· world trade report 2011 the wto and preferential trade agreements: from co-existence to...

World Trade Report 2011

The WTO and preferential trade agreements: From co-existence to coherence

9 789287 037640

World Trade Report

The ever-growing number of preferential trade agreements (PTAs) is a prominent feature of international trade. The World Trade Report 2011 describes the historical development of PTAs and the current landscape of agreements. It examines why PTAs are established, their economic effects, and the contents of the agreements themselves. Finally it considers the interaction between PTAs and the multilateral trading system.

Accumulated trade opening – at the multilateral, regional and unilateral level – has reduced the scope for offering preferential tariffs under PTAs. As a result, only a small fraction of global merchandise trade receives preferences and preferential tariffs are becoming less important in PTAs.

The report reveals that more and more PTAs are going beyond preferential tariffs, with numerous non-tariff areas of a regulatory nature being included in the agreements.

Global production networks may be prompting the emergence of these “deep” PTAs as good governance on a range of regulatory areas is far more important to these networks than further reductions in already low tariffs. Econometric evidence and case studies support this link between production networks and deep PTAs.

The report ends by examining the challenge that deep PTAs present to the multilateral trading system and proposes a number of options for increasing coherence between these agreements and the trading system regulated by the WTO.

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This report is also available inFrench and Spanish.

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© World Trade Organization 2011

Image credits (cover):Cover top left – Brian Jackson – iStockphoto

Cover left centre – Hande Guleryuz Yuce – iStockphotoCover bottom left – geopaul – iStockphoto

Cover bottom centre – Christian Lagereek – iStockphotoCover bottom right – René Mansi – iStockphoto

Cover image top right – Heather Sapey-Pertin

The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2011 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2010. The second part focuses on the special theme of preferential trade agreements.

Website: www.wto.orgGeneral enquiries: [email protected]: +41 (0)22 739 51 11

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Contents

1

ContentsAcknowledgements and Disclaimer 2

Foreword by the Wto Director-General 3

executive summary 5

I World trade in 2010 18

II The WTO and preferential trade agreements: From co-existence to coherence 40 A Introduction 42

1. PerspectivesandinsightsintheWorldTradeReport2011 44

2. Structureofthereport 45

B Historical background and current trends 46

1. TheformationofPTAs:ahistoricalperspective 48

2. TheevolutionofPTAs:stylizedfacts 54

3. TradeflowsrelatedtoPTAs 63

4. Howpreferentialistrade? 72

5. Conclusions 85

C Causes and effects of PtAs: Is it all about preferences? 92

1. MotivesforPTAs 94

2. ThestandardeconomicsofPTAs 100

3. Goingbeyondthestandardanalysis 109

4. Conclusions 114

TechnicalAppendix:SystemiceffectsofPTAs 118

D Anatomy of preferential trade agreements 122

1. ArelowertariffsstillimportantforPTAs? 124

2. PatternsinthecontentofPTAs 128

3. ProductionnetworksanddeepPTAs 145

4. Africanregionalcooperation:lessonsfromdeepintegration? 151

5. Conclusions 153

Appendixtables 157

e the multilateral trading system and PtAs 164

1. Systemiceffectsofpreferentialtariffliberalization 166

2. DeepPTAprovisionsandthemultilateraltradingsystem 168

3. RegionalismandtheWTO:historicalperspective 182

4. TherelationshipbetweenPTAsandtheWTO 187

F Conclusions 196

statistical appendix 199

Bibliography 228

technical notes 239

Abbreviations and symbols 243

List of figures, tables, boxes and maps 245

Wto members 249

Previous World trade Reports 250

WOrld Trade repOrT 2011

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acknowledgementsTheWorld Trade Report 2011waspreparedunderthegeneral direction of the Deputy Director-GeneralAlejandroJaraandsupervisedbyPatrickLow,DirectoroftheEconomicResearchandStatisticsDivision.Thewritingof thisyear’sreportwascoordinatedbyNadiaRocha and Robert Teh. The principal authors of theReport were Marc Bacchetta, Cosimo Beverelli, JohnHancock, Alexander Keck, Gaurav Nayyar, ColemanNee, Roberta Piermartini, Nadia Rocha, Martin Roy,Michele Ruta, Robert Teh and Alan Yanovich. Otherwritten contributions were provided by Marc Auboin,Manfred Elsig, Trudi Hartzenberg and Roy Santana.Special acknowledgment is owed to Richard Baldwinfor his many suggestions and contributions to thereport.TradestatisticsinformationwasprovidedbytheStatistics Group of the Economic Research andStatistics Division, coordinated by Hubert Escaith,Julia de Verteuil, Andreas Maurer and JurgenRichtering.AishahColauttiassistedinthepreparationof the graphical input and Paulette Planchette,assisted by Véronique Bernard, prepared thebibliography. Research assistance was provided byHans Baumgarten, Pavel Chakraborty, ClaudiaHofmann, Joelle Latina, Alen Mulabdic, AndreasLendle,andGianlucaOrefice.

Other Divisions in the WTO Secretariat providedvaluable comments on drafts at various stages of

preparation. The authors are particularly grateful toseveralindividualsintheLegalAffairsDivision(ValerieHughes, Gabrielle Marceau and Edna Robles), theTrade in Services Division (Rolf Adlung) and TradePolicies Review Division (Rohini Acharya, Jo-AnnCrawford, and Christelle Renard). The followingindividuals from outside the WTO Secretariat alsomade useful comments on earlier drafts: DaleAndrews,AnnCapling,ManfredElsig,GaryHufbauer,Lena Lindberg, Xuepeng Liu, Mark Manger, Jean-ChristopheMaur,AlessandroNicita,EmanuelOrnelas,Joost Pauwelyn, John Ravenhill, Robert Staiger, KatiSuominen, Tania Voon, Peter Williams, and JohnWhalley.

The production of the Report was managed byPaulette Planchette of the Economic Research andStatistics Division in close cooperation with AnthonyMartin,HeatherSapey-PertinandHelenSwainoftheInformation and External Relations Division. Thetranslators in the Languages, Documentation andInformationManagementDivisionworkedhardtomeettight deadlines. This year the WTO Secretariatlaunched a Webpage discussion on the topic of theWorld Trade Report 2011. The Webpage, whichattracted many stimulating contributions, wasmanaged by Joelle Latina, in collaboration withAnthonyMartin.

disclaimerThe World Trade Report and any opinions reflected therein are the sole responsibility of the WTOSecretariat.TheydonotpurporttoreflecttheopinionsorviewsofmembersoftheWTO.Themainauthorsof the Report also wish to exonerate those who have commented upon it from responsibility for anyoutstandingerrorsoromissions.

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FoReWoRD

Foreword by the WTO director-GeneralThisyear'sWorld Trade Reporttakesanin-depthfreshlook at preferential trade. The choice of this topicreflects two significant trends in international traderelations,bothofwhichcarryfar-reachingimplicationsfor themultilateral tradingsystem.Thefirstandmostreadily evident of these is the continuing growth andincreasing prominence of preferential tradeagreements (PTAs). In the last two decades, thenumberofPTAshasincreasedmorethanfour-fold,toaround 300 active agreements today. There is noreason to assume that PTAs will cease to grow innumberorthattheywillnotformpartofthelong-termtapestryof internationaltraderelations.Secondly, thecontent of PTAs continues to evolve and deepen,reflecting important changes in the world economy.This too raises vital questions about the focus andreach of the WTO, and the value assigned bygovernmentstoglobally-basedtraderelations.

TheperennialconcernabouttherelationshipbetweenthemultilateraltradingsystemandPTAshasprovokeddifferentreactionsamongcommentatorsandanalysts.Some would emphasize a clash of systems andinherent inconsistencies between discriminatory andnon-discriminatory approaches to trade relations.OtherswouldpointtothegrowingprominenceofPTAsasareflectionofthedemiseofmultilateralism.Othersstill would assert that regional and multilateralarrangements are in essence complementary andneed to be fashioned accordingly. None of theseperspectives can singly capture the complexity ofinternationaltraderelationsinaglobalizingworld.

Our report seeks to navigate a way through thesecomplexities in bringing new data and analyses tounderstandtheseissues.Itacknowledgesthemultiplemotivations for preferential approaches. At the sametime,thereportidentifiesimportantwaysinwhichthefocus of trade policy, particularly of the preferentialvariety,isbeingreshapedtoreflecttheconsequencesof past policies as well as changes in productionstructuresinternationally.

InearliertimesPTAsweremostlikelytobemotivatedby the desire to avoid relatively high most-favourednation (MFN) tariffs. The theory on free trade areasandcustomsunionsmirroredthisrealitybyplacingthenotions of trade creation and trade diversion centre-stage. At the same time, considerable attention hasbeen paid to the discriminatory effects of rules oforiginonthetradeofthirdparties.Morerecently,thiscontext has lost some of its relevance becauseunderlying realities have changed. As the reportdocuments, average tariffs have fallen markedly inrecent years, making tariff preferences a more minormotivation for entering into PTAs. Furthermore, itseems that where MFN tariffs remain high they arealsoexcludedfrompreferentialreductions,additionallyweakeningthismotivation.

As tariff preferenceshavediminished in importance,non-tariff measures havebecome relatively moresignificantasdeterminantsof market access and theconditions of competition.Non-tariffmeasurescomeinmanyshapes.Theymaybe designed to influencecompetitive conditions inmarkets,justliketariffs,orthey may focus on publicpolicy concerns such ashealth, safety, and theenvironment. These publicpolicyinterventionsalsohavetradeconsequencesandmaybemoreorlessdiscriminatoryintheireffects.

For the most part, it would seem that non-tariffmeasures of the public policy variety have remainedfocused on consumer welfare and not benefits toproducers. However, the fact that interventionsputatively designed to protect consumers may alsofavour producers can lead to concerns over hiddenprotectionandunwarrantedmarketsegmentation. InaworldwheretheWTOishavingdifficultyadvancinganupdated multilateral agenda, the risks of preference-based discrimination and market disintegration builtaroundregulatorydivergenceshouldnotbedisregarded.

An important additional element in the equation,stemming from the emergence of supply chainproduction as a prominent mode of twenty-first-centuryintegration,isthatnewregulatorymattersareincreasingly on PTA agendas. These include issuessuch as investment, competition policy, governmentprocurementandharmonizationormutual recognitionofproductandprocessstandards.Thereportanalysesthe content of a large number of PTAs in terms ofwhether they augment WTO provisions in particularpolicyareasandintroduceentirelynewissues.Bothofthese tendencies are identified in many PTAs,particularly those that have entered into force morerecently.Here,then,isanotherreasonwhyweneedtoremainattentivetopolicyfragmentation.Totheextentthat the desire for deeper integration under PTAs, inbothWTOandnon-WTOareasofregulation,isdrivenby the logic of vertically integrated internationalproduction structures, one is less likely to encounterdiscriminatory intent lurking behind regulatorycooperationinPTAs.Butweshouldbemindfulofthepossibility that even in the absence of intent, marketsegmentation and discriminatory outcomes could beanunavoidableconsequenceofthesearrangements.

The report pays explicit attention to the question ofwhatisneededinamultilateralcontexttoensurethat


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PTAsandtheWTOdonotsimplyrunonparalleltracks,offering plentiful opportunities for inconsistency andconflict. This focusexplains the subtitle of the report–“Fromco-existencetocoherence”.Whatthen,shouldtheWTObedoing? It hasoftenbeensaid that if theWTOmadeprogress inmultilateralnegotiations,bothon market access and rules, this would soften thelikelihood of clashes and inconsistencies with PTAs.Thisisundoubtedlyavalidpoint,buttheexperienceoftheDohaDevelopmentRoundduring the lastdecadehasraisedquestionsabout theabilityandwillingnessofgovernments toadvance themultilateralagenda. Ithas also raised the need to connect the multilateralandbilateral“brains”oftradepolicydriversandactors.We need a better record if we are to attain greatercoherence between the WTO and PTAs throughsuccessfulmultilateralnegotiations.

A second possibility is to continue the quest forgreaterlegalclarityanddetailintheWTOrulesaboutwhat is permissible under PTAs. Progress here couldblunt the likelihood of damaging discriminatoryoutcomes under PTAs, whether intentional orotherwise.Hereagain,however, yearsofeffort in theDoha Round and before to address multilateralprovisionsonPTAshaveyieldedlimitedresults.Itisforgovernments todeterminewhether theyneedgreaterlegal certainty in this domain. If they do, perhaps amorecircuitous route to theobjective isprecisely theone thatmembershave recentlyembarkedupon.Theprovisional establishment of the TransparencyMechanismforRegionalTradeAgreementsmaypavethewayfornon-litigiousdeliberationsthatcouldbuildconfidence and understanding among membersregardingthemotives,contentsandpolicyapproachesunderpinningregionalinitiatives,leadingovertimetoasharedvisionandreinforcedlegalprovisions.

