Category Archives: Preferential Trade

Will the US Congress pass three PTAs this year?

Doug Palmer:

A congressional committee on Wednesday strongly backed deals with South Korea, Colombia and Panama, setting them on course for expected final approval and ending years of trade policy paralysis…

The panel’s chairman, Representative Dave Camp, said approval of the deals could not come at a better time for the struggling U.S. economy…

The three pacts must be approved by the full House and the Senate to become law. The panel backed the pacts on the following bipartisan votes: Colombia, 24-12; Panama, 32-3; and South Korea, 31-5.

Camp said he expected the full House to approve the trade deals next week. The Senate also could move quickly enough for the pacts to be approved in time for South Korean President Lee Myung-Bak’s visit to the White House on Oct 13.

How PTAs may segment regulatory systems

Back in April, I wrote:

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare.

A new WTO report tackles this very issue:

Director-General Pascal Lamy, in launching the World Trade Report 2011 on 20 July 2011, warned that preferential trade agreements (PTAs) “may lock in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement”. “The new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs,” he added…

In fact PTAs of today are less about tariff preferences and more about regulatory measures that were once considered the domain of national rather than international economic policy.  This change is occurring partly because of changes in the way production is being organized internationally with the rise of global production networks.  To prosper, these production networks require an enabling regulatory environment that provides stronger investor protection, better infrastructural services, freedom of movement of corporate personnel, protection to intellectual property rights, and facilitation of trade.   The demand for governance in these policy areas is being met by the supply of deep PTAs…

Another idea would be that we should not ignore the potential difficulties that deep PTAs can give rise to on the regulatory side.  One can observe in the sprawl of agreements what can only be called “families” of PTAs, with each family adopting a particular approach to important policy areas such as technical barriers to trade or competition policy.  The peril here is that PTAs may lock-in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement.

In a nutshell, the new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs. This is not a statement about the legitimacy of these regulatory systems. It is a factual assessment of their impact on economies of scale, which is what the WTO should care about.

The report, titled “The WTO and preferential trade agreements: From co-existence to coherence”, is available online.

PTAs as first-mover advantages

Brookings’ Joshua Meltzer takes an extended look at the future of the global trading system (html / pdf / event). The introduction is a good overview of the status quo’s challenges, though knowledgeable observers will find plenty of room for disagreement in assessing the shape and magnitude of various obstacles (e.g. the bicycle theory of trade negotiations, PTAs’ diversion of attention from multilateral talks).

The discussion of WTO legitimacy at the end of the piece is very interesting, though I won’t focus on it in this post. (More on that subject can be found in this Oxford book on trade ethics.)

In the middle of the article, Meltzer hints at an argument that has perhaps not received sufficient attention:

For the United States, the European Union, China, and Japan, bilateral and even regional FTAs maximize their ability to get their own way. Were these outcomes to become templates for future multilateral trade rounds, then a two-level game that leverages FTA outcomes into the WTO might undermine the WTO’s legitimacy.

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare. (This scenario would be most damaging if technical standards are to be harmonized, but it also highlights the difficulties of harmonization. If mutual recognition is the future of reconciling technical barriers to trade, then the scope for first-mover advantages may be reduced.)

How preferential is world trade?

Using tariff line data for the 20 largest importers, Theresa Carpenter and Andreas Lendle estimate that only 16.3% of global trade flows are given preferential treatment. (That estimate is an upper bound since they don’t observe preference utilization and therefore measure eligibility.) That seems small, and the authors conclude that “there is not much trade with high preferential margins.”

On the other hand, “on aggregate, preferences reduce the global trade-weighted average tariff from 3.2% to 2.1%.” (Their calculations don’t account for the endogeneity of trade volumes, so these 1.1 percentage points probably overstate the preferential margin. But remember that trade-weighted average tariff measures underestimate protection, so we’re taking the difference of two fuzzy numbers.) Policies equivalent to 1/2 of remaining global tariff barriers strike me as big. (Though tariff barriers are never big when compared to non-tariff barriers like labor mobility restrictions!)

Preferential trade and economic efficiency

Daniel Altman makes (what I believe is) a novel claim:

Already, we’ve seen rich and poor countries shifting their attention to regional trade deals. Diverse groups of countries can do a lot by trading amongst themselves, exploiting differences in costs, resources, and technologies. Pretty soon, we should see a few large regional blocs dominating global trade. The ones that lower trade barriers faster will grow faster, too. In these cases, the poorer countries would be expected to catch up to the richer ones. When that happens, the wealthier blocs will start to look at the blocs that lagged behind for new trading relationships, and the barriers will start to fall between the blocs. In the end, we’ll have something very close to a global trade deal – and we will have arrived at that deal in a much more organic, economically efficient way. [emphasis added]

Yes, preferential trade is an importance force shaping the WTO talks. Yes, preferential trade is more politically palatable than multilateralism. But more economically efficient?

Most who are relatively optimistic about the dynamics of preferential trade don’t claim it’s the best path (Baldwin: “(1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agreements; (2) this motley assortment is not the best way to organise world trade”). How would large trade blocs be more economically efficient than a global trade deal?

Will AGOA be renewed in 2015?

Rosa Whitaker, who helped create the African Growth and Opportunity Act (AGOA) as assistant USTR for Africa under President Clinton, thinks that AGOA may not be renewed.

Instead, the idea gaining currency in Washington is a version of trade preference reform in which Agoa-like benefits are extended to all “least developed countries”, leaving Africa with no exclusive trade benefits and SA [South Africa], with its middle-income status, completely out of the loop.

Though a relaxed rule of origin for fabric inputs will expire at the end of 2012, AGOA won’t expire until 2015, so I think it’s a bit early to be sounding alarm bells. The US is supposed to strike a Doha deal in the meantime, for example.

Previous posts on AGOA include thinking about identification, dynamic vs static gains, and binding constraints.

[HT: LWS]