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Editorial: Preferential Trade Agreements – Adjusting to New Trade Realities?

June 2012

Chauffour, J.-P. 2012. Preferential Trade Agreements: Adjusting to New Trade Realities? GREAT Insights, Volume 1, Issue 4. June 2012. Maastricht: ECDPM.

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Over the past 10 years, the world has witnessed a renewed dynamism in the negotiation and conclusion of preferential trade agreements (PTAs). This new wave of “21st century regionalism” as Richard Baldwin calls it, is characterised by several features: the rise of cross-regional initiatives and agreements that cover wider networks of participants, the increased involvement of countries at all levels of development; the stronger participation of Asian countries to bilateral and regional agreements; and of course the growth of the deep integration and behind the border agenda in these agreements (1). In this short article we first reflect on the possible reasons explaining this new wave of regionalism before attempting to outline some implications for developing countries.

the promotion of more complex models of integration by developed countries, explain why the agenda of preferential agreements is shifting towards deeper integration policies.

Today’s international trade is radically different and more complex than yesterday’s. First the process of globalization and regional integration has deepened, driven by large reductions in border barriers and technological changes that have lowered, inter alia, the costs of communications and transport. Second the emergence of production networks, global value chains, and trade in tasks (as opposed to goods) is shaping the new trade landscape. This is best illustrated by the Asia factory and the famous example about the ubiquitous production of the iPod. Third is the rise in immaterial trade, linked to increasing services tradeability. Fourth is the global fall in MFN tariffs and the increasing participation in preferential trading agreements, notwithstanding the current stalemate in the Doha round negotiations.

These factors, along perhaps with more institutional ones such as the natural evolution of existing agreements towards new disciplines, and the promotion of more complex models of integration by developed countries, explain why the agenda of preferential agreements is shifting towards deeper integration policies. In a world where traditional barriers to trade have diminished and where the gains from historical tariff preferences have eroded, the emphasis has turned to non-tariff barriers, trade facilitation, services, investment, and other domestic complementary policies (e.g. competition and procurement policies). Additionally, the fragmentation of production and the emergence of new services trade have put more emphasis on the importance of regulatory policies affecting the movement of production factors and the contestability of markets in input services sectors. To be sure, with the rise of PTAs and the distortion of tariff structures, such as the practice of sectoral tariff peaks in agriculture and textile, the quest for a transparent, nondiscriminatory and predictable international trading system has remained as important as ever. Yet, policymakers are facing new concurrent priorities.

Objectives beyond market access and preferences have emerged as important focus of modern PTAs. Increased economic interdependence is generating more demands for regional and global policy coordination and the delivery of transnational public goods. PTAs are increasingly seen as institutional means to solve these coordination problems. This in itself has long been understood by policymakers and several regional economic integration initiatives, starting with the European Economic Community, have been fostered by noneconomic motives. Trade agreements also offer a locus where governments can credibly commit to policy reform, through external anchoring, improved governance (transparency accountability, and voice and participation) and potentially the possibility to import best regulatory and reform practices from others.

More controversially, beyond regulatory rapprochement and cooperation, PTAs can be a way for global and regional hegemons to pursue non-trade related agendas. At this stage this is largely driven by large rich countries, and to a lesser extent by smaller developed countries. Issues such as intellectual property rights are now routinely part of PTAs, and provisions pertaining to social norms, such as labor standards and human rights, are not rare either.

Importantly, in the architecture of most PTAs, not all the commitments are legally binding. Soft-law provisions abound in preferential schemes, reflecting the incomplete contractual nature of international trade transactions. There are several reasons for this, some directly linked to the evolving nature of PTAs. Chief among them, the elimination of regulatory barriers to trade and investment is synonymous with positive integration, whereby new rules and institutions must be devised, often jointly, to lower such barriers.