Thirdly, to the extent that PTAs are motivated by adesire for deeper integration rather than marketsegmentation, there could be a role for the WTO topromotegreatercoherenceamongnon-competingbutdivergent regulatory regimes that in practice causegeographical fragmentation or raise trade costs. Thisagenda has been referred to as multilateralizingregionalism. In some cases the multilateralizationeffect occurs de facto because regulatory reformsundertaken in a PTA context are applied in a non-discriminatory manner. This MFN dividend could bebuiltupon inotherpolicyareas.The feasibilityof thisapproachwouldneedtoberesearchedfurther.

Whateverviewonetakesofpreciselyhowtopromoteaglobalorientationintraderelations,thereisnodoubtthat we need to build towards a more stable andhealthier tradingenvironment,wherealternative tradepolicyapproachesaremutuallysupportiveandbalanceequitablytheneedsofallnations.Itistothediscussionof this agenda that this year's World Trade Reportseeks to make a contribution. I hope members willhaveafirstopportunitytoconsidersomeoftheissuesin this report at the upcoming 8th WTO MinisterialConferenceinDecember2011.

Pascal LamyDirector-General

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executive summarySection a: Introduction

The report is divided into four main parts. The firstprovides an historical analysis of preferential tradeagreements (PTAs) and a description of the currentlandscape. It documents the large increase in PTAactivity in recentyears,breaking thisdownby region,levelofeconomicdevelopment,andtypeofintegrationagreement.ItprovidesapreciseestimateofhowmuchtradeinPTAsreceivespreferentialtreatment.

The second section discusses the causes andconsequences of PTAs, focusing on both economicand political factors. A distinction is made betweenshallowanddeep integration inorder tosuggest thattraditional theories do not fully explain the emergingpatternofPTAs.ThereportexaminesinparticulartheroleofinternationalproductionnetworksinpromptingthecreationofdeepPTAs.

The third section focuses on the policy content ofPTAs,withparticularreferencetothedepthandscopeofcommitmentscomparedwiththosecontainedintheWTO agreements. It supports the link betweenproduction networks and PTAs with both statisticalevidenceandcasestudies.

The final section identifies areas of synergies andpotential conflicts between PTAs and the multilateraltrading system and examines ways in which the two“tradesystems”canbemademorecoherent.

See page 42

Section B: Historical background and current trends

the formation of trading blocs: a historical perspective

Global trade relations have never been uniform or monolithic and regional trading arrangements have been around for centuries.

Regional trading arrangements have encompassedempires and colonial spheres of influence, bilateralcommercial treaties and, more recently, multilateralagreements. They have often overlapped andinteracted,creatingatradelandscapedefinedlessbyclear-cut choices between regionalism andmultilateralism – or discrimination and non-discrimination – than by the complex interplay, evencompetition,amongmultipletraderegimes.

Despitethiscomplexity,inmorerecenttimestradeco-operation has become broader and more inclusive.Defining landmarks in this trend have been theestablishment of the GATT in 1947 and the WTO in1995.At thesame time, trade relationshavebecomedeeper and more far-reaching, incorporating areassuchasservicestrade,foreigninvestment,intellectualproperty and regulatory regimes. These tendenciesareaclearreflectionofthegrowingintegrationoftheworld economy and the “internationalization” ofpoliciesthatwereonceconsidereddomestic. Insomecases,regionalagreementshaveprogressedfurtherinthis direction than the over-arching multilateralframework.

Progress has not been continuous, and there havebeenmajorset-backsandreversalsalongtheway.Theeconomicdepressionoftheearly1870s,forinstance,effectivelybroughttheexpansionofEurope'sbilateraltradetreatiestoanend,justasthe“GreatDepression”oftheearly1930shelpedfuelthespreadofdefensiveand increasingly hostile trade blocs in the inter-warperiod. Conversely, the push for a more open andinclusive trading order has been strongest duringperiods of economic expansion and internationalpeace.AmainjustificationforcreatingtheGATTinthepost-warperiodwasthewidelyheldbeliefthathostiletrade blocs had contributed directly to the economicchaos of the 1930s and the outbreak of the SecondWorldWar.

the establishment of the post-war multilateral trading system did not diminish the attraction of bilateral or regional approaches to trade arrangements and led instead to a period of creative interaction and sometimes tension between multilateralism and regionalism.


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The first wave of regionalism in the late 1950s and1960s was driven by Western Europe's push forcontinentalintegration,leadingtotheestablishmentofthe European Economic Community (EEC) in 1957and the European Free Trade Agreement (EFTA) in1960.Throughoutthisperiod,GATTtariffcuttingandmembership enlargement moved in tandem, first withtheDillonRound in1960-61and thenwith themuchmore ambitious Kennedy Round between 1964 and1967.

Subsequent waves of regionalism, from around themid-1980s onwards, reflected an increasing embraceofsucharrangementsintheAmericas,AsiaandAfrica,as well as in Europe. The continuing proliferation ofregionalagreementsoverthelast25years involvesawide network of participants – including bilateral,plurilateral and cross-regional initiatives – andencompassescountriesatdifferentlevelsofeconomicdevelopment – including “developed-developed”,“developing-developing”, and “developed-developing”alliances. These newest agreements also oftenaddress WTO+ type issues, suchas services, capitalflows, standards, intellectual property, regulatorysystems (many of which are non-discriminatory) andcommitmentsonlabourandenvironmentissues.

The Uruguay Round (1986-1994) coincided with aperiod of growing regionalism and several issues,including services and intellectual property, wereaddressed for the first time both regionally andmultilaterally. The continuing proliferation of PTAs inparallel with the Doha Round has provoked a debateabout coherence, compatibility and potential conflictbetweenmultilateralandregionalapproachestotradecooperation. Among the questions addressed in thisdebatearewhetherburgeoning regionalismsignals aweakeningofinternationalcommitmenttoopentrade,and foreshadows a return to a more fragmentedtrading system. Alternatively, PTAs may be part of abroad pattern seen since the Second World War –where some countries want to move “further andfaster” in trade rule-making than others, wherebilateralandregionalagreementscanhaveapositive,“domino effect”, encouraging the pace of multilateralcooperation (and vice versa), andwhere regional andmultilateral agreements are becoming coherent, notconflicting, approaches to managing a more complexandintegratedworldtradingorder.

stylized facts about PtAs

PtA participation has accelerated over time and become more widespread.

From the1950sonwards, thenumberofactivePTAsincreased more or less continuously to about 70 in1990.Thereafter,PTAactivityacceleratednoticeably.The number of PTAs in force in 2010 was close to300. The surge in PTA activity is driven both by agrowing number of countries taking an interest in

reciprocal trade opening and by an increase in thenumberofPTAspercountry.AllWTOmembers (withtheexceptionofMongolia)belongtoatleastonePTA.

PtA activity has transcended regional boundaries.

OnehalfofthePTAscurrentlyinforcearenotstrictly“regional”.Theadventofcross-regionalPTAshasbeenparticularlypronounced in the lastdecade.The trendtowardsabroadergeographicalscopeofPTAsisevenmore pronounced for those PTAs that are currentlyunder negotiation or have recently been signed (butarenotyet inforce).Practicallyalloftheseareofthecross-regionaltype.

PtAs have seen opposing trends towards further rationalization on the one hand and a sprawling web of new bilateral and overlapping deals on the other.

Numerous bilateral agreements have beenconsolidated into plurilateral agreements either viaaccessions or negotiations between existing PTAs.Examples include successive EU enlargements, theconsolidation of bilateral pacts between EasternEuropean countries in the context of the CentralEuropean Free Trade Agreement (CEFTA) and theconclusion of a PTA between Mercosur and theAndeanCommunity in theLatinAmerican IntegrationAssociation(LAIA)framework.

Atthesametime,aparalleltrendisdiscernibletowardsbilateral deals across regions. While many of thesebilateral arrangements are between developingcountries,developedcountrieshavealsoplayedapart.A consequence of this trend is an increasedfragmentation of trade relations, with countriesbelongingtomultiple,sometimesoverlappingPTAs.

Free trade agreements are far more prevalent than customs unions and a number of products continue to be excluded from preferential access.

Free trade agreements account for more than three-quarters of all PTAs in force. Although GATTArticle XXIV requires that import duties are to beeliminated on substantially all trade among themembers of customs unions and free trade areas,some products are often excluded. A recent study ofPTAs involving four major trading countries and theirpartnersshowsthatabout7percentof tariff lines inthe sample are excluded, either temporarily orpermanently.Theseproductsaremainlyagriculturalorfood items, and labour-intensive manufacturedproductssuchasfootwearandtextiles.

the coverage of PtAs in terms of policy areas has widened and deepened over time.

Notwithstanding the prevailing pattern of specificproductexclusionsfromtariffelimination,mostrecent

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PTAsgobeyondtraditionaltariff-cuttingexercisesandmay include such policy areas as services trade,investment, intellectual property, technical barriers totradeanddisputesettlement.Forinstance,aboutone-third of PTAs in force today contain servicescommitmentscomparedtolessthanatenthin1990.

stylized facts about trade flows related to PtAs

the value of world trade between members of preferential trade agreements has increased as the number of PtAs has expanded.

Intra-PTAtraderepresentedabout35percentoftotalworld merchandise trade in 2008, compared with 18per cent in 1990.1 Preferential trade – that is, tradeactually receiving preferential tariff treatment –represents a much smaller share of world trade.However,itisstillworthconsideringtotaltradeamongPTAmembersbecause the latestgenerationof tradeagreements may be motivated by a broader set ofconsiderationsthanjusttariffreductions,includingthedevelopmentandmaintenanceofsupplychains.

The share of manufactured goods in total intra-PTAexports is the same as the share of manufacturedgoodsinworldtrade(65percent),andthissharedoesnotvarymuchacrossPTAs.However, intra-PTAtradeinpartsandcomponentsdoesvarysignificantlyacrosstrade agreements, suggesting a link between somePTAsandverticallyintegratedproductionstructures.

Plurilateral trade agreements accounted for half ofglobal intra-PTA trade in 2008, while bilateral tradeagreements(includingthosewhereonepartyisaPTA)accountedfortheotherhalf.

If many recent PtAs were designed to support production networks, we might expect to see greater geographic concentration of trade over time, since many production networks are regional in nature. evidence of this exists only for certain regions.

The share of intra-regional trade in Europe's totalexports remained roughly constant at around 73 percent from 1990 to 2009. Asia's intra-regional tradeshare increased from 42 per cent to 52 per cent oftotalexportsduringthesameperiod.NorthAmerica’sintra-regional trade share rose from 41 per cent in1990 to 56 per cent in 2000, but then fell back to48percentin2009,sothereappearstobenoglobalpattern that applies to all industrialized regions.Developing regions that predominantly export naturalresourceshaveseen theshareof intra-regional tradeintheirtotalexportssharesrisesubstantiallyoverthepast20yearsorso,buttheyremainquitesmall.

The extent to which trade has become moregeographicallyconcentrateddiffersdependingonthe

typeofgoodsbeingtraded.Theshareofintra-regionaltrade in world exports of manufactured goods wasquite stable between 1990 and 2009, fluctuatingbetween56and59percent,but theshareforofficeand telecom equipment jumped from 41 per cent to58 per cent. Taken together, these results suggestthatsupplychainsmaybeanimportantcomponentofrecent PTA activity in Asia and in the electronicssector,butnotsomuch inother regionsoreconomicsectors.

How preferential is trade?

trade among PtA members is not all preferential on account of the fact that a significant portion of intra-PtA trade is mFn duty-free.

In a sample covering imports of the 20 largestimporters from all their trading partner countries –accountingfor90percentofworldmerchandisetradein 2008 – only 16 per cent qualified as preferentialtrade,assumingfullutilizationofpreferences.2Inotherwords,despite theexplosionofPTAs in recentyears,84 per cent of world merchandise trade still takesplace on a non-discriminatory most-favoured nation(MFN)basis.Thisisfirstlybecausehalfofworldtradeis already subject to zero MFN tariff rates. Secondly,PTAs tend to exempt high MFN-tariff items frompreferential treatment and continue to trade theseproductsatMFNrates.

Existing preferential tariffs reduce the global trade-weightedaverage tariffbyonepercentagepoint, and90 per cent of this reduction (i.e. 0.9 percentagepoints) is due to reciprocal preference regimes. Only2percentofglobalimportsareeligibleforpreferentialtariffs where preference margins are 10 per cent ormore. For most large exporters, preferential tariffsmatter little for the bulk of their exports. This is notalwaystruefor individualsectorsespecially incertainsmaller economies exporting a narrow set ofcommodities (mainly sugar, rice, bananas, fish andgarments), where preference margins may be moresubstantial. There is a possibility though that thesepreferenceswillbeerodedover timeasthecountriestowhichtheyexportenterintomorePTAs.

