Discuss whether regionalism (PTA) is helping or hindering the achievement of global

free trade.

Building


1. The agreements allow countries to engage in regional or exclusive free trade cooperation.
When countries are engaged in a PTA, they mutually grant preferential access on goods and
services under the agreement to each other (e.g. charge very low or zero tariffs and exempt
its trading partners from the importing quota). moving free trade
Generally, charging different tariffs rates on different trading partners is considered illegal,
according to the WTOs rules, since it departs from the non-discrimination Most-Favored-
Nation (MFN) rule in Article I of GATT and Article II of GATS.
However, the WTO does permit its members to engage in PTAs, provided that the PTAs
comply with certain conditions. The WTOs rules that allow countries to form PTAs are from
Article XXIV of GATT, which specify that tariffs charged on non-signing countries (i.e. MFN
external tariffs) by a member of a PTA shall not be higher or more restrictive than the
corresponding *tariffs+ of that country prior to the formation of the PTA (Regional Trade
Agreements: Goods Rules, n.d.).
Punyakumpol

2. Easier to form a free trade area among a small number of neighbouring countries

3. Rules at the PTA level then can provide basis for wider multilateral negotiations

- Can experiment with new agreements that are impossible among a large number,
such as the opening of certain types of services that have been traditionally close
for example the Agricultural Industry.


4. Increase in competition can lower costs of production

5. Lower costs arising from economies of scale move towards free trade

6. Increased opportunities for business investment encourage more FDI into the
member countries as the PTA has expanded its market size



In many preferential trade agreements (PTAs) countries exchange not only reductions in trade barriers
but also cooperation in non-trade issues such as labor and environmental standards, intellectual
property, etc.

We find that such PTAs increase the cost of multilateral
tariff reductions and thus cause a stumbling block to global free trade.

The welfare analysis shows that the current WTO rules allowing this type of
PTAs may be optimal for economically large countries

- An alternative to multilateralism
- Is a usefull supplement were only walking on two legs.
- It accelerates the multilateral process

Stumbling
1. Discriminatory against poor and less-developed countries.
- low income countries are unable to negotiate forcefully and often lack resources and
infrastructure that will be needed to take advantage of market opening.
- Pg 19 wp 288. The already cited World Bank report
Weakest partners are the biggest losers.

2. Quicker?
The support of business groups for multilateralism may also erode with regional alternatives
because of two different reasons:
- If one can get a deal regionally, where one may have a great deal of trade, then one may
forget about the multilateral arena. Why bother to fight the battles at the Uruguay Round
where the powerful American manufacturing lobbies, zeroing in with the EC against the Far
East, seek instead weaken the GATT rules?
- One may get better protectionist, trade-diversionary deals for oneself in a preferential
arrangement than in the non-discriminatory world of the GATT.

3. Efficient?
Weak states may agree to demands of strong states, in ways which are not optimal from the
viewpoint of the economic efficiency of the world trading system. In turn, these concessions can
distort the outcome of the multilateral negotiations.

4. Some argue that PTAs might cause member countries to charge higher tariffs on non-
members.

5. Preference erosion, or exploitation. Starting from a world in which all nations have MFN
tariffs, the question is whether some group of nations can raise its collective welfare above
the free trade level by forming a trade bloc and thus exploiting other nations. If the answer
is yes, that bloc is a stumbling block on the road to multilateral free trade because the
members would veto global free trade as undermining their exploitation of third nations. In
trade models, the answer is almost always yes, but the answer may depend on the level of
MFN tariffs when the bloc is formed.8 Given Smiths certitude (briefly, that all parties to a
preferential trade arrangement benefit) and Haberlers spillover (postulating that third
nations must lose from such an arrangement), some combination of nations is bound to be
better able to exploit third nations by acting as a bloc. This is almost trivially true if the bloc
can violate its WTO tariff bindings by raising external tar- iffs. After all, the bloc as a whole
has more buying power than its constituents do individually, so it can better exploit
foreigners. Less obvious, but equally true, is that stumbling blocks can be found even when
external tariffs are maintained (as has been the case for all the major postwar PTAs).

6. Hurt third parties (not in the agreement) Trade Diversion

A different perspective is taken by Chang and Winters (2002), who study the effects of
Mercosura trading bloc formed by Argentina, Brazil, Paraguay, and Uruguay in 1991on
export prices to Brazil. They find that Argentinas export prices increased, whereas the
export prices of countries outside Mercosur fell. These price effects indicate that Mercosur
has hurt outsiders while helping Brazil, a Mercosur partner.

Chang, Won, and L. Alan Winters. 2002. How Regional Blocs Affect Excluded Countries: The
Price Effects of Mercosur. American Eco- nomic Review 92 (4): 889904.

7. PTAs might also serve as diffusion mechanisms either directly, in the form of
coercion, or more indirectly, in the form of learning. For example, a growing body of
work treats the EU as a conflicted power (Meunier and Nicolaidis 2006), which
uses its market power (i.e. access to the EUs single market) to coerce weaker powers,
including former colonies, into accepting new types of trade arrangements (Farrell
2005) (for example, European Partnership Agreements with the African, Caribbean
and Pacific group of states). Others consider that the European Community provided
an example for economic integration among countries in Latin America and Africa in
the 1960s (Pomfret 2001), demonstrating how the perceived success of trade
arrangements teach others to adopt similar policies (Krueger 1997).