Binding agreement on rules and discipline is an important dimension of the policy compact required for better regulatory integration. The effective implementation of PTAs calls for transparent and inclusive consultation processes, administrative modernization, and coordination mechanisms, such as soft-dispute resolution systems and standards setting bodies. Other examples of soft-law provisions include the provisions on capacity building and resource transfers often found in PTAs where there is strong asymmetry among partners, i.e., North-South agreements. Finally, the possibility of increased trust and confidence among parties is another important side benefit of PTAs (in addition to the legal certainty conveyed by the agreement itself). Institutions managing trade agreements such as regional economic communities have therefore a key responsibility in helping reap the benefits of this new generation of deep and high quality trade agreements.

Adjusting to new realities

An implication of the growth in number and breadth of scope of PTAs is the rising complexity of policy issues they raise. In many of the new areas covered by these agreements there is no clear and proven template of liberalization and reform. And probably there will never be given the country and sector-specific quality of most issues. So what does this mean for developing countries with weak capacity?

A first emerging lesson is that developing countries should not fear PTAs but think about them in a different way from old-style trade agreements. The economic paradigm of shallow PTAs does not necessarily apply to deep and high quality PTAs. Concepts such as mercantilist reciprocal liberalization, trade creation and diversion, or a textual approach to signing PTAs may still underpin the reasoning of many policymakers but are often obsolete or incomplete for deep integration liberalization. Failure to understand this may in turn explain why most PTAs have either not exploited to the full the liberalization opportunities of behind the border measures or not prioritized the one closest to the parties’ interests.

Second, deep integration PTAs are potentially powerful “tools” to push wide-ranging government-owned reforms. Beyond market access, deep integration PTAs create opportunities to complement trade liberalization with other behind the border reforms. And they offer unique instruments to promote bilateral or plurilateral cooperation and resource transfers, transparency mechanisms, mutual equivalence, informal mechanisms for dispute resolution, in-depth and expert dialogue, and deeper liberalization among willing parties. These are not approaches that can be easily – or at all – replicated in the large and formal setting of multilateral institutions.

Third, deep integration should be pursued in a strategic and selective mannerAnother answer to complexity, not sufficiently considered by developing countries in our view, is selectivity (2). Liberalization is a complex matter, not only from a capacity standpoint, but also politically. Overloading the negotiating agenda (which will later on become the implementing agenda) keeps the focus away from what may be achievable and where gains may be the most important. Agreements bloated by too many issues may lose significance and fail to achieve much. On the other hand, picking meaningful issues with the right partner and adequate technical assistance and cooperative approach may result in substantial liberalization progress and serve as a positive signal or trigger for more challenging areas. Market access should not be the only item on the agenda of negotiators, especially those of developing countries, since deep integration is really about domestic reform. In this respect too, prioritization of core objectives and sequencing should be central considerations of negotiators.

Finally, although core economic principles should be followed to promote to the extent possible market-based solutions in PTAs, there is no one-size-fits-all deep integration. As policymakers start integrating more and more these new dimensions, we can expect that they will become more intensive “users” of PTAs to further liberalization objectives, hopefully in complement to multilateral efforts. Liberalization in each sector is not a simple matter and escapes easy characterization, as well as uniform answers. This complexity means that there are few universal rules to follow, but mainly carefully designed and specific solutions. Deep and high quality integration is essentially a sui generis process.

Jean-Pierre Chauffour is lead economist in the World Bank’s International Trade Department, Poverty Reduction and Economic Management (PREM) network, where he works on regionalism, competitiveness, and trade policy issues

This article is based on Chauffour, Jean-Pierre and Jean-Christophe Maur, 2011. “Preferential Trade Agreement Policies for Development: A Handbook”, Washington DC: World Bank. Available at: http://go.worldbank.org/LVCIKU59J0

Footnotes
(1) WTO, The WTO and preferential trade agreements: From co-existence to coherence World Trade Report 2011 (Geneva: World Trade Organization: 2011), 3. 
(2) Hoekman, Bernard and Khalid Sekkat, 2010. “Arab Economic Integration: Missing Links”, CEPR Discussion Paper 7807, London: Centre for Economic and Policy Research.

Photo by the World Bank

This article was published in GREAT Insights Volume 1, Issue 4 (June 2012).

Economic Transformation and TradeRegional IntegrationTrade Policy and Economic Partnership AgreementsTrade

External authors

Jean-Pierre Chauffour