PREFERENTIAL TRADE AGREEMENTS:

CHALLENGES TO MULTILATERAL TRADE

ORDER

University of Trier
Module: Global Economic Governance
Lecturer: Prof. Dr. Joachim Schild
Presenter: Mirzo-Bobir Achilov
Summer Semester 2015

Structure:
I. Conceptual framework of PTAs
1.1. What are PTAs and how they differ from RTAs?
1.2. Problems with labeling PTA as RTA.
II. Cost and benefits of regionalization, driving forces and
tendencies.
2.1. Why countries prefer Regionalism (PTA/RTAs)
2.2. Political Economy of Regionalism
III. Economic consequences of regional integration
3.1. Relationship of PTAs and Globalization
3.2. Proposals on minimizing negative effects of PTAs.
Conclusions

Research Question
To what extent do preferential trade agreements

undermine multilateral trade system?

What are PTAs?

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.
Preferential trade arrangements (PTAs) in the WTO are unilateral
trade preferences. Only between signatories, non-members do not
share the benefits they provide.
Source: Regional trade agreements and preferential trade
arrangements, WTO.
https://www.wto.org/english/tratop_e/region_e/rta_pta_e.htm

They [PTAs] are distinct from regional trade agreements (RTAs).

Source: Preferential trade arrangements database, WTO.
http://ptadb.wto.org/

The difference between the Academic

literature and WTO language
Academic literature

Preferential Trade

Agreements RECIPROCAL
AGREEMENTS between
signatories, they are
Regional Trade
Agreements (with new
specifics: today, they are
not regional in
geographical area).

WTO language

Preferential Trade

Arrangements
UNILATERAL
PREFERENCES, they are
not the same as Regional
Trade Agreements.
We will study PTA in sense of
Regional Trade Agreements

Problems with labeling PTA as RTA

Usually, the concept of regional economic integration

associated with an arrangement of agreement between

three of more geographically contiguous states.
Recent agreements are not regional in geographical

sense and do not free all trade between the parties, so

they are labeled Preferential rather than being labeled
regional or free.

 Minilateral relationship involves

PTA forms

countries on geographically
concentrated basis (NAFTA,
ASEAN FTA).
Trans-regional grouping link

countries located in different parts

of the world. Recent PTA are an
obvious example of such grouping.
Inter-regional agreements links

two minilateral economic

agreements (EU-MERCOSUR,
CER-AFTA).

Types of PTA

Source: World Trade Report 2011, The WTO and preferential trade agreements: From co-existence to coherence, p 110.

Source: WTO, DISCUSSION PAPER NO 12, The Changing Landscape of Regional Trade Agreements: 2006 Update, p 35.

Source: Study on Preferential Rules of Origin, WCO. http://www.wcoomd.org/en/topics/origin/instrument-andtools/comparative-study-on-preferential-rules-of-origin/overview.aspx

Why Regionalism:
Trade diversion and Trade Creation
Trade
diversion

Trade
creation

Costs and benefits of RTA (Jacob Viner, 1950)

RTAs violate WTO`s principle of Non-discrimination

Trade diversion: gain for consumer, loss for government
If trade diversion outweighs trade creation, then the net effect

of a regional scheme on its members` welfare can be negative.

Economic
motivations

Political
motivations

Why RTA?

The principle objectives of the regional agreements are to promote local importsubstitution industrialization and to enhance bargaining power of participants with
external actors.

Factors which created favorable condition for the spread of PTA:

The growth of global

interdependence and
the ascendancy of
neo-liberal ideas

New type of
regionalism:
between
industrialized and
less developed
countries (NorthSouth orientation).

Global economic and financial crisis has

reduced the willingness of policymakers to
support trade liberalization

End of the
Cold War.

Today we see
trend of
agreements
between
developed
countries (NorthNorth orientation).

Difficulties with global agreements:

agenda-setting, complexity of
negotiation so in order to advance
their agendas, states should look for
RTAs.
Source: World Trade Report 2011, The WTO and preferential trade agreements: From co-existence to coherence, p 62.
NB: Notes on the table are attached by the presenter.

The Political Economy of Regionalism

New interest in regionalism is a defensive response to

developments elsewhere and some governments seek

new regional agreements to reduce their dependence on
existing regional partners.
Private Sector interests. Arguments protected domestic

market for economies of scale, regionalization of a

product, and relatively low-cost labor or a concentration of
product or industry-specific skills.
Why RTAs in form of FTA ? They require little pooling on

sovereignty and afford little scope for the emergence of

sources of power at the regional level.

Economic consequences of Regional

integration
RTA`s positive effect undeniable (can
be monitored/followed in statistics), but
welfare effects are still questionable
(trade creation and trade diversion
can`t be distinguished in statistical
reports).

