PREFERENTIAL TRADE AGREEMENT

Definition
• A trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement. While the tariffs are not necessarily eliminated, they are lower than countries not party to the agreement.

A Preferential trade area (also Preferential trade agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

-3 .• Preferential Trading Agreements – preferential trading agreements under which the participating countries. • The formation of preferential trading agreements is allowed if they lead to free trade between the agreeing countries. – The GATT-WTO prohibits such agreements. lower tariffs with respect to each other but not the rest of the world.

• Trade diversion – Occurs when the formation of a preferential trading agreement leads to the replacement of low-cost imports from non members with higher-cost imports from member nations.• Are preferential trading agreements good? • Trade creation – Occurs when the formation of a preferential trading agreement leads to replacement of high-cost domestic production by low-cost imports from other members. .

• A common market is a customs union with free factor movements (especially labor) among members. . but each member can have its own trade policy towards nonmember countries. Lesotho and Swaziland established the Southern African Customs Union (SACU) in 1969 as a continuance of their custom union arrangements. – Example: The North American Free Trade Agreement (NAFTA) creates a free trade area. Botswana. – Example: The European Union (EU) is a full customs union. • A customs union allows free trade among members and requires a common external trade policy towards nonmember countries. – South Africa. which are in force since 1910.– Free trade can be established among several WTO members as follows: • A free trade area allows free-trade among members.

often part of a regional intergovernmental organization. free trade areas. Trade blocs can fall into different categories. customs unions.Trade bloc • A trade bloc is a type of intergovernmental agreement. where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states Trade bloc mostly encourages regional trade • • Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement (NAFTA) or part of a regional organization (such as the European Union). common markets and economic and monetary unions. • . such as: preferential trading areas.

between independent nations. is the European Union and its euro zone.Economic integration • • • •       Term used to describe how different aspects between economies are integrated. The degree of economic integration can be categorized into six stages: Preferential trading area Free trade area Customs union Common market Economic and monetary union Complete economic integration . As economic integration increases. the barriers of trade between markets diminishes The most integrated economy today.

Western Europe in 1970s and 1980s .• • • • • • • • • • • • • • • • • • • Levels of integration Preferential trade agreement countries giving reciprocal concessions often countries already linked closely sometimes for specific goods e.g. NAFTA Customs union similar to FTA.g. US-Canada auto pact (before NAFTA) Free trade area (FTA) very low internal trade barriers aim to eliminate all trade restrictions no unified policy for outside FTA e.g. but common external tariffs joint position in world trade negotiations Common market customs union plus movement of factors especially labor and capital e.

quotas and preferences on most (if not all) goods and services traded between them. division of labour. meaning different quotas and customs The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialisation. and most importantly via (the • • • theory and practice of) comparative advantage . members of a free trade area do not have a common external tariff (same policies with respect to non-members). a designated group of countries that have agreed to eliminate tariffs. It can be considered as second stage of economic integration Unlike a customs union.Free trade • Is a type of trade bloc.

• Additional Gains from Free Trade – Protected markets in small countries do not allow firms to exploit scale economies. as opposed to “managed” trade. . provides a wider range of opportunities and thus a wider scope for innovation. – Free trade. – The presence of scale economies favors free trade that generates more varieties and results in lower prices.

P S Production distortion World price plus tariff World price Consumption distortion D Quantity. Q .The Case for Free Trade • Free Trade and Efficiency – In the case of a small country. free trade is the best policy. Price.

EXAMPLES FOR PTA • • • • • • the European Union and the ACP countries India and Afghanistan India and Mauritius the North American Free Trade Agreement (NAFTA) the Generalized System of Preferences the Cotonou Agreement. .

In June 1993.Some countries (not including the United States) avoid tariffs on a number of their exports to Peru because of preferential trade agreements.• • Venezuela. including the Europe Agreement between Hungary and the European Community and their Member States (December 1991).Bolivia's trade with neighboring countries is growing. Guatemala. but does have bilateral preferential trade agreements with Costa Rica.S. Panama . in part because of several regional preferential trade agreements it has negotiated. Bolivia .Panama is not a party to any agreements providing completely free trade. Honduras. • • • • • France and other EU member states have a network of preferential trade agreements that is expanding rapidly. Nicaragua and the Dominican Republic. PERU . Hungary has concluded a number of preferential trade agreements. fruit suppliers. . El Salvador. the EU agreed to accelerate the agreement's provisions and reaffirmed its commitment to Hungary's full membership.Preferential trade agreements signed between Chile and Venezuela give the Chilean exporters considerable advantage over U.

