Catalysts for third-country market entry: The role of preferential trade agreements

Preferential trade agreement (PTA) membership is known to divert trade volumes away from nonmember (third) countries along the intensive margin of trade, yet much less is known about its effects on third-country market entry along the extensive margin of trade. This paper examines whether PTAs catalyze market entry into third countries, and more broadly whether PTAs create spillover effects beyond member countries that matter for development. Using bilateral trade data from 1948 to 2020, we employ a difference-in-differences strategy, and find that the third-country market entry rate rises by 2.1% when the origin country has a PTA partner in the destination region, even after accounting for prior regional export experience. This effect is comparable in magnitude to both the origin and destination countries joining the WTO. We further show that this effect is stronger when the destination and the origin’s PTA partners are more closely linked through deep integration, common language, and colonial ties, and when products are differentiated or regulation-intensive. Beyond these heterogeneity analyses, we shed light on the underlying mechanism by showing that preferential PTA provisions enhance regional market access. The resulting scale effect appears to be an important channel through which higher variable profits help exporters cover the costs of entering third-country markets. Overall, our findings highlight the quantitative importance of the third-country entry effect of PTAs in explaining trade growth and offer broader implications for choosing optimal PTA partners. • Countries are more likely to enter a new destination when they have a PTA partner in the destination region. • Similarities between the destination and the origin’s PTA partners facilitate market entry. • The scale effect due to preferential regional market access spurs third-country market entry. • Third-country market entry effects are more pronounced for differentiated products and regulation-intensive products.