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.