Deeper integration

Even RTAs create advantages for

trading partners, sensitive
economies are excluded from
regional agreement or
liberalization provided to partners
are minimized.

Scale of
economies

Issues arising from

Rules of Origins.

Economic effects mixed

and inconclusive: models
suggest there is little
evidence of trade
diversion.

Competition
effects

Do PTAs undermine Multilateral Trade

Order? Yes
Magnify the influence of power disparities in international

trade.
Diversify scare bureaucratic resources of the government
away from the global negotiations
Spaghetti bowl effect multiplicity of PTA memberships
increases the cost of engaging to international trade
Exporters are satisfied on what they have they dont
have more willingness for further liberalization.
Regionalism and as a result protectionism of sensitive
economies strengthens protectionist groups so further
liberalization is impossible.

Do PTAs undermine Multilateral Trade

Order? Yes.
RTAs can turn producers against a multilateral agreement

that they would otherwise support, because free trade

would destroy the rents created by the RTAs. (Krishna,
1998)
A regional trade agreement can bring such large gains to
some groups that they lose from further liberalization. If
these groups are powerful enough, then free trade
becomes politically infeasible. (Levy 1997, Krishna 1998)

The "spaghetti-bowl"
of trade agreements

Source: UNCTAD Virtual Institute on Trade and Development. Studies in Trade and Investment 62
Towards coherent policy frameworks: Understanding trade and investment linkages. UN, NY, 2007, p73.
http://vi.unctad.org/resources-mainmenu-64/digital-library?task=dl_doc&doc_name=180-tipub246

PTAs Undermining Multilateral Trade Order? The

case against negative impact of PTAs to
Regionalism.
Agreement in deeper integration can serve for global

treaties.
They can enhance competitiveness of domestic industries
as a result get them ready for full liberalization.
Export-oriented interests ask for broader liberalization.
Domino effect of regionalization, broadening the scope of
liberalization.
Global negotiations of the groupings are easier (smaller
number of actors).
Evidences: Uruguay round of GATT negotiations and
lowering of barriers by RTA members more faster to nonmember states

 For spread of RTA:

Regional trade blocs are welfare improving in nature and

are unlikely to have any negative impact on the

multilateral trade system. (Krugman and Summers,1991)
Trade is already quite free in major trading nations, few
regional liberalizations are capable of creating antiliberalization forces. (Baldwin,1997)
Against RTAs:
Preferential trade agreements are essentially

discriminatory in nature and they view the drift towards

PTAs as a serious threat to the multilateral trading
system. (Bhagwati, Krueger, Panagariya 1991, 1995,
2003)

Are PTAs good or not?

Depends on perspective and goals.
But it`s clear that as any other blocks it create winners

and losers in international arena.

So the question rising in front of the state is not about

whether they are good or not, but whether TO WHAT

EXTENT DO THE STATE BENEFITS FROM SUCH
REGIONALIZATION?

Proposals on Minimizing negative effects of

PTAs
Further reduction of MFN tariffs (proposed to reduce below 5 percent).

Strengthen regulations within WTO: Transparency mechanism & Dispute

settlement proceedings exclusively in WTO.

Proposed to develop best-practice guidelines for preferential agreements.

Preferential rules of origin to be harmonized.
Multilateralizing commitments stated in preferential agreements.
Critical mass initiatives inside WTO (form coalition without leaving multilateral
negotiations).
Establish zones of diagonal cumulation of origin.

What are the consequences of RTA to

the Global Governance?

Conclusions
Further trend to increase number of PTAs and overlapping

membership should bring formation of more bigger interregional agreements.

Link between RTAs and global liberalization are still

inconclusive.
However, based on spaghetti bowl effect and as a result

of increased interdependence, further liberalization of

global trade is expected.

 World Trade Report 2011, The WTO and preferential trade

Bibliography:

agreements: From co-existence to coherence.

WTO, DISCUSSION PAPER NO 12, The Changing Landscape of
Regional Trade Agreements: 2006 Update.
Study on Preferential Rules of Origin, WCO.
http://www.wcoomd.org/en/topics/origin/instrument-andtools/comparative-study-on-preferential-rules-oforigin/overview.aspx
UNCTAD Virtual Institute on Trade and Development. Studies in
Trade and Investment 62
Towards coherent policy frameworks: Understanding trade and
investment linkages. UN, NY, 2007, p73.
http://vi.unctad.org/resources-mainmenu-64/digitallibrary?task=dl_doc&doc_name=180-tipub246
John Ravenhill. 2014. Regional trade agreements. In: John
Ravenhill (ed.): Global political economy, 4th ed., Oxford: Oxford
University Press, pp. 139-170.
Heribert Dieter. 2009. The multilateral trading system and preferential trade agreements: Can the negative effects be minimized? In:
Global Governance 15/3: 393-408.