• <div class="header-image" style="background-image: url(/live/image/gid/4/2897_V6N9_Header.rev.1540219621.jpg);">​</div><div class="header-background-color"/>

Role of Free Trade in the world with the Increasing Reliance on Preferential Trading Agreements

October 30, 2018
Until the 1990s, multilateral negotiations were the norm when states wanted to lower tariffs in order to improve transnational trade. However, the tense atmosphere and dissatisfaction of developing nations after the end of the Uruguay Round of the World Trade Organization (WTO) in 1994 led to an increase in Preferential Trade Agreements (PTAs). PTAs permit nations to make preferred trade agreements amongst individual nations or regional groups which lower trade barriers such as tariffs and oftentimes decrease non-trade barriers such as labor. As trade liberalization has become increasingly difficult over the years (as exemplified by the last two WTO rounds), PTAs have become much more common and the WTO has become a forum which regulates trade dispute settlements rather than improving free trade. The most recent WTO Round which took place in Doha began in 2001 and its fate is still at a standstill over 17 years later . Doha touches on around twenty aspects of trade and is meant to further lower tariffs and ameliorate the trade concerns of developing countries. [1] However, countries around the world finished Doha talks after fourteen years due to the fact that developed countries refused to give into the demands of developing countries and vice versa. [2] During the difficulties of Doha, countries seemed more inclined to participate in PTAs as seen by how 100 out of 200 plus regional and bilateral agreements were formed between countries during the seven years of negotiations before Doha’s suspension and then ultimate demise. [3] If the sheer volume of these treaties is not convincing enough, their market share is even more astounding as they account for around 60% of world trade (including the European Union). [4] Although countries now aggressively pursue PTAs as a means of increasing free trade, there is currently broad disagreement over the effects of PTAs on balance-of-trade estimates, multilateral negotiations, and social issues such as the environment and labor practices, in addition to global diplomacy and power relations at large.

Although PTAs may seem by definition to reject the unilateral free trade espoused by the WTO given that they only give preferential access given that they only give preferential market access to members within the PTA, these agreements are still protected under Article XXIV of the WTO. Article XXIV allows WTO members to join customs unions such as the European Union (EU) or make free trade agreements (FTAs) which also include PTAs. FTAs often completely eliminate tariffs whereas PTAs gradually reduce tariffs.[5] When WTO negotiations stagnate or fail, PTA proponents argue that these treaties can serve as useful stepping stones to successful multilateral negotiations. Daniel Griswold suggests that these treaties provide a more rapid and easily achievable alternative to the WTO’s required 146 member consensus. The WTO requires that all 146 members agree in order for WTO rounds to be completed. Thus, the WTO’s 146 member consensus can often make finishing rounds extremely difficult if even one country refuses to comply with the negotiations. Furthermore, they also provide competition to keep WTO members on track, and regional and bilateral options to U.S. exporters who have not been included in FTAs.[6] Furthermore, the fear that FTAs will lessen commitment to multilateral negotiations is unfounded because the vast majority of WTO members participating in PTAs are also pursuing multilateral treaties.[7] However, PTAs systematically disadvantage nonmembers by complicating universal Most-Favored-Nation (MFN) statuses which as Clause 1 of the WTO states that countries must treat all other WTO members equally without discrimination.[8] These bilateral and regional agreements also create internal conflict as a result of discordant PTAs and inconsistent legal standards. However, Nuno Limao mentions that PTAs would continue to create important market access even if tariffs were zero; contradicting Pravin Krishna’s approach which claims PTA trade is overinflated because many goods included in these agreements have MFN tariffs of zero and goods with high MFN tariffs are often exempted in treaties.[9]

Image: United Kingdom (UK) trade is dominated by preferential trade agreements as over 75% is covered under financial trade agreements and the European Union (EU). Source: The UK in a Changing World

Image: United Kingdom (UK) trade is dominated by preferential trade agreements as over 75% is covered under financial trade agreements and the European Union (EU). Source: The UK in a Changing World


Since countries who choose not to participate in smaller trade agreements automatically put themselves at a comparative disadvantage, it is more likely that these nonmember countries will turn to quicker regional and bilateral treaties. These countries are faced with a classic prisoner’s dilemma: cooperate and participate in more PTAs, disagree in an environment where other member states are joining regional or bilateral treaties and gaining advantages (sucker payoff), or disagree and hope for multilateralism to prevail. The sucker’s payoff is particularly disadvantageous due to a global “knife-edge comparative advantage” where even slight tariff differences can potentially lead to present and current trade diversions. [10]


