihong Yu, and seminar participants at various institutions and conferences for valuable comments and suggestions. We also thank the support of the Chair Jacquemin of the Université Catholique de Louvain in choosing this paper for its annual award at the 2009 European Trade Study Group Meeting. We gratefully acknowledge financial support from the British Academy and the ESRC.

We examine the effect of regionalism on unilateral trade liberalization using industry-level data on applied most-favored nation (MFN) tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these "complementarity effects" of preferential liberalization on external liberalization do not arise in customs unions. Overall, our results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.

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This article reviews the theoretical and the empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the past 15 years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization has materialized, whereas the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences.

This paper studies the political viability of free trade agreements (FTAs). The key element of the analysis is the "rent destruction" that these arrangements induce: by eliminating intrabloc trade barriers, an FTA lowers the incentives of import-competing industries to lobby for higher external tariffs, thereby inducing a reduction of the rents created in the lobbying process. Using a conventional competitive model, I show that the prospect of rent destruction can critically undermine (and in some cases rule out entirely) the political viability of welfare-reducing FTAs. This result contrasts sharply with findings from the earlier regionalism literature. Copyright (c) 2005 Massachusetts Institute of Technology.