Data from some customs administrations suggest a high rate of preference utilization.

Information on the value of imports under differentpreferential regimes from the EU and US revealpreference utilization rates of 87 and 92 per centrespectively.Preferenceutilizationratesareuniformlyhighformostexportingcountries,preferentialregimesand types of products. Analysis shows that bothpreferencemarginsand importvalueshaveapositiveand statistically significant impact on preferenceutilization.Surprisingly,however,manyindividualitemsfacing tariffs below 1 per cent still exhibit highutilization rates. This might suggest either that the


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cost of using preferential tariffs in certain cases isnegligible or that other benefits are linked to usingthese preferences, perhaps related to privilegedcustoms clearance, qualification under specificsecuritymeasuresoradvantages incaseofre-exporttootherPTApartners.

Data from firm surveys offer a more detailed and mixed picture of preference utilization rates.

Firm surveys carried out in 2007-08 by the AsianDevelopment Bank (ADB) and the Inter-AmericanDevelopment Bank (IDB) in six East Asian countriesandfourLatinAmericancountries respectively revealthattheuseofPTApreferentialtariffsisnotuniformlyhigh. For instance, the ADB survey shows that onlyaround one-quarter of firms in the sample currentlyusedthesepreferences.However,thisnumberdoubledwhen plans for using PTA preferences in the futurewere factored in. The IDB survey shows that only20 per cent of the firms in the sample did not makeanyuseofPTApreferences.

Complications and costs involved in complying withrulesoforiginwerecitedasconsiderationsinfluencingpreference utilization, especially where preferencemargins were low. The surveys also cited other firm-specific factors that influenced preference utilization.For instance, larger, more experienced firms, withhigherforeignequityandmoreinformationaboutPTAprovisions,weremore likelytousepreferential tariffs.Firms inanumberofcountriessuggested thata lackof informationonPTAswasthemajorexplanationforthenon-useofthesepreferences.

See page 46

Section C: Causes and effects of pTas: is it all about preferences?

motives for PtAs

economic and political science theories provide various explanations for why countries establish preferential trade agreements.

Unilateral trade policy choices can have “beggar-thy-neighbour” consequences, such as unfavourablyaffectingtheratioofimporttoexportprices(terms-of-tradeeffect)oraproductionrelocationeffect.Countriesmight be stuck in a situation characterized by highrestrictionsandinefficientlylowlevelsoftrade.Atradeagreementcouldneutralizethesebeggar-thy-neighboureffects and achieve higher welfare. Economic theorysuggests,however,thatamultilateralagreementratherthanaPTAisthebestwaytoaddresstheproblem.

Gains in credibility suggest a second reason forsigning a PTA. A government may choose to “tie itshands”throughaninternationalagreementinordertoprevent future policy reversals that would beconvenient in theshort-run,but inefficient in the longterm.APTAmayprovideastrongercommitmentthana multilateral agreement when a country is small inworldmarkets.

"Non-traditional”reasonsforwhycountriesformPTAsinclude accessing a larger market, ensuring againstpreference erosion, increasing predictability of futuretrade policy, signalling stability to investors, andachievingdeeperpolicycommitments.

The creation of PTAs cannot be understood withouttaking account of political circumstances. Politicalscience explanations of PTA formation focus on therole of political integration, the role of domesticpolitical considerations, the formofgovernmentsandinstitutions,diplomacy,andtheroleofpowerrelations.

Changes in trade relationships may explain the growth of PtAs over time. together with certain country characteristics, they may also explain the timing of PtA formation and enlargement.

Thepotentiallossofmarketsharefornon-membersofanexistingPTAinducesthemtoformnewPTAsorjoinexistingones.ThesedominoeffectsofPTAformationcan be further strengthened with multilateral tradeopening.

Among the factorsaccounting for thepatternofPTAformationandenlargementover timearethephysicaldistance between countries, economic size, similarityineconomicsize,proximityofapotentialentranttoanexistingPTA,theextentofexistingagreementsfacingacountrypair,andtheexistingnumberofmembersinaPTA.

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the standard economics of PtAs

the standard theory on the effects of PtAs suggests that preferential trade agreements increase trade between member countries and reduce trade with third-countries, leading to negative welfare effects for non-members of PtAs.

APTA increases tradeamongmembersasexportersbenefit from the elimination of tariffs in partnermarkets. Non-member countries suffer from areduction of exports to member countries and adecline in the price of their exports in internationalmarkets.

In the traditional Vinerian analysis, preferential tradeopening allows some domestic production to bereplacedby imports frommoreefficientfirms locatedin preference-receiving countries, leading to welfaregains (trade creation). At the same time PTAs mayreduce imports from more efficient non-membercountries,implyingawelfareloss(tradediversion).Thenet welfare effect of PTAs depends on the relativemagnitudeoftheseopposingeffects.

supply chain or vertical production arrangements may change the welfare calculus.

The possibility of trading components used in theproductionoffinalgoodsaltersthecalculationoftradecreationandtradediversion.Althoughtheoutcomeisstill uncertain, welfare-reducing PTAs trading only infinal goods could become welfare-improving oncemembers trade in parts and components along asupply chain. In this way, international productionnetworks can mitigate the trade diversion effects ofPTAs,althoughthisisbynomeansguaranteed.

the trade effects of a preferential agreement depend on the economic characteristics of PtA members.

The “natural trading partners” hypothesis suggeststhat trade agreements among countries which tradeintensively are more likely to be trade-creating.Preferentialtradeagreementsmayalsohavedynamiceffects,forinstancedrivenbyeconomiesofscale,andeffectsonthelocationofproduction.

Severalstudieshavetestedthetraditionaltheoriesontradecreationandtradediversion.Whilethisliteratureisnotconclusive, itsuggeststhattradediversionmayplaya role in someagreementsand in somesectors,but itdoesnotemergeasakeyeffectofpreferentialagreements.

When governments have political economy reasons for signing a PtA, the question arises whether trade-diverting or trade-creating agreements are more politically viable and

whether a PtA reduces or increases the incentive to set inefficiently high external tariffs.

In shaping their PTAs, governments may not beinfluenced exclusively by the welfare implications ofagreements.Iforganizedlobbygroupscarrysufficientweight in the political preferences of governments,trade-divertingPTAscouldbepoliticallyviableinsomecircumstances.

Moreover,conflictingpoliticaleconomyforcesmayactupon external tariffs agreed in a PTA. On the onehand, PTAs destroy protectionist benefits and lowerthe demand for high external tariffs. On the otherhand, high external tariffs can be used in PTAs tosustaincooperationonnon-tradeissues.Theempiricalliteraturefindsevidenceofbotheffects.

Restrictive rules of origin (Roos) in PtAs may divert or suppress trade in intermediate goods.

RestrictiveRoOsmaymake itprofitable forfirms inacountrytoengagein“supplyswitching”–replacinganefficientnon-membersupplierofanintermediategoodwithalessefficientone,eitherfromapartnercountry(tradediversion)oradomesticfirm(tradecontractionor suppression). Furthermore, by influencing thesourcing of intermediate goods, RoOs are likely toincreasefirms'costsandhencehaveanadverseeffectonfinalgoodstrade.

This discrimination, which leads to trade diversion byprotecting the exports of certain industries in PTAmember countries, can be resolved through the“diagonal cumulation” of RoOs. Under thisarrangement, participating countries agree that in allPTAs concluded among themselves, materialsoriginating in one country can be considered to bematerialsoriginatinginanyoftheothercountries.

Going beyond the standard analysis

the concept of deep integration is widely used to refer to any arrangement that goes beyond a simple free trade area.

Trade agreements that mostly deal with bordermeasuresareoftendefinedas “shallow”agreements.Incontrast,preferentialagreementsthatincluderuleson other domestic policies are referred to as “deep”agreements.

Two distinct dimensions of deep integration are the“extensive” and the “intensive” margin. The extensivemargin refers to an increase in the policy areascovered by an agreement, while the intensive marginreferstotheinstitutionaldepthoftheagreement.Theextensive and intensive dimensions of deepagreements may be related, as an extension of thecoverageofanagreementmayrequirethecreationofcommoninstitutionsforitsproperfunctioning.


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Deep integration and trade are intimately related.

Deep arrangements may be necessary to promotetradeincertainsectorsandeconomicintegrationmorebroadly. For instance, harmonization or mutualrecognition of certain regulations may be a pre-requisite for trade in services, or competition policyrulesmayberequiredtoallowcomparativeadvantagetomaterialize.

Economic theory also suggests that the degree oftradeopennessisadeterminantofdeepagreements.In this respect, shallow and deep integration may beseen as complementary where the first generates ademandforgovernancethatthesecondcanprovide.

An institutional challenge for the WTO is to find anapproachthatfacilitatesdeeper integrationsoughtbyits members while maintaining compatibility with thenon-discriminationprinciple.

the rise in international production networks illustrates the complementarity between trade and governance which is at the core of successful deep agreements.

In order for cross-border production networks tooperatesmoothly,certainnationalpoliciesneedtobeharmonized or rendered mutually compatible tofacilitate business activities in several countries. Thisgeneratesademandfordeepformsofintegration.

Developed countries were the first movers in theattempt toprovidesome international rules to furtherencourage international fragmentation of production.AgreementssuchastheEUSingleMarketProgrammeortheUS-Canadafreetradeareacanbeexplained(atleast in part) in terms of increased demand for deepintegration generated by the needs of internationalproductionsharingarrangements.

The continuous expansion of production sharingbetweendevelopedanddevelopingcountriesrequiresdeeperagreementstofillthegovernancegapbetweencountries.AnagreementsuchastheNorthAmericanFree Trade Agreement, for example, includesdisciplines going beyond preferential tariffs that arerequired to facilitate production sharing between theUnited States and Mexico. In Europe the Euro-Mediterraneanagreementsfulfilthesameobjective.

The recent wave of preferential agreements may (atleast in part) be an institutional response to newcircumstancescreatedby thegrowth inoffshoring. Inthissense,PTAsareefficiency-enhancingratherthanbeggar-thy-neighbour(trade-diverting)agreements.

Deep integration may involve several trade-offs that need to be addressed.

A basic trade-off arises between the benefits ofcommonpoliciesandthecostsofharmonizationwhenpolicypreferencesdifferamongmembercountries.

Deep integration lowers trade costs and providesshared benefits, such as common rules and a stablemonetary system, that the market or nationalgovernmentsfailtooffer.However,nounifyinganalysisispossibleoftheeconomiceffectsofdeepintegration,as these effects depend on the specific form thatarrangementstake.

Deepintegrationwithadvancedeconomiesmaycreateadvantages for developing countries from importingbest-practice institutions. However, costs may beinvolvedifthecommonrulesaredistantfromnationalpreferencesandtheneedsofdevelopingcountries.

Deep integration also has systemic effects. Deepagreements may impose costs on non-membercountries.Ontheotherhand,deepregionalintegrationcould provide an appropriate intermediate level ofintegration(e.g.commonrules)betweennationstatesand the global level in different behind-the-borderareas.

See page 92

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Section d: anatomy of preferential trade agreements

Preferential tariffs and PtAs

Preference margins are small and market access is unlikely in many cases to be an important reason for creating new PtAs.

The estimated average applied tariff across allproducts and countries was 4 per cent in 2009, andthescopeforexchangingpreferentialmarketaccessisthereforelimited.Significanttariffbarriersstillexistinsomesectors,however,suchasagricultureandlabour-intensivemanufacturedgoods.However,PTAsdonotappear tobeabout theremovalof tariffpeakseither.Most sensitive sectors remain sensitive (subject tohigher tariffs) in PTAs. Approximately 66 per cent oftarifflineswithMFNratesabove15percentagepointshavenotbeenreducedinPTAs.

Whentheadvantageconferredbyprovidingpreferentialaccesstoanexporter iscalculatedwithrespecttotheaverageappliedtarifffacedbyallexporterstothesamemarketratherthanrelativetotheMFNrate,theshareofglobal trade for which preferential market accessmattersislessthan13percent.

Patterns in the content of PtAs

PtAs cover many more policy areas than tariffs and frequently entail legally enforceable commitments.

In a sample of almost 100 PTAs, deep integrationelementswereclassifiedintoWTO+areasandWTO-Xareas. WTO+ refers to deeper integration in areascoveredbytheWTOandWTO-XreferstopolicyareasnotcoveredinWTOagreements.Theanalysisconfirmsthat many PTAs go beyond the WTO and these deepintegrationprovisionsarefrequentlyenforceablelegally.

As expected, WTO+ provisions universally includeindustrial and agricultural tariffs. An increasingly largenumberofPTAsnowalsoincludeprovisionsontechnicalbarriers to trade, services, intellectual property andtrade-related investment measures. WTO-X provisionscommonly include competition policy, investment andthemovementofcapital.Aboutone-thirdofthePTAsinthe sample also include environmental laws, labourmarketregulationsandmeasuresonvisaandasylum.

