Regional trade agreements (RTAs) are defined as trade agreements between two or more partners, which include free trade and customs unions. Preferential trade agreements (PTAs) are defined as unilateral trade preferences. These can include factors such as preferential import tariffs . As a result, it has been determined that the increase in trade between rich and poor countries (developed and developing) has increased tremendously as a result of PTAs. However, the explosion of PTAs is not being matched by expanding trade flows that receive preferential treatment . Despite this, it is important to be aware that PTAs “constitute a major channel for countries seeking to gain access to external markets; liberalize their own markets; and secure long-term links with strategic partners” . The following graph shows the increase of PTAs from 1950 to 2010 between developing and developing countries, developed and developing countries, and developed and developed countries:
The growth of PTAs has changed through the years. For instance, there were only about 70 PTAs in 1990, increasing to about 300 in 2010. Furthermore, significantly, “the average WTO member is party to 13 PTAs” . Interestingly, in 2008, 90% of imports of merchandise came from 20 importers and only 16% of these imports qualified for preferential treatment. It is important to realize that preferential margins are typically small. In fact, “only 2% of global imports are eligible for preferential tariffs where the preference margins are above 10%” . However, this typically only affects smaller export economies, exporting specific commodities.
Competitors also enjoy preferential treatment. In fact, “in 2007, preference margins appropriately adjusted to take account of the presence of the other preferential suppliers were no greater than two percent in absolute value of the bulk of all merchandise trade” . As a result, it is important to consider why PTAs are entered into by certain countries.
For instance, current PTAs cover a variety of issues. These issues include the traditional items of tariffs, but also include other services, investing opportunities, intellectual property protestors, and competition. As a result, PTAs are now considered to be more comprehensive because members of the PTA get to integrate within the market due to the delegation of a supra-national policy.
In fact, the policy areas within the PTA is continuously widening and developing. However, it is unclear as to the speed of which this development of advanced policies for PTAs is occurring. It is believed that the development of advanced PTA policies is related to trade openness. Thus, it is further suggested that preferential tariff opening may lead to multilateral trade agreements. As such, it may be suggested by opponents to PTAs that unilateral decision making is inferior to collective decision making. Despite these concerns, international production networks have continuously risen . As a result, it is crucial for PTA members to create harmony with all world traders.
This can be done with consideration of the exchange rate. This is one of the single most important factors relating to business and trade. For instance, if trade is too expensive with one country, another country can be substituted with relative ease. Therefore, the exchange rate for members of the PTA must be similar, if not the same. One way this can be done is through using one currency, such as the Euro.
There are other roadblocks to effective trade. For instance, trade agreements and barriers are considered roadblocks. This means that individual countries or groups of countries can set their own conditions through trade agreements that can either help or hinder trade. For a more specific example, if a rogue nation decided to halt trade by making the tariffs or price of business too high, then it is unlikely that nation will have many trade opportunities. In contrast, if another rogue nation decided to create fair tariffs and business prices, then it is more likely that nation will have many trade opportunities. Another hindrance to trade is tax. In fact, a high tax rate can be devastating to a nation seeking to engage in trade with another nation. For instance, by imposing a high tax rate on imported goods, it may be difficult to sell these goods due to the increased price due to the high tax rate.
PTAs have immense capabilities for success in sustaining global trade. However, there are some negative aspects, as well. Most significantly, PTAs need to be fair for all trading countries. Despite this, it is important to be aware that PTAs are designed to protect the interests of individual countries. As such, it is likely that they will continue to grow in strength to continue protecting these interests.
- Rocha, N., & Teh, R. (2011, July 11). Preferential trade agreements and the WTO. Retrieved from VOX CEPR: http://www.voxeu.org
- The World Bank. (2011, July). Preferential Trade Agreement Policies for Development: A Handbook. Retrieved from The World Bank: http://web.worldbank.org
- WTO. (2014). Regional trade agreements and preferential trade arrangements . Retrieved from WTO: http://www.wto.org/