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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.


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  [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.


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