Compared with PTAs between trading partners withsimilarlevelsofincome,thosebetweendevelopedanddeveloping countries contain a higher number ofWTO+ provisions on average. WTO-X provisions areencountered most frequently in agreements betweendeveloped countries, followed by those betweendevelopedanddevelopingcountries,andfinally thosebetweendevelopingcountries.

overall, services commitments in PtAs have gone well beyond commitments in the General Agreement on trade in services (GAts) as well as Doha Round offers in services.

Services obligations typically form part ofcomprehensivePTAscovering“newgeneration”issuessuch as investment, intellectual property, ore-commerce.Outof85notificationsunderArticleVoftheGATS,3a littlemore thana third relyonaGATS-typelistingofareaswherespecificcommitmentsapply(positive list), almost half rely on the morecomprehensive approach of indicating where specificcommitments do not apply (negative list) and theremainderadoptamixtureofthetwoapproaches.

Despite innovations in their structure, most servicesPTAs share a broad commonality with the GATS interms of the basic set of disciplines, although somePTAs have gone beyond GATS with respect todisciplinesondomesticregulationortransparency,forexample.

the investment chapters in PtAs contain many provisions and guarantees that are important to international production networks.

Since firm-specific assets such as human capital(management or technical experts) and intellectualproperty(patents,blueprints)giveinternationalfirmsacompetitive edge, protecting these assets againstexpropriationwillencouragemoreproductionsharing.Allowing freer movement of corporate personnel isanother critical requirement. Investor confidence willbe further improved through access to a disputesettlementmechanism.

FromthesampleofinvestmentchaptersinPTAsusedfor this report, it appears that a large proportion ofagreementshaveadoptedanegativelistandhenceamoreambitiousapproachtoinvestmentopening.TheytypicallyextendMFNandnationaltreatmenttoforeigninvestors, provide guarantees of investor protectionand grant private investors the right to disputesettlement. In general, the investment provisions inthesePTAsareaccommodating,althoughnoattempthas been made to test how much these provisionsactuallyaffectflowsofforeigndirectinvestment.Morerecent PTAs appear more open on the investmentfrontthanearlierones.

As tariff barriers have progressively been reduced, non-tariff barriers have acquired increasing weight. over time, more and more PtAs have included provisions regarding technical barriers to trade (tBts).

TheinclusionofspecificprovisionsinPTAsappearstofollowahubandspokestructure,withalargerpartnerrepresenting the hub to whose standards the spokeswill conform. For example, while the agreements


12

signed by the EU typically include harmonizationprovisions, North American agreements that embodyTBT provisions tend to prefer mutual recognition. Inaddition, North American, East Asian and South-CentralAmericanTBTprovisionsinPTAsmainlyfocuson introducing transparency requirements anddeveloping institutional bodies, while EU and Africanagreementsbarelyconsidertheseissues.

the risk of a lock-in effect exists in regional provisions on tBts.

Harmonizationtoaregionalstandardmayincreasethecostsforfurthermultilateralliberalization.Ifadoptingacertainstandardinvolvesthepaymentofsomeformoffixedcosts,theriskexiststhatregionalprovisionsmayworkasastumblingblockinmultilateralcooperation.

Competition policy complements the reduction of trade barriers.

TheadoptionofcompetitionpolicyinPTAsisinmanywaysanatural complement to the reductionof trade,investment and services barriers. In evaluatingcompetitionrulesinPTAs,oneneedstogobeyondthecompetition policy chapter of PTAs to includecompetition-related provisions that appear in otherchaptersoftradeagreements.Competitiondisciplinesappear in the chapters on investment, services (intelecommunications, maritime transport and financialservices), government procurement and intellectualproperty.

Sector-specific competition provisions may havestronger pro-competitive effects than the articles inthecompetitionpolicychapteritself,assumingthatthetrade agreement has one. Principles in PTAs relatingto non-discrimination, procedural fairness andtransparency can also have a strong bearing oncompetitionlawandpolicy.

many elements of competition rules in PtAs are characterized by non-discrimination.

Competition disciplines usually operate through theuseofdomesticregulations.Whileitisnotimpossiblefor these regulations to be tailored to favourenterprises originating from PTA partners, it may becostly to do so. To the extent that enforcement ofcompetitionlawreducesthemarketpowerofdomesticincumbents, theprospectsof foreignenterprises thatalreadyoperateinthemarketareimproved,whetherornottheyarefromaPTAmember.

Competition provisions in regional agreements maycarry other external benefits, such as economies ofscale from the creation of a regional competitionauthority. Even if no centralized authority isestablished,benefitscanflowfrominformationsharingand cooperation among enforcement authorities.Demonstration effects may also apply when a

competitionauthorityinonePTAmembertakesactionagainstanti-competitivebehaviour.

Production networks and deep PtAs

empirical analysis confirms the positive association between deep integration and production networks.

Lackofdataposessomedifficulties inassessingtheinternational fragmentation of production, forcingempirical studies to rely on proxy measures forproductionnetworks.Thisanalysisusestradeinpartsandcomponentstoproxyforglobalproductionsharing.

Results show that greater trade in parts andcomponents increases the depth of newly signedagreementsamongPTAmembers.PTAsalsoincreasetradeinpartsandcomponentsby35percentamongmembers. In addition, the greater the depth of anagreement, the bigger the increase in trade in partsand components among member countries. Theestimationresultsshowthatonaverage,signingdeepagreements increases trade in production networksbetween member countries by almost 8 percentagepoints.

the case of AseAn: from regionalization to regionalism.

ASEAN was established in 1967 largely to deal withrisingterritorial tensionsamongsomeof itsmembers(the original signatories were Indonesia, Malaysia,Philippines,SingaporeandThailand)andwithpossiblespilloversfromtheconflictinIndochina.Inthequarterof a century that spanned the creation of theassociationand thedecision formally toestablish theASEAN free trade area (AFTA), there was a shift ineconomicpolicyfromtraditionalimportsubstitutiontoexport promotion and openness to foreign directinvestment.

This led to a huge increase in total merchandiseexports of the five original members. In particular,exportsofpartsandcomponentsbecameincreasinglyimportant, rising from just about 2 per cent of totalexports in the year of the association's founding to17percentbythetimethefreetradeagreementwassigned. Equally telling was the increased prominenceofpartsandcomponentstradeinintra-regionaltrade.

While the increased regionalization of trade in partsandcomponentstradeinASEANwouldnothavebeenpossiblewithoutthecountries'opennesstotradeandforeigninvestment,itmaynothavebeensufficientforproductionnetworks tocontinue toflourish.Thismayexplain AFTA's evolution beyond a free trade area.Services and intellectual property agreements weresignedin1995,aninvestmentagreementanddisputesettlement mechanism in 1996, and a frameworkagreement for mutual recognition arrangements in

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1998.RecentstudiesdocumenthowAFTAsucceededinreducingtradecosts,not throughpreferential tariffliberalization but through concerted trade facilitationinitiatives,andhowthiswasmotivatedbyparticipationininternationalproductionnetworks.

Production networks may explain some PtAs in Latin America too: the case of Costa Rica.

As a result of its policies of trade and investmentopening, Costa Rica has experienced a significantchangeinitstradestructure,withasubstantialriseintheshareofmanufacturingexportsaswellastradeinservices in total exports. Over the last decade, thecountry has become more integrated with globalproduction networks in such sectors as electronics,medical devices, automotive, aeronautic/aerospace,andfilm/broadcastingdevices.

The link between production networks and PTAsseems apparent in Costa Rica's agreements with theUnited States (US-CAFTA-DR agreement) and withChina.WhileoveralltradewiththeUnitedStatesgrewby about 11 per cent annually from 1995, parts andcomponentstradegrewatabouttwicethatrate.Morethan25percentofCostaRica'stotalgoodsexportsin2009weredirectly related toproductionnetworks inelectronics,withChinabeingthemaintradingpartner.Overall, trade in parts and components makes upabouthalfofCostaRica'scurrenttradewithChina.

not all integration experiences conform to this pattern: the case of Africa.

The roots of African integration lay in the effort tocorrectthegeographicalfragmentationbequeathedbycolonialism. Fragmentation resulted in small markets,land-locked economies, and limited developmentoptions. In the 1980s, the Lagos Plan of Actionproposed the division of the continent into regionalintegration areas that would eventually constitute aunitedAfricaneconomy.

For themostpart,African integrationhasfocusedonimport tariffs. The inclusion of services and otherbehind-the-border issues, such as investment,competition policy and government procurement, hasproved contentious. A major limitation to Africanintegration progress has been its adherence to a“linear” integration model. This process is marked bythe stepwise integration of goods, labour and capitalmarkets, and eventually monetary and fiscalintegration.

Deep integration could improve Africa's record on regional cooperation.

Border measures are likely to represent a minorconstraint to regional trade in Africa compared withstructural economic shortcomings, such as a lack ofinfrastructure, an institutional framework, skills, and

economic diversification. Enhanced market accesswithoutthecapacitytoproducegoodsandservicestobenefit from those opportunities will fail to producehigher economic growth. At a regional level thesesupply-sideconstraintscouldbeaddressed inpartbya regional integration agenda that includes services,investment, competition policy and other behind-the-border issues. In short, a deep integration agendacouldaddresssupply-sideconstraintsmoreeffectivelythan an agenda that focuses almost exclusively onbordermeasures.

See page 122


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Section e: The multilateral trading system and pTas

systemic effects of preferential tariff liberalization

A number of different mechanisms have been identified through which PtAs could foster or hinder multilateral trade opening.

Theprospectofpreferenceerosioncanbeaforceforsupporting further multilateral tariff reduction or forresisting it. The presence of political-economymotivations behind tariff reductions is another factorthat can either foster or slow down the diminution ofpreferential tariffs through trade-openingonanMFNbasis.

Opposition to further multilateral tariff reductionsmightalsoariseinthecaseofPTAsthatareconcludedto foster mutual cooperation on non-trade issues, orwhenPTAs increasetheadjustmentcostsassociatedwith multilateral opening, or when the PTA is trade-creatingfromtheperspectiveofexcludedcountries.

evidence on the systemic effects of regionalism on multilateral tariff reductions is inconclusive.

The literature that considers whether MFN andpreferential tariffscomplementorcompetewitheachother finds opposite results for developing anddevelopedcountries.Mostof thecontributions to thisliterature, however, do not distinguish between MFNtariffs that have been negotiated at the multilaterallevelandunilateraltariffreductions.

ExaminationofthecorrelationbetweenPTAformationandmultilateralismcannotproduceconclusive resultsbecause multilateral trade rounds are rare events,wheremoreorlessambitioustradeopeningscenariosarenegotiated.Multilateral tradenegotiationsarenotstructured to contemplate either full or zero tradeopening.Anecdotalevidencecanbefoundtosupporttheview thatPTAs facilitate furthermultilateral tradeopeningandtheoppositeviewthattheyhinderit.

Deep PtA provisions and the multilateral trading system

so far not much research has been conducted on the systemic effects of deep-integration provisions. the existing literature suggests that deep integration is often non-discriminatory.

Bytheirverynature,somedeepintegrationprovisionsarede facto extended tonon-membersbecause theyare embedded in broader regulatory frameworks thatapplytoalltradingpartners.Insuchcases,multilateralregulation may not be necessary. PTAs may also

directly refer to WTO rules on deep integrationmeasures, automatically supporting the multilateraltradingsystem.

Severalmechanismssupportingfurthertradeopeningare found in PTAs. These include “non-party” MFNclauses, a tendency to use template approaches thatreplicate trade rules, and domino effects pointing inthe direction of the progressive extension ofpreferentialmarketaccess.

Production chains can alter political-economy forces in favour of the adoption of trade measures that comply with the principle of non-discrimination.

Final good producers sourcing their imports throughinternational value chains are likely to support theharmonization of rules of origin across PTAs, forinstancethroughtheadoptionofrulesofcumulation.

The international fragmentation of production mayalsobeadriverofdeepintegrationprovisionsthatareconsistentwiththeprinciplesofthemultilateraltradingsystem, such as international standards andmultilateralrulesontraderemedies.

some deep provisions in PtAs can, however, contain discriminatory aspects, creating a tension with the multilateral trading system.

Theriskof tradediversionmayextendbeyondtariffs,forexampletotheareaofanti-dumping.Anti-dumpingprovisionsinPTAsmayresultinmembersbeingsparedfromanti-dumpingactionsandanincreasedfrequencyof anti-dumping actions against non-members.Moreover, many PTAs exclude the imports of PTApartnersfromglobalsafeguardactions.

Lock-in effects of regulatory harmonization within a given PtA may have negative systemic effects.