Prisoner’s Dilemma

  Cooperate (Country A)  Disagree (Country A) 
Cooperate (Country B)  3, 3  4,1 (sucker payoff) 
Disagree (Country B)  4, 1 (sucker payoff)   2, 2


The last scenario where both countries chose not to participate in PTAs (bottom-right cell) is unrealistic considering the incontrovertible failure of Doha and the vast number of smaller treaties establishing trade liberalization. Although in this day and age, cooperation may seem to be the “best” overall option (top-right cell), some economists infer serious consequences to a new PTA-based approach. Bhagwati warns that trade diversion is a larger concern than many economists believe because Article XXIV does not protect against tariffs that can be raised when they are bound at higher levels (through MFN status) than the actual tariffs.[11] For example, the Mexican peso crisis increased tariffs for everyone except North American Free Trade Agreement (NAFTA) members because prior to the crisis, the actual tariffs were 20% but were bound to 35%. Thus, Mexico was perfectly within its rights to raise the tariffs to 35% with the exception of NAFTA members whose tariff rates were protected by the regional treaty.[12] Krishna nonetheless disagrees with the claim that countries use trade liberalization to achieve deeper integration and “institutional harmonization” because the number of legally enforceable agreements (within PTAs) which are outside of the WTO mandate is fairly small.[13] However, the minimal amount of legally enforceable agreements concerning non-trade barriers has led to language containing “legal inflation” since it covers a wide range of topics which go beyond the scope of the WTO and are legally unenforceable.[14] There are broad calls for more consistent legal standards and Rachael Denae Thrasher explicates that these inconsistent legal standards will have serious ramifications in dispute settlement panels and even possibly damage international legal institutions.[15] As the WTO becomes more and more relegated to an arbiter of dispute settlements, the amount of uncertainty regarding the number of trade diversion and the lack of knowledge regarding these treaties’ is concerning to say the least.

 

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

 

References

  [1] “The Doha Round.” World Trade Organization , WTO , www.wto.org/english/tratop_e/dda_e/dda_e.htm. Accessed 27 Aug. 2018.
  [2] New York Times Editorial Board. “Global Trade After the Failure of the Doha Round.” The New York Times , The New York Times Company, Jan. 2016, www.nytimes.com/2016/01/01/opinion/global-trade-after-the-failure-of-the-doha-round.html. Accessed 14 Aug. 2018.
  [3] “A second-best choice.” The Economist, The Economist Group Limited, 4 Sept. 2008, www.economist.com/leaders/2008/09/04/a-second-best-choice. Accessed 23 July 2018.
  [4] Ibid.
  [5] Mrázová, Monika, et al. ““Is The WTO’s Article XXIV Bad?”.” World Trade Organization , WTO, 18 July 2011, www.wto.org/english/res_e/publications_e/wtr11_forum_e/wtr11_18july11_d_e.htm. Accessed 16 Aug. 2018.
  [6] Griswold, Dan T. “Free Trade Agreements: Steppingstones to a more Open World .” Trade Series Briefing Paper no. 18, CATO Institute, 10 July 2003 . Accessed 23 July 2018
  [7] Ibid.
  [8] “Principles of the trading system .” World Trade Organization , WTO , www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm. Accessed 27 Aug. 2018.
  [9] Krishna, Pravin. “Preferential Trade Agreements and the World Trade System: A Multilateralist View” in Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, Feenstra and Taylor. University of Chicago Press, 2014; Limao, Nuno, “Preferential Trade Agreements” (NBER Working Paper No. 22138), NBER, 2016.
  [10] Bhagwati, Jagdish. “Why PTAs are a Pox on the World Trading System” in Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Oxford University Press, 2008, pp. 49-88.
  [11] Ibid.
  [12] Ibid.
  [13] Ibid; Krishna, “Preferential Trade Agreements and the World Trade System”
  [14] Horn, Henrik et al. “Beyond the WTO? An anatomy of EU and US preferential trade agreements”, Bruegel, 9 February 2009, http://bruegel.org/wp-content/uploads/imported/publications/bp_trade_jan09.pdf, Accessed July 23, 2018.
  [15] Thrasher, Rachael Denae. “Preferential Trade Agreements: “Free” Trade at What Cost?”, 9 Sept. 2009, http://www.bu.edu/pardee/files/2009/10/pardeeiib-009-sept-09.pdf?PDF=policy-009-trade, Accessed July 23, 2018.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>