Preferential Trade Agreements Or Trade blocs Ch. 12

Motivation Thus far we have: “nondiscriminatory” reduction in tariff rates under the WTO multilateral agreement If a country offers a reduction in a tariff to one member, it must be offered to all members of the WTO A country should not discriminate between trading partners they should all have… Most Favored Nation (MFN) status by the MFN clause of the GATT/WTO

Motivation Exceptions to MFN Countries can set up a free trade agreement that applies only to goods traded within a group of countries Countries can give developing countries special access to their markets. Countries can raise barriers against products that are considered to be traded unfairly from specific countries. These exceptions are supposed to be allowed under strict conditions…

Motivation What is a Preferential Trading Agreement (PTA)? PTA: trade agreements between countries in which they lower tariffs for each other, but not for the rest of the world. GATT allows these agreements provided that: Preferences are 100% (tariff rates are zero) There is a timeline for achieving free trade The PTA does not increase protection against the rest of the world. Key point: Regional integration (PTAs) should complement the multilateral trading system and not threaten it.

Motivation History and place of PTAs in GATT/WTO 1940s-1970s Trends toward multilateral – GATT resulted in a reduction of mfg tariff rates by 40-70% Most PTAs failed (except current EU under various names) 1980s: attitudes changed and countries began to favor PTAs WTO rounds started to move slowly Kennedy round (1964) took 37 months Tokyo round (1973) took 74 months Uruguay round (finally launched in 1986, took 87 months)… US-Caribbean Basin Initiative US-FTA with Israel Canada-US Free Trade Agreement (CUSFTA) North American Free Trade Agreement (NAFTA) Association of Southeast Asian Nations (ASEAN) Asia-Pacific Economic Cooperation (APEC)

The WTO and regional/preferential trade agreements Motivation The WTO and regional/preferential trade agreements Regional trade agreements In the WTO, regional trade agreements (RTAs) are defined as reciprocal trade agreements between two or more partners. They include free trade agreements and customs unions. WTO database

Source: https://www.wto.org/english/tratop_e/region_e/regfac_e.htm

The WTO and regional/preferential trade agreements Motivation The WTO and regional/preferential trade agreements Preferential trade arrangements In the WTO, preferential trade agreements (PTAs) are unilateral trade preferences. They include Generalized System of Preferences schemes (under which developed countries grant preferential tariffs to imports from developing countries), as well as other non-reciprocal preferential schemes granted a waiver by the General Council. WTO database

The WTO and regional/preferential trade agreements Motivation The WTO and regional/preferential trade agreements Almost 300 PTA were in force by 2010. A WTO member is party to 13 PTA’s on average Despite the surge of PTAs in recent years, 16% of global merchandise trade receives preferential treatment! A large number of disputes between PTA members are brought to the WTO dispute settlement system. About 30% of disputes are between WTO members who are parties to the same PTA

Motivation As this happened, questions started to arise: What are the effects of PTAs? Do they increase the volume of trade? Trade Creating vs Trade Diverting Are PTAs compatible with strengthening multilateral trading system? Are PTAs “building blocks” or “stumbling blocks”?

x X 4 types of PTAs 1. Free trade area 2. Customs union 3. Common market 4. Economic Union Same Internal barriers x X Same External barriers Free factor mobility Common monetary Policy

Type of PTA: 1. Free Trade Area 1. Free trade area (FTA) Tariffs and other trade barriers among members are removed Each nation maintains its own tariff schedule and other commercial policies with regard to goods coming from nonmember countries. Potential problem: Nonmembers will export their good to the member country in a FTA with the lowest external barrier The importing FTA member country then re-ships to member countries with the higher barrier Need: Rules of Origin Ex: NAFTA Ex: China- Iceland free trade agreement (April 15, 2013) Same Internal barriers x Same External barriers Free factor mobility Common monetary Policy

.

Type of PTA: 2. Customs Union Eliminates barriers to trade in goods between or among its members Adopts a common external tariff that all members of the customs union apply to trade from countries outside the union. The common external tariff must on average be no higher than the pre-union tariff Difficult to negotiate Ex: Andean Group currently: Bolivia, Venezuela, Colombia, Ecuador The Southern African Customs Union: South Africa, Botswana, Lesotho, Namibia and Swaziland Same Internal barriers x Same External barriers X Free factor mobility Common monetary Policy

Free trade area vs. Customs Union Key difference is external trade barriers Free Trade area: members may differ in the trade barriers that they impose on non-members; don’t have to have a common external tariff rate on goods from nonmembers Problem: Importers within a FTA will avoid tariffs by importing via a low-tariff member Rules of Origin is meant to deter Customs union: have a common external trade barrier Difficult to get all member countries to agree on external barriers Once established tariff , administration is easy: Goods must pay tariffs when they enter the union – but then they can be freely shipped within the union More FTAs than Customs unions: why? FTAs are faster to conclude FTAs are more concerned about market access, often unbounded by geography (often needed for a common external barrier)

Type of PTA: 3. Common Market Eliminates all barriers to trade in goods among the members Adopts a common external tariff. Permits the free movement of goods, services, people, and capital within the market. Example The European Common Market (EEC, 1958) which became the European Community (EC) which became the European Union The Southern Common Market (MERCOSUR): Argentina, Brazil, Paraguay and Uruguay Same Internal barriers x Same External barriers Free factor mobility Common monetary Policy

Type of PTA: 4. Economic Union Eliminates all barriers to trade in goods among the members Adopts a common external tariff Permits the free movement of goods, services, people, and capital within the market Provides for common monetary policy, a common fiscal policy and a common currency for its members. Ex: European Union Not all EU members have adopted the Euro (about 16 of the 27 countries have) Same Internal barriers x Same External barriers Free factor mobility Common monetary Policy