The goal of NAFTA was to eliminate barriers to trade and investment between the USA. and Mexico creating a trilateral trade bloc in North America. agriculture) no common external tariff restrictive rules of origin goods must have “a substantial transformation” e. 60% of autos must be locally made e. stability.ratified 1993.NAFTA • • • • is an agreement signed by the governments of the United States. textiles must be made from NAFTA yarn • • • • • • • • • . Canada and Mexico.g.implementation 1994-2008 US proponents of NAFTA trade benefits reduce immigration pressures prosperity. Canada.g.g. democracy for Mexico General features elimination of trade barriers in 10 years 15 for special products (e. agreement December 1992.

•  • • •  • • • Specific features investment national treatment dispute settlement by international tribunals exempt – Canadian cultural industries Environment Commission on Environmental Cooperation has country enforced its environmental policy? fines or trade sanctions can be imposed  Safety valve • pre-NAFTA measures allowed if import surge  Transportation • no barriers eventually  No permanent independent organization • NAFTA functions through meetings • of country officials .

capital. 6 countries in “Coal and Steel Community” • Treaty of Rome. 370 million people • eleven official languages • 10 new members in May 2004 • 3 more applicants negotiating for membership History • origins .success new European political institutions 6 new members (UK in 1973) increased trade. 1957 European Economic Community customs union UK rejects • 1950's – 1980's .EUROPEAN UNION formerly European Common Market.Europe's devastation after 1939-45 • economic integration as political move • 1951. labor flows . European Community (EC) • fifteen members.

etc transportation problems ▫ coordinate roads.• • • • • • • • • • • • • • • Common market + positive measures to reduce market frictions transactions costs ▫ legal rules coordinated ▫ common standards. instability politics – conflicts between "Europe" and countries . etc ▫ no border checkpoints exchange rate uncertainty ▫ coordination of macro policies ▫ possibly single currency Success reveals three problem areas microeconomic – natural and administrative barriers Macroeconomic.different currencies. financial regulations. rail.

Free trade thoughts of Netherlands etc paved way GATT article XXIV sanctioned free trade areas and custom unions Jacob Viner performed static analysis of PTA in 1950 Vinerian approach said PTA could be trade diverting or trade creating 1957.evolution of European union and EFTA enhanced PTA Vinerian approach reworked by Paul Wannacott & Mark hutz-1989 By Lawrence Summers in 1991 World Banks Export.oriented industrialisation policy also promoted PTA • • • • • • • • . and that the global volume of international trade is "unchangeable.Evolution • • Traced back to 1500s in Europe when mercantilism developed Mercantilism -Mercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital." Prosperity of Britain Union.

where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods Establish criteria for determining the country or customs territory from which a product originates Allow customs authorities to distinguish between goods that are and that are not eligilble for preferential treatement Rules determine the eligibility of products for tariff preferences under various types of trade agreements PTA s could alter global trade patterns in textiles and apparels significantly to the advantage of members and dis advantage of non –members New PTA rules that US and EU follow. allow some flexibility Administering of rules of origin will impose costs on firms and governments.Preferential rules of origin • • • • • • • Countries use the system of certification of origin most commonly called rules of origin. so economic cost factor should be considered Simplification and harmonization of rules of origin is part of the future program of work for the WTO • .

PREFERNTIAL TRADE AGREEMENTS IN ASIA AND PACIFIC REGION .

Japan. the Republic of Korea. individual ASEAN members such as Thailand. and (e) a response to regional trade agreements formed or forming elsewhere. (d) the opportunity to address issues not addressed by WTO or not effectively addressed. (b) geographic proximity of the partners. including a reflection of the fear of exclusion from major markets. and China had joined the trend. and the momentum has since continued. . Australia. 1996) is clearly evident in the Asian and Pacific region. Singapore. Chile and New Zealand showing initial interest in PTAs in the 1990s. By 2000.the United States of America. various non-tariff barriers and labour. foreign investment flows. (c) dissatisfaction with the GATT/WTO process for trade liberalization.REASONS FOR ESTABLISHMENT OF PTAs • (a) • • • • • recognition of the political needs of member nations. This “domino” effect (Baldwin. and environmental standards. with the Association of Southeast Asian Nations (ASEAN). such as barriers to services trade.

