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PREFERENTIAL TRADE
AGREEMENT
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Definition
A trade pact between countries that reduces tariffs for certain products tothe countries who sign the agreement. While the tariffs are not necessarilyeliminated, they are lower than countries not party to the agreement.
A Preferential trade area (also Preferential trade agreement, PTA) isa trading blocwhich gives preferential access to certain products from theparticipating countries. A PTA can be established through a trade pact. It isthe first stage ofeconomic integration. The line between a PTA anda 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 onTariffs and Trade.
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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 tradebetween the agreeing countries.
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Are preferential trading agreementsgood? Trade creation
Occurs when the formation of a preferential trading
agreement leads to replacement of high-costdomestic production by low-cost imports from other
members.
Trade diversion
Occurs when the formation of a preferential trading
agreement leads to the replacement of low-costimports from non members with higher-cost imports
from member nations.
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Free trade can be established among several WTOmembers as follows:
A free trade area allows free-trade among members, buteach 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 andrequires a common external trade policy towards non-member countries.
South Africa, Botswana, Lesotho and Swaziland establishedthe Southern African Customs Union (SACU) in 1969 as a
continuance of their custom union arrangements, which arein force since 1910.
A common market is a customs union with free factormovements (especially labor) among members.
Example: The European Union (EU) is a full customs union.
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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, freetrade areas, customs unions, common markets and economic and monetary unions.
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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
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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
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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
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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 lowerprices.
Free trade, as opposed to managed trade, provides
a wider range of opportunities and thus a wider scope
for innovation.
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Free Trade and Efficiency
In the case of a small country, free trade is the best policy.
The Case for Free Trade
World price
plus tariffWorld price
Price, P
Quantity, Q
S
D
Consumptiondistortion
Productiondistortion
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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.
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Venezuela- Preferential trade agreements signed between Chile and Venezuela givethe Chilean exporters considerable advantage over U.S. fruit suppliers.
Bolivia - Bolivia's trade with neighboring countries is growing, in part because ofseveral regional preferential trade agreements it has negotiated.
PERU - Some countries (not including the United States) avoid tariffs on a number oftheir exports to Peru because of preferential trade agreements.
Panama - Panama is not a party to any agreements providing completely free trade,but does have bilateral preferential trade agreements with Costa Rica, El Salvador,Honduras, Guatemala, Nicaragua and the Dominican Republic.
Hungary has concluded a number of preferential trade agreements, including theEurope Agreement between Hungary and the European Community and their MemberStates (December 1991). In June 1993, the EU agreed to accelerate the agreement'sprovisions and reaffirmed its commitment to Hungary's full membership.
France and other EU member states have a network of preferential tradeagreements that is expanding rapidly.
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NAFTA
is an agreement signed by the governments of the United States, Canada,
and Mexico creating a trilateral trade bloc in North America. The goal of NAFTA was to eliminate barriers to trade and investment between the
USA, Canada and Mexico.
agreement December 1992,ratified 1993,implementation 1994-2008
US proponents of NAFTA
- trade benefits
- reduce immigration pressures- prosperity, stability, democracy for Mexico
General features
elimination of trade barriers
- in 10 years
- 15 for special products (e.g. agriculture)
no common external tariff restrictive rules of origin
- goods must have a substantial transformation
- e.g. 60% of autos must be locally made
- e.g. textiles must be made from NAFTA yarn
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Specific features
investment
national treatment dispute settlement by international tribunals
exempt Canadian cultural industries
Environment
Commission on Environmental Cooperation
has country enforced its environmental policy?
fines or trade sanctions can be imposed
Safetyvalve pre-NAFTA measures allowed if import surge
Transportation
no barriers eventually
No permanent independent organization
NAFTA functions through meetings
of country officials
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EUROPEAN UNION
formerly European Common Market,
European Community (EC)
fifteen members, 370 million people
eleven official languages
10 new members in May 2004
3 more applicants negotiating for membership
History
origins - Europe's devastation after 1939-45
economic integration as political move
1951, 6 countries in Coal and Steel Community
Treaty of Rome, 1957
- European Economic Community
- customs union- UK rejects
1950's 1980's - success
- new European political institutions
- 6 new members (UK in 1973)
- increased trade, capital, labor flows
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Common market + positive measures to
reduce market frictions
transactions costs
legal rules coordinated
common standards, financial regulations, etc
transportation problems
coordinate roads, rail, etc
no border checkpoints
exchange rate uncertainty
coordination of macro policies
possibly single currency
Success reveals three problem areas
microeconomic natural and administrative barriers
Macroeconomic- different currencies, instability
politics conflicts between "Europe" and countries
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Evolution
Traced back to 1500s in Europe when mercantilism developed
Mercantilism -Mercantilism is an economic theory that holds that the prosperity of a
nation is dependent upon its supply of capital, and that the global
volume of international trade is "unchangeable."
Prosperity of Britain Union, Free trade thoughts of Netherlands etc paved way GATT article XXIV sanctioned free trade areas and custom unions
Jacob Viner performed static analysis of PTA in 1950
Vinerian approach said PTA could be trade diverting or trade creating
1957- evolution of European union and EFTA enhanced PTA
Vinerian approach reworked by Paul Wannacott & Mark hutz-1989
By Lawrence Summers in 1991
World Banks Export- oriented industrialisation policy also promoted PTA
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Preferential rules of origin
Countries use the system of certification of origin most commonly calledrules of origin, where there is a requirement for the minimum extent oflocal material inputs and local transformations adding value to the goods
Establish criteria for determining the country or customs territory from whicha product originates
Allow customs authorities to distinguish between goods that are and that
are not eligilble for preferential treatement Rules determine the eligibility of products for tariff preferences undervarious types of trade agreements
PTA s could alter global trade patterns in textiles and apparels significantlyto the advantage of members and dis advantage of nonmembers
New PTA rules that US and EU follow, allow some flexibility
Administering of rules of origin will impose costs on firms and governments,
so economic cost factor should be considered Simplification and harmonization of rules of origin is part of the future
program of work for the WTO
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PREFERNTIAL TRADE
AGREEMENTS IN ASIA AND PACIFICREGION
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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.
