Preferential Trading Agreements

Preferential trading agreements affect worldwide market balance.

Nearly every economy in the world is, or has been, a party to a preferential trade agreement (PTA) or scheme. The amount of goods and services that are given away or received where PTA access is granted depends upon how effective the market responds to each particular economic climate and how it applies to any given specific trade agreement. According to the World Bank, in 2005 it was estimated that the average World Trade Organization (WTO) member participated in a minimum of six such agreements.

The Preferential Trade Agreement Defined

The preferential trade agreement (PTA) is sometimes referred to as a preferential trade area. It consists of a trading block of nations that allows for preferential access to certain products that come from the participating countries. While reduction of tariffs does occur, trade tax impositions are not completely eliminated. The PTA can also be established through a trade pact in which such preferential arrangements mark the the first stage of an integration process leading to closer economic relations.

Free Trade Agreements

The precise line that separates a PTA from a Free Trade Agreement or area (FTA) can be blurry. This is because the main objective of almost all PTAs is eventual FTA status, as outlined by the WTO's General Agreement on Tariffs and Trade (GATT). Tariff preferences have been instrumental in creating various departures from the principles mandating normal trade relations as created by the WTO member guidelines.

PTA Resurgence

According to the WTO, over the course of a decade or more, PTAs have experienced a resurgence. Initially the WTO had encouraged PTAs since it was believed that regional integration initiatives would benefit the multilateral trade regime. For example, it was thought that the easier market access conditions provided by PTAs would increase economic growth.

However, debate is ongoing as to how PTAs may affect the multilateral system of world trade. The existence of a PTA can actually lower a member's overall welfare if it causes trade to be diverted. As a result, PTAs may reduce the incentive for multilateral free trade by causing a less efficient system for an exporter.

The overall economic impact of PTAs can effect the welfare of world country suppliers as the balance of bargaining power fluctuates. PTAs may appear to complement and strengthen the multilateral trading system. However, since they are discriminatory and can be inherently ambiguous, their actual effects on global trade and economic growth remain unclear.

Benefits of PTAs

Individual countries may benefit more from PTAs, particularly if the countries import less from partner countries. For example, a smaller country may lose from forming an FTA with a small partner country, but could effectively gain from forming one with the rest of the world. The smaller country may benefit more as a smaller member of a large group, as opposed to being designated as a larger member of a smaller block of countries.

Other Considerations

Many large developed countries such as the USA and the major nations of the European Union have increased participation in Free Trade Agreements with developing countries. As a defensive necessity against possible market exclusion, this has in turn prompted many developing countries to seek membership in PTAs. The motivation for smaller countries to enter into PTAs increases, particularly when other competing countries supply goods to the developed PTA markets. Rather than risk exclusion, smaller nonmember countries may attempt to create their own PTA markets by joining with an excluded member. After large countries such as the USA push PTAs so as to create large capital, smaller countries may be forced to forge regional participation groupings among themselves to survive and grow.

Trade Preferences for Development

Trade Preferences for Development are agreements that include everything but arms, for duty-free and quota-free market access. Generally engaged in by trading partners that are major members of the Organisation for Economic Co-Operation and Development (OECD), a grouping of wealthy nations, they are accomplished through nonreciprocal preferential access schemes through the Generalised System of Preferences (GSP). The United States and European Union nations are occasionally engaged simultaneously in multiple PTA negotiations with other PTA groups as opposed to single partners.

Preferential Access Cautions

Trading partners need to be aware of precisely how much they may be "giving away," as well as "receiving," in preferential trading situations. Such an awareness is necessary to create an effective market access scenario that is mutually beneficial to all parties involved.The global economic and financial climates should always be considered, along with recommendations from policymakers when supporting trade liberalization through the PTA process. For example, it would be wise that the standards of conduct be guided by the need to protect domestic labor, consumption and capital formation. Monitoring PTAs effectively can ensure that the multilateral trading system does not suffer setbacks from economic crises as they may arise.

References

• "Preferential Trade Agreements"; Pravin Krishna; 2005
• "World Bank: Small Is Beautiful--Preferential Trade Agreements and the Impact of Country Size"; Maurice Schiff; 1996
• CIESIN: General Agreement on Tariffs and Trade
• OECD: OECD Partners
• "Regional Trade Agreements in a Multilateral Trade Regime: An Overview"; Parthapratim Pal; 2004

Resources

• Understanding the WTO: Non-tariff Barriers
• The Multilateral Trading System and Preferential Trade Agreements