there is clearly the risk that a hub-and-spoke system will dominate. • • • • • • . including the well-known possibilities of : trade diversion rather than creation. Zhai (2006) considered the possibility of China or Japan being regional hubs. concentration on regional arrangements diverting scarce negotiating resources away from multilateral negotiations. the administrative costs and confusion that could result from a plethora of overlapping trade agreements (Hilaire and Yang. Agriculture. of course.CONCERNS ASSOCIATED WITH PTAs Various concerns can be mentioned in association with PTAs. with these leading economies as the hubs. is the problematic sensitive sector in many of the completed agreements as well as in ongoing negotiations. Asia-Pacific PTAs have followed a variety of approaches in incorporating agricultural preferences. and the agreements range from quite comprehensive to very restrictive coverage. 2003).

while other partner countries now at the study. Pakistan. the implications of these trading partners also liberalizing among themselves are considered. negotiation or ratification stage include Australia and the Republic of Korea. Japan. The Global Trade Analysis Project (GTAP) dynamic model is applied to bilateral and regional trade analyses in the Asian and Pacific region. China. • • • . Hong Kong. In particular. The web of agreements becomes even more tangled when considering those agreements involving individual ASEAN member countries. those already in force include agreements with ASEAN. perhaps in ways that may not have been anticipated. Chile. ASEAN has agreements or negotiations with Australia and New Zealand. New Zealand. the Republic of Korea and the European Union. China (from 1 October 2008). a number of China’s possible preferential agreements are examined.MOTIVATION AND METHODOLOGY • This study is motivated by the many PTAs that are being simultaneously negotiated and implemented in the Asian and Pacific region with potential to interact and change outcomes. China is involved in a range of agreements. and Macao. consultation.

including endogenous capital growth. 2006). extended to facilitate analysis of dynamic capital accumulation. The baseline simulation captures some of the significant ways in which the structure of the world economy is anticipated to change by 2020. to produce final output. as well as price and income elasticities • • • • . and unskilled and skilled labour) combine with intermediate inputs. from the benchmark GTAP 6 dynamic database projection. The current study uses version 6 of the GTAP database. natural resources. First a baseline model is developed.Model and baseline • The GTAP-Dyn model permits capital accumulation. including imports. and 57 sectors (Dimaranan. Changes in the structure of production for each region are driven by differences in the relative rates of factor accumulation. up to 2020. together with international mobility and foreign ownership of capital Under this model-Five primary factors of production (land. comprising 87 economic regions. physical capital. These combine with different factor intensities in each sector.

Liberalization scenariois • • • • 1.Bilateral agreements (hub-and-spoke) All bilateral tariffs are removed between China (the hub) and three regions: Australia and New Zealand in 2009. and developing countries by 2020. but now also liberalizing trade between ASEAN. Australia and New Zealand and the Republic of Korea in 2013 (extended to 2017 for tariffs imposed by new ASEAN countries). but with sensitive sectors not liberalized. a Intra-ASEAN tariffs are also eliminated. 2. ASEAN countries in 2010 (new ASEAN countries in 2015). APEC Developed APEC countries are assumed to fully liberalize their tariffs by 2010. For Australia and New Zealand. the sectors assumed to be sensitive are textiles. the Republic of Korea. and dairy product sectors.a and the Republic of Korea in 2012. For Asian countries. Regional free trade area (RFTA) All bilateral tariffs are removed within an FTA comprising China. sensitive products are assumed to be the rice. Regional free trade area with sensitive products (RFTA-Sensitive) As for scenario 2. Australia and New Zealand. • • • • • . cattle and sheep meat. The timing of liberalization is as for scenario 1. 4. wearing apparel and leather products. 3. ASEAN.

and (v) inclusion of measures to facilitate trade and to promote cross-border competition. . (iv) liberal rules of origin. sectors and products. • In addition. with few exemptions. well-designed agreements also need to be supported by effective monitoring and enforcement mechanisms to ensure consistent implementation. (iii) comprehensive coverage in terms of measures. (ii) low external MFN tariffs.Determinants of successful PTAs Preferential agreements that are most likely to produce benefits are those with the following characteristics: (i) large and diverse membership.

investment. Administrative complications could severely diminish any potential benefits of PTAs and further accentuate trade diversion.Effects of PTA s • • Inclusion of sensitive sectors and the provisions on services . although the provisions generally lack specifics and a time table for implementation. • • • • l . especially because the MFN tariff rates in some countries are high and strongly dispersed. investment. and consistent implementation of these agreements could create a momentum for further agricultural liberalisation Most PTAs include provisions on services. such as ASEAN-China CEC. and trade facilitation. and trade facilitation Some PTAs. The proliferation of Asia Pacific PTAs increases the bias toward intraregional trade and raises the risk of trade diversion. Preferential agreements could potentially inhibit the processes of crossborder production networking which has been central to the region’s successful integration. include agriculture.

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