Competing PTAs with incompatible regulatorystructures and standards may lock in members to aparticular regime, undermining the principles oftransparency and predictability of regulatory regimesand making movement towards multilateral tradeopeningcostly.

the non-discriminatory nature of deep provisions might in principle create political-economy and third-country resistance to further multilateral opening.

If preferential liberalization is non-discriminatory innature, it might be opposed by political-economyforces because higher market shares (and profits) intheothermember’smarketmightbemorethanoffsetby the loss of domestic profits vis-à-vis firms frompartnersandnon-members.

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Concerns over overlapping jurisdiction between the Wto dispute settlement system and the dispute settlement mechanisms of PtAs have received considerable attention in the academic literature.

The possibility that dispute settlement procedures inmore than one forum can give rise to conflictingjudgementshasbeendiscussedasapotentialsourceofconcern.TheissuehasbeenraisedonlyinahandfulofWTOdisputes.Areviewof thedisputesbrought tothe WTO reveals that members continue to use theWTO dispute settlement system to resolvedisagreementswiththeirPTApartners.

seeking coherence between PtAs and the Wto

GAtt/Wto provisions provide exemptions under certain circumstances from the mFn principle for PtAs.

Surveysoftheapplicationoftheseprovisionssuggesta relatively tolerant attitude towards PTAs. Theprovisions themselves are widely regarded asincomplete and lacking in clarity. Recently, attentionhasfocusedon improvingtransparencyandtheDohaRound negotiations have resulted in the introductionon a provisional basis of a new transparencymechanism.

The fact that the Transparency Mechanism forRegional Trade Agreements is the only result of theDohanegotiationsthathasbeenallowedsofar togoforwardindependentlyofthefullresultsoftheRoundsuggeststhatWTOmembersareawareoftheneedtobetterunderstandwhatregionaltradeagreementsareabout.

the quest for coherence between regionalism and multilateralism is nothing new.

Until recently, ensuring coherence was broadlyunderstoodasacceptingthatPTAsandthemultilateralsystem could complement each other while imposingdisciplines aimed at minimizing the negative effectsthat PTAs could have. Approaches to improvingcoherencefocusedontheweaknessesofmultilateraldisciplinesandhowtheycouldbefixed.

RecentdevelopmentsinPTAactivitymaywellchangethe perspective on coherence. Beyond the fact thatPTA activity has accelerated noticeably since 1990,what may challenge the current thinking is that thenewPTAs, or at least someof them, are qualitativelydifferentfromtheoldones.

Some of the new PTAs focus more on reducingbehind-the-border barriers than on extendingpreferentialtariffs.Giventhatpreferentialagreements

involvingsuchmeasuresdonot typically induce tradediversion, their systemic implications cannot beanalysed using the traditional stumbling blocks/building blocks framework. Moreover, the politicaleconomy of new PTAs is different from that ofpreferentialtariffs.

new international trade rules are being developed outside the Wto, with attendant risks of exclusion and additional trade costs arising from overlapping and possibly competing regulatory structures.

Whether and how these new challenges might beaddressed is an open question. The principle ofsubsidiarity, which states that regulatory regimesshouldbeasdecentralizedaspossible,couldbeusedtoassesswhethermeasuresagreedatthebilateralorregionallevelneedtobeincorporatedinamultilateralsetting.

A number of different approaches have been proposed for improving coherence between PtAs and the multilateral trading system.

Theremaybeacaseformaintainingseparateregimesfor regional and multilateral cooperation whereparticulartypesofcooperationaremoreappropriatelymanaged at the regional rather than the multilaterallevel.Bythesametoken,thereareissuesthatcannotbe addressed adequately at the regional level. Inbetweenthesetwoextremes,thecoherencequestionarises.

Proposals can be grouped under four headings:accelerating multilateral trade opening; fixing thedeficiencies in the WTO legal framework; adopting asofterapproachasacomplementtotheexistinglegalframework; multilateralizing regionalism (extendingexisting preferential arrangements in a non-discriminatory manner to additional parties). Theseapproachesarenotmutuallyexclusive.TheyallaimatmakingsurethatPTAscontributetotradecooperationandopeninginanon-discriminatorymanner.

LoweringMFNtariffswouldreducediscriminationandthereby blunt the adverse effects of PTAs. However,reducing all tariffs to zero does not seem to bepolitically feasible in thepresentcontextand itwouldnoteliminateallpotentiallyadverseeffectsofdeeperintegration measures. Moreover, the scope for far-reaching action in this domain is limited by the lowaveragelevelofexistingpreferentialtariffs.

TheDohaRoundincludesamandatetonegotiatewitha view to “clarifying and improving disciplines andprocedures under the existing WTO provisionsapplying to regional trade agreements”. Whilenegotiationsontheproceduralissueshaveresultedinthe adoption on a provisional basis of the newtransparency mechanism for regional trade


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agreements,negotiationsonruleshavenotadvanced.These difficulties conform to a long-standing patternoflimitedprogress.

Therationaleforusinga“softlaw”approachwouldbeto allow WTO members to better understand theirrespective priorities and interests, with a vieweventually to unblocking progress towards legalinterpretations of particular provisions that wouldensure coherence.However, the soft lawapproach isnotwithoutriskassoftlawandhardlawcouldbecomeantagonistictooneanotheriftheunderlyingconditionsforcooperationareabsent.

As a result of global production sharing, new forcesfavourabletothemultilateralizationofregionalismmayhave emerged. The extent to which deep integrationmeasures inPTAshave thepotential togenerate thesame sort of costly spaghetti/noodle bowl aspreferentialtariffsisstillamatterfordebate,buttheremaybearolefortheWTOtoreducethesetransactioncosts.

See page 164

Conclusions

An over-arching conclusion of this report is thatregional and multilateral approaches to tradecooperationneednotbeincompatible,butneithercanthey be seen simply as arrangements that serve thesamepurposeorsatisfy thesameneeds.Support foran increasingly outward-looking and inclusive globaltradingorderhasbeenstrong in theperiodsince theendof theSecondWorldWar,and thisgrowingtrendtowards openness has manifested itself throughunilateral, bilateral, regional and multilateralapproaches.

The spread of deep PTAs and the weightier role ofnon-tariff commitments have important implicationsfor how to evaluate the role of PTAs and how theyinteractwiththemultilateraltradingsystem.Thesheernumber of PTAs and continuing momentum towardsestablishingmoreof themsuggest that theyarehereto stay. They respond to a range of economic andpolitical needs. Governments will need to find acoherentwayoffashioningtradepolicyattheregionalandmultilateral level. Thismeansensuring thatPTAsand the multilateral system complement each otherandthatmultilateraldisciplinesminimizeanynegativeeffectsfromPTAs.

See page 196

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Endnotes1 Thesefigureshavebeencalculatedexcludingintra-EUtrade.

2 Ifintra-EUtradeisincluded,30percentofworldtradeispreferential.

3 Thisfigureiscurrentasof1March2011,countingnotificationsforagreementsthatarecurrentlyinforce.

Global trade flows rebounded strongly in 2010 following their collapse in 2009. The rise in the volume of goods exports in 2010 was the largest on record, enabling world trade to return to its pre-crisis level but not its long-term trend. Economic conditions continued to improve in both developed and developing economies, but the recovery of both trade and output proceeded more slowly in developed countries.

I. World trade in 2010

Contents A. Introduction 20

B. the state of the world economy and trade in 2010 22

Appendix tables and charts 31


20

a. IntroductionWorld trade recorded its largesteverannual increasein2010asmerchandiseexportssurged14.5percent,buoyedbya3.6percentrecovery inglobaloutputasmeasured by gross domestic product (GDP) (seeFigure 1). Both trade and output grew faster indevelopingeconomiesthanindevelopedones.Exportsin volume terms (i.e. in real terms, accounting forchangesinpricesandexchangerates)wereup13percent in developed economies while the increase fordeveloping economies was nearly 17 per cent. Thedifferencebetweentradeofdevelopedanddevelopingeconomieswasevengreaterontheimportside,wheredeveloped economies' imports rose by 11 per centcomparedwith18percentintherestoftheworld.

The factors that contributed to the unusually large12percentdropinworldtradein2009mayhavealsohelped boost the size of the rebound in 2010. Theseinclude the spread of global supply chains and theproduct composition of trade compared with output.Global supply chains cause goods to cross nationalboundariesseveraltimesduringtheproductionprocess,whichraisesmeasuredworldtradeflowscomparedwithearlierdecades.Thequantificationofthiseffectwouldrequire data on trade in value added that are notcurrentlyavailable.Thegoodsthatweremostaffectedby the downturn (consumer durables, industrialmachinery,etc.)havealargershareinworldtradethanin world GDP, which increased the magnitude of thetradeslumprelative toGDP in2009,andwhichhadasimilarpositiveeffectduringtherecoveryof2010.

Higher prices for primary commodities and theextraordinary growth of trade in developing Asia

helped boost the combined share of developingeconomies and the Commonwealth of IndependentStates (CIS) inworldexports to45percent in2010,itshighestever.

China in particular made an outsized contribution tothe recovery of world trade in 2010, as the country'sexportsincreasedbyamassive28percentinvolumetermsandimportsswelledbymorethan22percent.

1. Puttingthetraderecoveryintoperspective

Although the growth of world exports in 2010 was thehighestonrecordinadataseriesgoingbackto1950,itmighthavebeenevenhigheriftradehadquicklyrevertedtoitspre-crisistrend.Thisdidnothappen.Thereboundwas strong enough for world exports to recover theirpeaklevelof2008,butitwasnotstrongenoughtobringaboutareturntothepreviousgrowthpath(seeFigure2).

The3.6percentgrowthrateofworldGDPfor2010isalsolessrobustthanitmightappearatfirstglance. Itwas above its average rate of 3.1 per cent between1990and2008,but itwas far froma record. In fact,world GDP growth equalled or exceeded 4 per centseveral times in recent years, including 1997, 2000,2004 and 2006. Considering the depressed level ofworld output in 2009, growth in this range or higherwouldnothavebeensurprisingin2010.

A number of factors combined to make trade andoutput grow more slowly than they might otherwisehave done. First, curtailment of fiscal stimulus

Figure1: Growth in volume of world merchandise trade and GDP, 2000-10 (Annualpercentagechange)

Source:WTOSecretariat.

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measures in many countries dampened economicactivity in the second half of the year. Europeangovernments in particular moved towards fiscalconsolidation in an attempt to reduce their budgetdeficits through a combination of spending cuts andrevenue measures, with negative consequences forshort-termgrowth.

Secondly, although oil prices stabilized at aroundUS$78/barrel in2010, theywerestillhighby recenthistorical standards (e.g. oil prices averagedUS$31/barrelbetween2000and2005).Priceswerebelow the US$ 96/barrel average seen in 2008, butthey were also up 30 per cent from 2009, raisingenergycostsforhouseholdsandbusinesses.

Finally, persistent unemployment prevented domesticconsumption from rebounding more strongly indeveloped countries and limited income growth andimport demand. The Organisation for EconomicCo-operation and Development (OECD) averageunemploymentratewas8.6percentin2010(upfrom6.1 per cent in 2008), and unemployment remainedatornear9percent in theUnitedStatesthroughouttheyear.

The record expansion of trade and the revival ofeconomic activity in 2010 were certainly welcomedevelopments, but their importance should not beoverstated. Despite the rebound, the negative impactofthefinancialcrisisandglobalrecessionarelikelytopersistforsometime.

Figure2: volume of world merchandise trade, 1990-2010 (Indices,1990=100)


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B. The state of the world economy and trade in 2010

1. Economicgrowth

World GDP at market exchange rates expanded3.6percentin2010,oneyearafteranunprecedentedcontraction of 2.4 per cent that accompanied thefinancialcrisisin2009.Outputofdevelopedeconomiesrose 2.6 per cent in 2010 after falling3.7 per cent in 2009, while the rest of the world(including developing economies and the CIS) grew7.0percent,upfrom2.1percentin2009(seeTable1).

Growth was stronger in the first half of the year, butweakened in the second half as the sovereign debtcrisisaffectingsmallereuroareaeconomiesrestrainedeconomicgrowth,especiallyinEurope.

Althoughdevelopingeconomiescollectivelyavoidedanoutright decline in 2009, many individual economiessawtheirGDPcontract,forexampleSouthAfrica,Chile,Singapore and Chinese Taipei. However, all of theseeconomiesreturnedtopositivegrowthin2010,andtheonly large developing country that remained mired inrecessionwastheBolivarianRepublicofVenezuela.

GDPgrewfasterindevelopingAsia(8.8percent)thaninotherdevelopingregions lastyear,withChinaand India

registeringstrongincreasesof10.3percentand9.7percent, respectively.South andCentralAmerica also sawvigorousgrowthof5.8percent,drivenbyBrazil’sstrong7.5 per cent upturn. However, Africa had the fastestaveragerateofGDPgrowthofanyregionover the lastfiveyears(4.7percentbetween2005and2010).