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CONCERNS ASSOCIATED WITH PTAs
Various concerns can be mentioned in association with PTAs, including the
well-known possibilities of :
trade diversion rather than creation,
concentration on regional arrangements diverting scarce negotiating
resources away from multilateral negotiations,
the administrative costs and confusion that could result from a plethora of
overlapping trade agreements (Hilaire and Yang, 2003).
there is clearly the risk that a hub-and-spoke system will dominate, with
these leading economies as the hubs.
Zhai (2006) considered the possibility of China or Japan being regional
hubs.
Agriculture, of course, is the problematic sensitive sector in many of thecompleted agreements as well as in ongoing negotiations. Asia-Pacific
PTAs have followed a variety of approaches in incorporating agricultural
preferences, and the agreements range from quite comprehensive to very
restrictive coverage.
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MOTIVATION AND METHODOLOGY
This study is motivated by the many PTAs that are being simultaneously negotiated
and implemented in the Asian and Pacific region with potential to interact and change
outcomes, perhaps in ways that may not have been anticipated.
China is involved in a range of agreements; those already in force include
agreements with ASEAN, Chile, New Zealand, Pakistan, Hong Kong, China, and
Macao, China (from 1 October 2008), while other partner countries now at the study,
consultation, negotiation or ratification stage include Australia and the Republic ofKorea.
ASEAN has agreements or negotiations with Australia and New Zealand, Japan, the
Republic of Korea and the European Union. The web of agreements becomes even
more tangled when considering those agreements involving individual ASEAN
member countries.
The Global Trade Analysis Project (GTAP) dynamic model is applied to bilateral andregional trade analyses in the Asian and Pacific region. In particular, a number of
Chinas possible preferential agreements are examined, the implications of these
trading partners also liberalizing among themselves are considered.
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Model and baseline
The GTAP-Dyn model permits capital accumulation, together with international
mobility and foreign ownership of capital
Under this model-Five primary factors of production (land, natural resources, physical
capital, and unskilled and skilled labour) combine with intermediate inputs, including
imports, to produce final output.
The current study uses version 6 of the GTAP database, comprising 87 economic
regions, and 57 sectors (Dimaranan, 2006), extended to facilitate analysis of dynamic
capital accumulation.
First a baseline model is developed, up to 2020, from the benchmark GTAP 6
dynamic database projection.
The baseline simulation captures some of the significant ways in which the structure
of the world economy is anticipated to change by 2020. Changes in the structure of
production for each region are driven by differences in the relative rates of factoraccumulation, including endogenous capital growth. These combine with different
factor intensities in each sector, as well as price and income elasticities
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Liberalization scenariois
1.Bilateral agreements (hub-and-spoke)
All bilateral tariffs are removed between China (the hub) and three regions:Australia and New Zealand in 2009; ASEAN countries in 2010 (new ASEANcountries in 2015);a and the Republic of Korea in 2012.
2.Regional free trade area (RFTA) All bilateral tariffs are removed within an FTA comprising China, ASEAN,
the Republic of Korea, Australia and New Zealand. The timing ofliberalization is as for scenario 1, but now also liberalizing trade between
ASEAN, Australia and New Zealand and the Republic of Korea in 2013(extended to 2017 for tariffs imposed by new ASEAN countries).
3. Regional free trade area with sensitive products (RFTA-Sensitive) As for scenario 2, but with sensitive sectors not liberalized. For Asian
countries, sensitive products are assumed to be the rice, cattle and sheepmeat, and dairy product sectors. For Australia and New Zealand, thesectors assumed to be sensitive are textiles, wearing apparel and leatherproducts.
4. APEC Developed APEC countries are assumed to fully liberalize their tariffs by
2010, and developing countries by 2020.
a Intra-ASEAN tariffs are also eliminated.
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Determinants of successful PTAs
Preferential agreements that are most likely to produce benefits are those with
the following characteristics:
(i) large and diverse membership;
(ii) low external MFN tariffs;
(iii) comprehensive coverage in terms of measures, sectors and products, with
few exemptions;
(iv) liberal rules of origin; and
(v) inclusion of measures to facilitate trade and to promote cross-border
competition.
In addition, well-designed agreements also need to be supported by
effective monitoring and enforcement mechanisms to ensure consistentimplementation.
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Effects of PTA s Inclusion of sensitive sectors and the provisions on services ,investment,
and trade facilitation
Some PTAs, such as ASEAN-China CEC, include agriculture, and
consistent implementation of these agreements could create a momentum
for further agricultural liberalisation
Most PTAs include provisions on services, investment, and trade facilitation,
although the provisions generally lack specifics and a time table forimplementation.
The proliferation of Asia Pacific PTAs increases the bias toward
intraregional trade and raises the risk of trade diversion, especially because
the MFN tariff rates in some countries are high and strongly dispersed.
Administrative complications could severely diminish any potential benefits
of PTAs and further accentuate trade diversion.
Preferential agreements could potentially inhibit the processes of cross-
border production networking which has been central to the regions
successful integration.
l
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THANK YOU