We see Smith’s certitude and Haberler’s spillover immediately in Figure 2. Smith’s certitude shows up
as Partner gains (the areas a+b) that result from the higher exports and higher border price. Since the
FTA is reciprocal and nations are symmetric, Home gains the same from a higher border price and
greater exports to Partner in good 2. Haberler’s spillover shows up as the RoW lose (the area ‘e’) from
the drop in the border price it faces (from P-T to P’-T) and the reduction of it s exports to Home.
The preference rent. A critical observation, as far as the regionalism-multilateralism debate is
concerned, touches on a decomposition of Smith’s certitude, namely how FTA exporters gain from two
distinct features of their improved market access. First, the removal of the intra-FTA tariff boosts their
market access directly. Second, FTA-based exporters benefit from the reduction in RoW exports
induced by the tariff discrimination. The second part of the gain – area ‘a’ in Figure 2 – could be called
the ‘preference rent’ since if the tariff cutting were multilateral instead of preferential, FTA partners
would gain only ‘b’, not a+b. This preference rent ‘a’ is vulnerable to so-called preference erosion and
as such, it plays a leading role in the stumbling bloc logic.
On the import side (Figure 3), Home gains a trade-volume effect (equal to area A) from expanding its
imports, i.e. replacing high cost domestic production with lower cost imports. Home also gains from a
border-price effect, i.e. the terms-of-trade improvement against RoW (area B) while losing from the
terms-of-trade loss against Partner (area C1+C2). Home’s terms-of-trade gain on the export side partly
offset the terms-of-trade loss on the import side (D1=C1), so Home’s net welfare change is A+B+D2-
C2.
13 As drawn it looks like Home and Partner gain, but this depends upon elasticities and the initial
MFN tariff; in general Viner’s ambiguity holds in this framework.14
The net welfare impact on RoW is unambiguously negative (Haberler’s spillover). RoW experiences no
change on the import side, but twice loses area ‘e’ (rightmost panel in Figure 2) – once on its exports of good 1 to Home and once on its exports of good 2 to Partner. The ‘Haberler spillover’ is an externality
as far as the global trade system is concerned and as such it plays a central role in the big-think
regionalism literature.