Developed economies grew more slowly thandeveloping economies, but some performed betterthan others. Concerns about the possibility ofsovereign defaults in Greece, Ireland, Portugal andSpainbroughtrenewedfinancialmarketinstabilityandfiscalausterityinthesecondhalfof2010,whichheldEurope’sgrowthratedownto1.9percent,theslowestof any region. The economies of Greece, Ireland andSpain all contracted in 2010, as did Iceland’s, whichwashitbyabankingcrisisin2008.

ThemajorexceptiontothebelowaverageGDPgrowthin Europe was Germany, whose 3.6 per cent growthrate outpaced all euro area economies and allEuropean Union members except for Sweden andPoland. According to OECD National AccountsStatistics,Germany’snetexportsofgoodscontributed1.4percenttoits3.6percentGDPgrowth,or40percent of the total increase. By comparison, domestic

Table1: GDP and merchandise trade by region, 2007-10 (Annualpercentagechange)GDP exports Imports

2008 2009 2010 2008 2009 2010 2008 2009 2010

World 1.4 -2.4 3.6 2.2 -12.0 14.5 2.2 -12.8 13.5

north America 0.1 -2.8 3.0 2.1 -14.8 15.0 -2.4 -16.7 15.7

UnitedStates 0.0 -2.6 2.8 5.8 -14.0 15.4 -3.7 -16.4 14.8

south and Central Americaa 5.1 -0.2 5.8 0.8 -7.9 6.2 13.2 -16.3 22.7

europe 0.5 -4.0 1.9 0.2 -14.1 10.8 -0.6 -14.2 9.4

EuropeanUnion(27) 0.5 -4.2 1.8 0.0 -14.5 11.4 -0.9 -14.2 9.2

Commonwealth of Independent states (CIs) 5.5 -7.1 4.3 2.0 -5.2 10.1 16.4 -25.6 20.6

Africa 4.8 2.1 4.7 1.2 -4.2 6.5 14.6 -5.0 7.0

middle east 5.3 0.8 3.8 3.5 -4.3 9.5 14.2 -7.8 7.5

Asia 2.8 -0.2 6.3 5.5 -11.2 23.1 4.7 -7.5 17.6

China 9.6 9.1 10.3 8.5 -10.5 28.4 3.8 2.9 22.1

Japan -1.2 -6.3 3.9 2.2 -24.8 27.5 -1.0 -12.2 10.0

India 6.4 5.7 9.7 14.4 -6.8 19.9 17.3 -1.0 11.2

Newlyindustrializedeconomies(4)b 1.9 -0.8 7.7 4.9 -5.7 21.3 3.5 -11.4 18.0

memo: Developed economies 0.2 -3.7 2.6 0.8 -15.1 12.9 -1.2 -14.4 10.7

memo: Developing and CIs 5.7 2.1 7.0 4.2 -7.8 16.7 8.5 -10.2 17.9

aIncludestheCaribbean.bHongKong,China;RepublicofKorea;Singapore;andChineseTaipei.



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finalconsumptionexpenditureonlycontributed0.7percenttoGDP,or19percentofthetotalincrease.

GDPgrowthintheUnitedStateswasmoresubdued,at2.8percentin2010,whileJapan’swasup3.9percent.However,theJapaneserecoveryshouldbeseeninthecontext of the 6.3 per cent drop in output that thecountryexperienced in2009, themostseveredeclineamong leading industrialized economies. Japan alsoceded the position of the world’s second-largesteconomytoChina,measuredindollarterms.Intermsofincomeperhead,however,itmaybenotedthatJapan’sper capita GDP was US$ 44,800 in 2010, comparedwithafigureofUS$4,800forChina.

2. Merchandisetradeinvolume(i.e.real)terms

Worldmerchandiseexportsinvolumeterms(i.e.excludingtheinfluenceofpricesandexchangerates)rose14.5percentin2010,whileworldimportsgrew13.5percent.Inprinciple, world exports and imports should increase atroughly the same rate, with some discrepancies due todifferences in data recording across countries. WorldtradeasmeasuredbyexportsgrewfourtimesasfastasglobalGDPin2010,whereastradenormallygrowsabouttwiceasfastasGDP(seeTable1).

The uneven recovery in output produced an equallyuneven recovery in trade. While world merchandiseexports rose 14.5 per cent in volume terms, those ofdevelopedeconomiesincreasedby12.9percent,andcombined shipments from developing economies andthe CIS jumped 16.7 per cent. Imports of developedeconomies grew more slowly than exports last year(10.7 per cent compared with 12.9 per cent) whiledeveloping economies plus the CIS saw the oppositehappen (17.9 per cent growth in imports comparedwith16.7percentforexports).

OnlyinAsiaandNorthAmericadidexportsgrowfasterthantheworldaverage(15.0percentand23.1percent,respectively),whereasslowerthanaveragegrowthwasrecorded in Europe (10.8 per cent), the CIS (10.1 percent), the Middle East (9.5 per cent), Africa (6.4 percent)andSouthandCentralAmerica(6.2percent).

On the import side, faster than average growth wasobserved in South and Central America (22.7 percent),theCIS(20.6percent),Asia(17.6percent)andNorthAmerica(15.7percent)whileslowergrowthwasreported in Europe (9.4 per cent), the Middle East(7.5percent)andAfrica(7.1percent).

Asia's rapid real export growth in 2010 was led byChinaandJapan,whoseshipments to the restof theworld each rose roughly 28 per cent. China’s tradeperformance is more impressive when one considersthat thedecline in thecountry’sexports in2009wasless than half that of Japan (11 per cent comparedwith 25 per cent). Meanwhile, the United States andthe European Union saw their exports growing moreslowlyat15.4percentand11.4percent,respectively.Importswereup22.1percent in real terms inChina,14.8 per cent in the United States, 10.0 per cent inJapan,and9.2percentintheEuropeanUnion.

Regions that export significant quantities of naturalresources(Africa,theCIS,theMiddleEastandSouthAmerica)all experienced relatively lowexport volumegrowthin2010,butverystrongincreasesinthedollarvalue of their exports. For example, Africa’s exportswereup6percentinvolumeterms,and28percentindollarterms(seeAppendixTable1).

An explanation for this can be seen in rising primarycommodity prices, which resumed their upwardtrajectory in 2010, after plunging in 2009. Table 2illustrates commodity price developments in the lastfew years. Despite recent volatility, the overall trendtowards higher prices is clear. Prices fell sharply in2009astheglobalrecessiontookhold,butthenshotupagainwhengrowthresumedin2010.Theincreasesweredriventoalargeextentbyrisingimportdemandon the part of fast-growing developing economiessuch as China and India. Between 2000 and 2010,prices for metals rose faster than any other primarycommodity group, with average annual increases of12 per cent, followed closely by energy with 11 percentgrowthperannum.Onlyagriculturalrawmaterialpricesstagnated,withincreasesofjust2percentperyearonaverageoverthelasttenyears.

Table2: export prices of selected primary products, 2000-10 (Annualpercentagechange)

2008 2009 2010 2000-10 2005-10

Allcommodities 28 -30 26 10 9

Metals -8 -20 48 13 15

Beveragesa 23 2 14 9 12

Food 23 -15 12 6 8

Agriculturalrawmaterials -1 -17 33 2 5

Energy 40 -37 26 11 8

aComprisingcoffee,cocoabeansandtea.

Source:IMFInternationalFinancialStatistics.


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Incontrasttoprimaryproducts,pricesofmanufacturedgoodsroseverylittlein2010.Exportandimportpriceindices may differ substantially across countries, butasanexample,USnon-fuelimportpricesin2010werenearlyunchangedfrom2009(up2.7percentin2010afterfalling3percentin2009),andpricesofimportsfrom China (predominated by manufactures) declinedby0.1percent.Thismeansthatnominaltradefiguresfor natural resource exporters would be stronglydeflatedwhencalculating volumeestimates,whereasreal trade growth for countries that mostly exportmanufacturedgoodswouldberelativelyclosetotheirnominalgrowthrates.

Higher commodity prices lifted foreign exchangeearnings in regions that export a lot of primaryproductsandhelpedboostimports,especiallyinSouthand Central America, where the volume of importsjumped22.7per cent in2010, and in theCIS,whereimportswereup20.6percent.Africa’simportvolumegrowthwasactuallythelowestofanyregionlastyear,at7.0percent,despite thecontinent’s largeshareoffuelsandminingproducts in its totalexports (64percent in 2009 and 71 per cent in 2008, whencommoditypriceswerehigher).

This relatively small increasemaybepartlyexplainedbythefactthatAfrican importsdidnotfallveryfar in2009(Africahadthesmallestdeclineofanyregionat-5.0percent),leavinglesspent-updemandforimportsinthefollowingyear.Also,notallAfricancountriesareimportant exporters of fuels and mining products,which saw the biggest price rises. Net importers oftheseproducts includeEthiopia,Kenya,MoroccoandTanzania, among others. These countries did notexperience the same windfall in export earningsenjoyedbynaturalresourceexporters.

Although South Africa is a net exporter of miningproducts, it is a net importer of fuels, whichrepresentedjustover21percentofthecountry’stotalimports of goods in 2009 (the share is the same forKenyaandMorocco,whileTanzania’s share is23percent).

3. Merchandiseandcommercialservicestradeinvalue(i.e.dollar)terms

AsaresultofrisingcommoditypricesandadepreciatingUS currency (down 3.5 per cent on average againstmajor currencies in 2010 according to US FederalReserve nominal effective exchange rate statistics),growth in the dollar value of world trade in 2010 wasgreater than the increase in volume terms. Worldmerchandise exports were up 22 per cent, rising fromUS$12.5trilliontoUS$15.2trillioninasingleyear,whileworld exports of commercial services rose 8 per cent,fromUS$3.4trilliontoUS$3.7trillion(seeTable3).1

The faster growth of merchandise trade comparedwith services can be partly explained by the smallerdeclineinservicesin2009(just12percentcomparedwith22percent formerchandise),which implies lessneed for faster-than-average growth to catch up toearliertrends.Theaverageannualgrowthinthevalueof merchandise trade and commercial services tradebetween2005and2010wasthesame,at8percent.

World exports of goods and commercial services incurrentUSdollarsreboundedmorequicklythanworldGDPin2010,andasaresulttheratioofworldtradetoGDP rose sharply after falling even more sharply in2009(seeFigure3).At124in2010,itremainedbelowits2008peakof132,butthe2010valuewasstillhighbyhistoricalstandards.

merchandise trade

Nominalmerchandiseexportsofdevelopedeconomiesjumped16percentin2010toUS$8.2trillion,upfromUS$7.0trillionin2009.However,becausethisrateofincreasewasslowerthantheworldaverageof22percent, the share of developed countries in worldmerchandise exports fell to 55 per cent, its lowestlevelever.

This falling share cannot be explained mainly as aresult of higher prices for primary products exportedpredominantlybydevelopingcountries.Thisisbecausethe latter prices were even higher in 2008 but the

Table3: World exports of merchandise and commercial services, 2005-10 (Billiondollarsandannualpercentagechange)

value Annual percentage change

2010 2008 2009 2010 2005-10

Merchandisea 15,238 15 -22 22 8

Commercialservices 3,665 13 -12 8 8

Transport 783 16 -23 14 7

Travel 936 10 -9 8 6

Othercommercialservices 1,945 13 -8 6 9

Source:WTOSecretariat.aIncludessignificantre-exportsorimportsforre-export.


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share of developed countries in world trade at thattimewasalsohigher,atnearly58percent.

Thestoryissimilarontheimportside,wheredevelopedeconomy imports increased 16 per cent to US$ 8.9trillion,buttheirshareinworldimportsdroppedto59percentfrom61percentin2009and63percentin2008.

AllWTOregionsexperienceddouble-digitincreasesinthedollar valueofbothexportsand imports in2010,thanks in part to rising prices for fuels and othercommodities(seeAppendixTable1).

The leading merchandise exporters in 2010 wereChina (US$ 1.58 trillion, or 10 per cent of worldexports), the United States (US$ 1.28 trillion, 8 percentofworld),Germany(US$1.27trillion,8percentofworld),Japan(US$770billion,5percentofworld)andtheNetherlands(US$572billion,3.8percentofworld). The United States overtook Germany tobecome the second-largest exporter, one year afterGermany ceded the top position to China (seeAppendixTable3).

ThetopmerchandiseimportersweretheUnitedStates(US$1.97trillion,13percentofworldimports),China(US$ 1.40 trillion, 9 per cent of world), Germany(US$ 1.07 trillion, 7 per cent of world), Japan(US$ 693 billion, 4.5 per cent of world) and France(US$606billion,4percentofworld).

