PREFERENTIAL TRADE AGREEMENT

As of 2000, the WTO identified 240 PTAs in the world! Of these, some 170 were already in force and the remainder under discussion/negotiation. In sheer numbers, about 90 per cent of the PTAs took the form of FTAs and only 10 per cent were customs 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 t ency

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.

Features of free TA
Features of free trade Free trade implies the following features:[ Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers) Trade in services without taxes or other trade barriers The absence of "trade-distorting" policies (such as taxes subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others Free access to markets Free access to market information Inability of firms to distort markets through government-imposed monopoly or oligopoly power The free movement of labor between and within countries The free movement of capital between and within countries

Main aim
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

Definition
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.

PTA
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.

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 Are preferential trading agreements good? ( effects)

Trade creation
Occurs when the formation of a preferential trading agreement leads to replacement of high-cost domestic 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-cost imports from non members with higher-cost imports from member nations.( non members prove more strong)

FTAs and others

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 nonmember 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 nonmember 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.

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), 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

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

Venezuela- Preferential trade agreements signed between Chile and Venezuela give the Chilean exporters considerable advantage over U.S. fruit suppliers. Bolivia - Bolivia's trade with neighboring countries is growing, in part because of several regional preferential trade agreements it has negotiated. PERU - Some countries (not including the United States) avoid tariffs on a number of their 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 the Europe Agreement between Hungary and the European Community and their Member States (December 1991). In June 1993, the EU agreed to accelerate the agreement's provisions and reaffirmed its commitment to Hungary's full membership.

France and other EU member states have a network of preferential trade agreements that is expanding rapidly.

Benefits of FTA
Free trade implies the following features:[citation needed Trade of goods without taxes (including tariffs or other trade barriers (e.g., quotas on imports or subsidies for producers) Trade in services without taxes or other trade barriers The absence of "trade-distorting" policies (such as taxes subsidies regulations or laws) that give some firms, households, or factors of production an advantage over others Free access to markets Free access to market information Inability of firms to distort markets through government-imposed monopoly or oligopoly power because of powerful Pvt players The free movement of labor between and within countries

Demerits of FTA
National sovereignty issue Shifts in employment Globalisation sideeffects Trade diversion

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

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

Safety valve pre-NAFTA measures allowed if import surge Transportation no barriers eventually No permanent independent organization NAFTA functions through meetings of country officials

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

Preferential rules of origin

Countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods Establish criteria for determining the country or customs territory from which a 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 under various types of trade agreements PTA s could alter global trade patterns in textiles and apparels significantly to the advantage of members and dis advantage of non members 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

PREFERNTIAL TRADE AGREEMENTS IN ASIA AND PACIFIC REGION

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.

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 the completed 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.

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 ASEAN countries 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 of liberalization 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 sheep meat, and dairy product sectors. For Australia and New Zealand, the sectors assumed to be sensitive are textiles, wearing apparel and leather products. 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.

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 consistent implementation.

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 for implementation. 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 crossborder production networking which has been central to the regions successful integration.

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