PREFERENTIAL TRADE AGREEMENT
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
Preferential Trading Agreements
preferential trading agreements under which the participating
countries, lower tariffs with respect to each other but not the rest of
the world.
The GATT-WTO prohibits such agreements.
The formation of preferential trading agreements is allowed if
they lead to free trade between the agreeing countries.
Are preferential trading agreements good?
Trade creation
Trade diversion
Occurs when the formation of a preferential trading
agreement leads to replacement of high-cost domestic
production by low-cost imports from other members.
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.
Free trade can be established among several WTO members as follows:
A free trade area allows free-trade among members, but each
member can have its own trade policy towards non-member
countries.
Example: The North American Free Trade Agreement
(NAFTA) creates a free trade area.
A customs union allows free trade among members and
requires a common external trade policy towards non-member
countries.
South Africa, Botswana, Lesotho and Swaziland
established the Southern African Customs Union (SACU) in
1969 as a continuance of their custom union
arrangements, which are in force since 1910.
A common market is a customs union with free factor
movements (especially labor) among members.
Example: The European Union (EU) is a full customs union
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a
regional intergovernmental organization, 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).
Trade blocs can fall into different categories, such as: preferential
trading areas, free trade areas, customs unions, common
markets and economic and monetary unions.
Economic integration
Term used to describe how different aspects between economies are
integrated.
As economic integration increases, the barriers of trade between
markets diminishes
The most integrated economy today, between independent nations, is
the European Union and its euro zone.
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
Levels of integration
Preferential trade agreement
countries giving reciprocal concessions
often countries already linked closely
sometimes for specific goods
e.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. NAFTA
Customs union
similar to FTA, but
common external tariffs
joint position in world trade negotiations
Common market
customs union plus movement of factors
especially labor and capital
e.g. Western Europe in 1970s and 1980s
Free trade
Is a type of trade bloc, a designated group of countries that have
agreed to eliminate tariffs, quotas and preferences on most (if not
all) goods and services traded between them.
It can be considered as second stage of economic integration
Unlike a customs union, members of a free trade area do not have
a common external tariff (same policies with respect to non-members),
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, division of labour, and
most importantly via (the theory and practice of) comparative
advantage
Additional Gains from Free Trade
Protected markets in small countries do not allow firms to exploit
scale economies.
The presence of scale economies favors free trade that
generates more varieties and results in lower prices.
Free trade, as opposed to managed trade, provides a wider
range of opportunities and thus a wider scope for innovation.
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.
REASONS FOR ESTABLISHMENT OF PTAs
(a) recognition of the political needs of member nations;
(b) geographic proximity of the partners;
(c) dissatisfaction with the GATT/WTO process for trade liberalization;
(d) the opportunity to address issues not addressed by WTO or not
effectively addressed, such as barriers to services trade, foreign
investment flows, various non-tariff barriers and labour, and
environmental standards; and
(e) a response to regional trade agreements formed or forming
elsewhere, including a reflection of the fear of exclusion from major
markets. This domino effect (Baldwin, 1996) is clearly evident in the
Asian and Pacific region, with the Association of Southeast Asian
Nations (ASEAN), Japan, the Republic of Korea, Singapore, Chile and
New Zealand showing initial interest in PTAs in the 1990s. By 2000,the
United States of America, Australia, individual ASEAN members such as
Thailand, and China had joined the trend, and the momentum has
since continued.