If we ignore trade between the 27 European Unionmembers and treat the EU as a single entity, theleading exporters were the European Union(US$ 1.79 trillion, or 15 per cent of the total), China(13 per cent), the United States (11 per cent), Japan(6.5percent)andtheRepublicofKorea(4percent).

ThetopimportersexcludingtradewithintheEUweretheEuropeanUnion(US$1.98trillionor16.5percent

of world imports), the United States (16 per cent),China (12 per cent), Japan (6 per cent) and theRepublic of Korea (US$ 425 billion, 3.5 per cent).Hong Kong’s total imports were actually larger thanKorea’s (US$ 442 billion), but retained imports weresmaller(US$116billion)(seeAppendixTable4).

Commercial services

Worldexportsofcommercialservicesincreased8percenttoUS$3.67trillionin2010afterdropping12percentin2009(seeTable3).

Transportationwasthefastestgrowingcomponentofcommercialservicesexportsin2010,withanincreaseof14percenttoUS$782.8billion.Thefastergrowthof transport services is not surprising since they areclosely linked to trade in goods, which saw recordgrowth last year. Travel grew in line with commercialservices overall, whereas other commercial services(includingfinancialservices)advancedmoreslowly.

NorthAmerica’sexportswereworthUS$599billion in2010, while the value of the region’s imports came toUS$ 471 billion. Exports and imports were both up9percentyear-on-year,butMexicolaggedontheexportsidewith5percentgrowth(seeAppendixTable2).

SouthandCentralAmerica’sexportsrose11percenttoUS$111billion,but importsgrewmore than twiceas fast (23 per cent) to reach US$ 135 billion. Bothexports and imports of Brazil grew faster than theregional average (15 per cent and 35 per cent,respectively), with particularly high growth ratesobserved for imports of transport services (42 percent) and travel (51 per cent), partly due to thestrengthofthereal.

Europe’s exports and imports were both larger thanany other region’s in 2010 (US$ 1.72 trillion and

Figure3: Ratio of world exports of goods and commercial services to GDP, 1980-2010

(Index,2000=100)

Source:IMFforworldGDP,WTOSecretariatforworldtradeingoodsandcommercialservices.

1980 1985 1990 1995 2000 2005 2010

140

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US$1.5trillion,respectively)buttheywerealsotheleastdynamic,withgrowthofjust2percentontheexportsideand 1 per cent on the import side. The reason forEurope’spoorperformancecanbefoundintheweaknessof travel services, which declined by 3 per cent on theexportsideand2percentontheimportside.

In2010,exportsofCIScountriesincreasedby10percenttoUS$78billion.Theregion’s importsalsorose14percenttoUS$105billion.Russianexportgrowthof6percentwasdrivenbytransportservices.

Meanwhile, Africa exported US$ 86 billion worth ofcommercial services,11percentmore than in2009.The continent’s imports advanced 12 per cent toUS$ 141 billion. In South Africa, travel receiptsincreasedby24per centdue to the largenumberofforeignvisitorsattendingtheFIFAWorldCup.

The Middle East exported US$ 103 billion worth ofcommercial servicesand importedUS$185billion in2010. Exports and imports were both up 9 per centyear-on-year.

Finally, Asia exported US$ 963 billion worth ofservices in 2010 and imported a similar amount,US$961billion.Exportsand importswereup21percentand20percent, respectively.Transportwas themostdynamicsector,withagrowthrateof26percenton both the export and import sides. Travel exportsalsoroserapidlyat25percent.Also,othercommercialservices increased by 17 per cent, which nowrepresentshalfoftheregion’sexports.

The United States exported US$ 515 billion incommercialservicesin2010,or14percentoftheglobaltotal, making it the world’s largest exporter. The othercountriesinthetopfivewereGermany(US$230billion,or 6 per cent of world exports), the United Kingdom(US$ 227 billion, also 6 per cent of world), China(US$ 170 billion, 5 per cent of world) and France(US$ 140 billion, 4 per cent of world) (see AppendixTable5).

TheUnitedStateswasalsotheleadingimporter,withpurchases of US$ 358 billion from foreign providers,equalto10percentofworld imports. Itwasfollowedby Germany (US$ 256 billion, 7 per cent of world),China (US$ 192, 5.5 per cent of world), the UnitedKingdom(US$156billion,4.5percentofworld)andJapan(US$155billion,4.5percentofworld).

China replaced France as the fourth-largest exporterof commercial services, while Germany overtook theUnitedKingdominsecondplace.Chinaalsomovedupthe rankingson the import side, takingover the thirdpositionfromtheUnitedKingdom.

When trade within the EU is excluded, the EuropeanUnion becomes the leading global exporter, withservices exports to the rest of the world totalling

US$684billionin2010,or25percentofglobaltrade.ItisfollowedbytheUnitedStates(with18percentofthereducedworldtotal),China(with6percent),Japan(with5percent)andSingapore(with4percent).

TheEuropeanUnionisalsothetopimporterwhentradewithin the EU is left out. Its imports from non-EUcountries in2010came toUS$598billion, or22percentofworldtrade.Theremainingcountries inthetopfiveweretheUnitedStates(13percentofworld),China(7percent),Japan(6percent)andIndia(4percent).

4. Sectoraldevelopments

Prices for traded manufactured goods tended to bemore stable than those of primary products, bothbeforeandaftertheeconomiccrisis,somovementsinnominal trade flows reflect changes in quantitiesreasonablywell.Thisisimportantbecausetheproductcomposition of trade was a major determinant of theextent to which the exports and imports of variouscountries declined in 2009, and the same was trueduringtherecoveryof2010.

Figure 4 shows indices of estimated quarterly worldtradeinmanufacturedgoodsbrokendownbyproduct.Bytheendof2010,exportsofmanufactureshadonlyjust returned to a level close to their pre-crisismaximum, while particular categories such asautomotiveproductsand ironandsteelwerestillwellbelowtheirmid-2008peaks.

World exports of office and telecom equipmentdeclinedlessthanotherproductsduringthecrisis,buthave grown faster since then. Exports of office andtelecom equipment rose nearly 73 per cent betweenQ1-2009 and Q4-2010, and automotive productsincreasedbyasimilaramount(71percent).

However, automotive products declined much moreduring the crisis (51 per cent compared with 30 percent for office and telecom), so that by the end of2010theywereonly5percentabovetheirlevelatthebeginningof2007,whereasworld trade inofficeandtelecomequipmentwasup37percent.Manufacturesas a whole rose 46 per cent between Q1-2009 andQ4-2010.

Theshareofofficeandtelecomequipmentinexportsof developing economies is greater than its share indeveloped economies’ exports (15 per cent in 2008for the former, 7 per cent for the latter) whileautomotiveproductsareresponsibleforalargershareofdevelopedeconomyexports(11percent,comparedwith 4 per cent for developing economies), so it isperhapsnotsurprisingthatdevelopedcountryexportshave lagged behind those of developing countriessincethecrisis.

Worldtradeintextilesandclothingdidnotfluctuateasmuch as other products in 2009 (down 14 per cent)


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and 2010 (up 11 per cent) but the category “othermachinery” matched the trend for total manufacturesalmostperfectly.Thisispartlyduetoitsrelativelylargeshare in manufactures trade (about 13 per cent in2009)butalsotothefactthatitismostlymadeupofinvestment goods (industrial machinery, power-generatingequipment,etc.),whicharehighlysensitiveto economic conditions and closely linked toproduction.About4percentoftradeinmanufacturesis composed of consumer durables other thanautomobiles(mostlyhouseholdappliances).

Due to insufficient data, we cannot say at this stagewhetherworld tradebecamemoreor less regional in2010, but we can get an indication by looking at theautomotive sector, where quarterly trade data areavailable by partner for all of the main exportingcountriesandregions.

Table 4 shows preliminary estimates of automotiveproduct exports of North America, Europe and Asiafrom2008to2010,includingintra-regionalandextra-regional trade flows. In Asia and North America,

Figure4: World exports of manufactured goods by product, 2007-10 (Indices,2007Q1=100)

Source:WTOSecretariatestimatesbasedonmirrordata.

Q1

-20

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Manufactures Other machinery

Iron and steelTextiles and clothig

Automotive products

Table4: exports of automotive products by major exporting regions, 2008-10 (Billiondollarsandpercentage)

value of exports to

world

value of intra-

regional exports

value of extra-

regional exports

share of intra-regional

trade in exports to world

Annual % change in exports to

world

Annual % change in

intra-regional exports

Annual % change in

extra-regional exports

2010 2010 2010 2008 2009 2010 2009 2010 2009 2010 2009 2010

north America

Automotiveproducts 205.3 156.6 48.7 72.2 75.6 76.3 -32 43 -28 45 -40 39

Vehicles 132.4 94.2 38.1 66.4 70.7 71.2 -33 45 -29 46 -42 42

Partsandcomponents 73.0 62.4 10.6 83.1 84.4 85.5 -29 41 -28 43 -34 31

europe


Vehicles 351.1 247.3 103.7 73.5 76.5 70.5 -32 16 -29 7 -39 46


Asia


Vehicles 170.7 43.9 126.8 17.6 24.0 25.7 -41 45 -19 55 -45 42


Source:WTOSecretariatestimatesbasedonmonthlydataforavailablereportersinGlobalTradeInformationServices’GlobalTradeAtlasdatabase.


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exports of automotive products became increasinglyintra-regional between 2008 and 2010, with NorthAmerica’s intra-regional trade share rising from72percentto76percentandAsia’sincreasingfrom24percentto32percent.

On the other hand, Europe’s exports became moreintra-regionalin2009butsharplymoreextra-regionalin2010.ReasonsforthisincludeweakdemandwithinEurope on account of the continent’s relatively slowrate of GDP growth, and booming exports fromGermanytoChina.

The value of Germany’s total exports of automotiveproductswasup25percentfromUS$159.7billionin2009toUS$199.6billion in2010.However,exportstoChinaroughlydoubledduringthesameperiod,fromUS$ 8.7 billion to US$ 17.6 billion. Also, whileGermany’sexportstotherestoftheworldweredown34percentin2009,exportstoChinawereup12percent.Asa result,Chinahasbecome the third-largestmarket for German cars after the United States andtheUnitedKingdom.

Exports of vehicles and auto parts developed alongsimilar lines inNorthAmericaandalso inEurope,buttheydivergedslightly inAsia in2010,as the region’sexportsofvehiclesbecamemore intra-regional,whiletrade in parts and components became more extra-regional.

5. Tradebalancesandexchangerates

Trade imbalances of leading economies widened in2010,asexportsandimportsbouncedbackfromtheirdepressedlevelsof2009.However,formostcountriesthe gap between exports and imports was smallerafterthecrisisthanbefore(seeAppendixFigure1).

ThemonthlytradedeficitoftheUnitedStateswidenedfrom a low of US$ 32 billion in February 2009 toaround US$ 62 billion per month on average in thesecond half of 2010, and the deficit for the yearincreased26percentcomparedwith2009.However,the 2010 deficit of roughly US$ 690 billion was22percentlessthanthecorrespondingdeficitofUS$882billionin2008.

China’s merchandise trade surplus for 2010 totalledUS$ 183 billion, roughly 7 per cent less than theUS$196billion it recorded in2009,and39percentlessthanthenearlyUS$300billionsurplusof2008.TheEuropeanUnionhadatradedeficitwiththerestofthe world of US$ 190 billion in 2010, which was up26percentfrom2009butdown49percentfromtheUS$375billionitrecordedin2008.

Japanwasanexception to the trend towardssmallertrade deficits/surpluses after the financial crisis. In2008thecountryrecordedaUS$19billionsurplusofexports over imports, but this nearly quadrupled toUS$77billionin2010.

Intermsofexchangerates,byFebruary2011theyuanhadappreciatedagainsttheUSdollarinnominaltermsbyaround3.8percentfromitspreviouslevel.However,real appreciation against the dollar is happening at afasterrateduetohigherinflationinChina.China’sreal(i.e.inflationadjusted)effectiveexchangerateagainstabroadbasketofcurrenciesrose1.3percentin2010according to indices supplied by J.P. Morgan. Bycomparison,theUSdollarregistereda5percentrealeffective depreciation against trading partners’currenciesduringthesameperiod.


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The yen appreciated by nearly 7 per cent in nominaltermsagainst thedollar in2010,but itsrealeffectiveratewasonlyupbylessthan1percentonaccountofa falling price level (i.e. deflation) in Japan. Thissuggeststhatthehighervalueoftheyendidnothurtthe competitiveness of Japanese goods on worldmarkets.

Ontheotherhand,thestrongnominalappreciationsofthe Brazilian real (12 per cent) and the Korean won(10percent)againstthedollarwerematchedbylargereal effective rises (15 per cent and 9 per cent,respectively)thatwouldhaveraisedthecostofgoodsfrom these countries relative to other countries’exports(seeFigure5).

Figure5: nominal dollar exchange rates, January 2000 - February 2011

(IndicesofUSdollarsperunitofnationalcurrency,2000=100)

Source:FederalReserveBankofSt.Louis.

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1 Worldexportsofgoodsmeasuredonabalanceofpaymentsbasislikeserviceswerealsoup22percentin2010.

Endnotes


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appendix tables and charts

AppendixTable1:World merchandise trade by region and selected economies, 2010 (Billiondollarsandpercentage)

exports Imports

value Annual percentage change value Annual percentage change

2010 2005-10 2008 2009 2010 2010 2005-10 2008 2009 2010

World 14,855 8 15 -23 22 15,050 7 16 -23 21

north America 1,964 6 11 -21 23 2,681 3 8 -25 23

UnitedStates 1,278 7 12 -18 21 1,968 3 7 -26 23

Canadaa 387 1 9 -31 22 402 4 7 -21 22

Mexico 298 7 7 -21 30 311 6 10 -24 29

south and Central Americab 575 10 21 -24 25 576 14 30 -26 30

Brazil 202 11 23 -23 32 191 20 44 -27 43

OtherSouthandCentralAmericab 373 9 20 -25 22 385 12 25 -25 24

europe 5,626 5 12 -22 12 5,841 5 13 -25 13

EuropeanUnion(27) 5,147 5 11 -22 12 5,337 5 12 -25 12

Germany 1,269 5 9 -23 13 1,067 7 12 -22 15

France 521 2 10 -21 7 606 4 13 -22 8

Netherlands 572 7 16 -22 15 517 7 18 -24 17

UnitedKingdom 405 1 5 -23 15 558 2 2 -24 15

Italy 448 4 9 -25 10 484 5 10 -26 17

Commonwealth of Independent states (CIs) 588 11 35 -36 30 414 14 32 -33 24

RussianFederationa 400 10 33 -36 32 248 15 31 -34 30

Africa 500 10 29 -30 28 463 13 28 -15 14

SouthAfrica 82 10 16 -24 33 94 9 14 -27 29

AfricalessSouthAfrica 418 10 31 -31 28 369 14 33 -12 11

Oilexportersc 277 9 34 -38 31 138 14 39 -9 4

Nonoilexporters 141 12 24 -14 21 231 13 29 -14 15

middle east 916 11 34 -31 30 572 11 28 -15 13

Asia 4,685 11 15 -18 31 4,503 11 21 -20 32

China 1,578 16 17 -16 31 1,395 16 18 -11 39

Japan 770 5 9 -26 33 693 6 23 -28 25

India 216 17 30 -15 31 323 18 40 -20 25

Newlyindustrializedeconomies(4)d 1,111 9 10 -17 30 1,103 9 17 -24 33

memorandum items:

MERCOSURe 282 11 24 -22 30 267 19 41 -28 43

ASEANf 1,052 10 14 -18 29 950 10 21 -23 31

EU(27)extra-trade 1,787 6 13 -21 17 1,977 6 17 -27 18

Least-developedcountries(LDCs) 164 15 32 -24 28 174 15 30 -5 13

aImportsarevaluedf.o.b.bIncludestheCaribbean.ForcompositionofgroupsseetheTechnicalNotesofWTO,InternationalTradeStatistics,2010.cAlgeria,Angola,Cameroon,Chad,Congo,EquatorialGuinea,Gabon,Libya,Nigeria,Sudan.dHongKong,China;RepublicofKorea;Singapore;andChineseTaipei.eCommonMarketoftheSouthernCone:Argentina,Brazil,Paraguay,Uruguay.fAssociationofSoutheastAsianNations:BruneiDarussalam;Cambodia;Indonesia;LaoPeople’sDemocraticRepublic;Malaysia;Myanmar;Philippines;Singapore;Thailand;VietNam.



32

AppendixTable2:World exports of commercial services by region and selected country, 2010 (Billiondollarsandpercentage)

exports Imports

value Annual percentage change value Annual percentage change

2010 2005-10 2008 2009 2010 2010 2005-10 2008 2009 2010

World 3,665 8 13 -12 8 3,505 8 14 -11 9

north America 599 7 9 -8 9 471 6 9 -9 9

UnitedStates 515 8 10 -7 8 358 6 9 -8 7

south and Central Americaa 111 10 15 -8 11 135 14 21 -9 23

Brazil 30 15 27 -9 15 60 22 28 -1 35

europe 1,724 6 12 -14 2 1,504 6 12 -13 1

EuropeanUnion(27) 1,553 6 11 -15 2 1,394 5 12 -13 1

Germany 230 7 15 -12 2 256 4 11 -12 1

UnitedKingdom 227 2 0 -19 0 156 0 -1 -19 -1

France 140 3 12 -14 -1 126 3 9 -10 0

Netherlands 111 4 13 -9 0 109 5 14 -3 1

Spain 121 5 12 -14 -1 85 5 9 -17 -1

Commonwealth of Independent states (CIs) 78 14 27 -17 10 105 12 26 -19 14

RussianFederation 44 12 30 -19 6 70 13 30 -20 18

Ukraine 16 12 27 -23 20 11 10 43 -30 0

Africa 86 9 14 -9 11 141 14 30 -12 12

Egypt 24 10 25 -14 12 13 6 25 -22 -1

SouthAfrica 14 5 -8 -6 21 18 9 2 -13 25

Morocco 12 10 12 -7 1 6 14 24 -6 15

middle east 103 … … -3 9 185 … … -8 9

Israel 24 7 15 -10 11 17 5 13 -14 3

Asia 963 12 16 -11 21 961 11 16 -10 20

Chinab 170 18 20 -12 32 192 18 22 0 22

Japan 138 6 15 -14 9 155 5 13 -12 6

India 110 … 20 -13 … 117 … 25 -9 …

Singapore 112 15 17 -6 20 96 12 17 -9 21

Korea,Republicof 82 11 25 -19 13 93 10 14 -17 17

HongKong,China 108 11 9 -6 25 51 9 11 -5 15

Australia 48 9 12 -8 17 50 11 21 -15 22

memorandum item

EU(27)extra-trade 684 7 12 -14 5 598 7 16 -13 6

aIncludestheCaribbean.ForcompositionofgroupsseeChapterIVMetadataofWTOInternationalTradeStatistics,2010.bPreliminaryestimate.

Note: While provisional full-year data were available in early March for 50 economies accounting for more than two thirds of worldcommercialservicestrade,estimatesformostothercountriesarebasedondataforthefirstthreequarters.



33

AppendixTable3:merchandise trade: leading exporters and importers, 2010 (Billiondollarsandpercentage)

Rank exporters value share Annual

percentage change

Rank Importers value share Annual

percentage change

1 China 1,578 10.4 31 1 UnitedStates 1,968 12.8 23

2 UnitedStates 1,278 8.4 21 2 China 1,395 9.1 39

3 Germany 1,269 8.3 13 3 Germany 1,067 6.9 15

4 Japan 770 5.1 33 4 Japan 693 4.5 25

5 Netherlands 572 3.8 15 5 France 606 3.9 8

6 France 521 3.4 7 6 UnitedKingdom 558 3.6 15

7 Korea,Republicof 466 3.1 28 7 Netherlands 517 3.4 17

8 Italy 448 2.9 10 8 Italy 484 3.1 17

9 Belgium 411 2.7 11 9 HongKong,China 442 2.9 25

–retainedimportsa 116 0.8 31

10 UnitedKingdom 405 2.7 15 10 Korea,Republicof 425 2.8 32

11 HongKong,China 401 2.6 22 11 Canadab 402 2.6 22

–domesticexportsa 18 0.1 7

–re-exportsa 383 2.5 23

12 RussianFederation 400 2.6 32 12 Belgium 390 2.5 11

13 Canada 387 2.5 22 13 India 323 2.1 25

14 Singapore 352 2.3 30 14 Spain 312 2.0 6

–domesticexports 183 1.2 32

–re-exports 169 1.1 28

15 Mexico 298 2.0 30 15 Singapore 311 2.0 26

–retainedimportsc 142 0.9 24

16 Taipei,Chinese 275 1.8 35 16 Mexico 311 2.0 29

17 KingdomofSaudiArabiaa 254 1.7 32 17 Taipei,Chinese 251 1.6 44

18 Spain 245 1.6 8 18 RussianFederationb 248 1.6 30

19 UnitedArabEmiratesa 235 1.5 27 19 Australia 202 1.3 22

20 India 216 1.4 31 20 Brazil 191 1.2 43

21 Australia 212 1.4 38 21 Turkey 185 1.2 32

22 Brazil 202 1.3 32 22 Thailand 182 1.2 36

23 Malaysia 199 1.3 26 23 Switzerland 176 1.1 13

24 Switzerland 195 1.3 13 24 Poland 174 1.1 16

25 Thailand 195 1.3 28 25 UnitedArabEmiratesa 170 1.1 13

26 Sweden 158 1.0 21 26 Malaysia 165 1.1 33

27 Indonesia 158 1.0 32 27 Austria 159 1.0 11

28 Poland 156 1.0 14 28 Sweden 148 1.0 23

29 Austria 152 1.0 11 29 Indonesia 132 0.9 46

30 CzechRepublic 133 0.9 18 30 CzechRepublic 126 0.8 20

total of aboved 12,541 82.3 - total of aboved 12,712 82.7 -

Worldd 15,238 100.0 22 Worldd 15,376 100.0 21

aSecretariatestimates.bImportsarevaluedf.o.b.cSingapore’sretainedimportsaredefinedasimportslessre-exports.dIncludessignificantre-exportsorimportsforre-export.



34

AppendixTable4:merchandise trade: leading exporters and importers (excluding intra-eu (27) trade), 2010 (Billiondollarsandpercentage)

Rank exporters value share Annual

percentage change

Rank Importers value share Annual

percentage change

1 Extra-EU(27)exports 1,787 15.0 17 1 Extra-EU(27)imports 1,977 16.5 18

2 China 1,578 13.3 31 2 UnitedStates 1,968 16.4 23

3 UnitedStates 1,278 10.8 21 3 China 1,395 11.6 39

4 Japan 770 6.5 33 4 Japan 693 5.8 25

5 Korea,Republicof 466 3.9 28 5 HongKong,China 442 3.7 25

–retainedimportsa 116 1.0 31

6 HongKong,China 401 3.4 22 6 Korea,Republicof 425 3.5 32

–domesticexportsa 18 0.2 7

–re-exportsa 383 3.2 23

7 RussianFederation 400 3.4 32 7 Canadab 402 3.3 22

8 Canada 387 3.3 22 8 India 323 2.7 25

9 Singapore 352 3.0 30 9 Singapore 311 2.6 26

–domesticexports 183 1.5 32 –retainedimportsc 142 1.2 24

–re-exports 169 1.4 28

10 Mexico 298 2.5 30 10 Mexico 311 2.6 29

11 Taipei,Chinese 275 2.3 35 11 Taipei,Chinese 251 2.1 44

12 KingdomofSaudiArabiaa 254 2.1 32 12 RussianFederationb 248 2.1 30

13 UnitedArabEmiratesa 235 2.0 27 13 Australia 202 1.7 22

14 India 216 1.8 31 14 Brazil 191 1.6 43

15 Australia 212 1.8 38 15 Turkey 185 1.5 32

16 Brazil 202 1.7 32 16 Thailand 182 1.5 36

17 Malaysia 199 1.7 26 17 Switzerland 176 1.5 13

18 Switzerland 195 1.6 13 18 UnitedArabEmiratesa 170 1.4 13

19 Thailand 195 1.6 28 19 Malaysia 165 1.4 33

20 Indonesia 158 1.3 32 20 Indonesia 132 1.1 46

21 Norway 132 1.1 9 21 KingdomofSaudiArabiaa 102 0.8 7

22 Turkey 114 1.0 12 22 SouthAfrica 94 0.8 29

23 Iran,IslamicRep.ofa 101 0.8 28 23 VietNam 85 0.7 21

24 SouthAfrica 82 0.7 33 24 Norway 77 0.6 11

25 Nigeriaa 79 0.7 49 25 Iran,IslamicRep.ofa 63 0.5 24

26 VietNam 72 0.6 26 26 Israela 61 0.5 24

27 Chile 70 0.6 30 27 Ukraine 61 0.5 34

28 Argentina 69 0.6 23 28 Philippinesa 58 0.5 27

29 Kuwaita 66 0.6 27 29 Chile 58 0.5 37

30 BolivarianRep.ofVenezuela

66 0.6 14 30 Argentina 56 0.5 46

total of aboved 10,709 90.2 - total of aboved 10,865 90.4 -

Worldd (excl. intra-eu (27))

11,878 100.0 26 Worldd (excl. intra-eu (27))

12,016 100.0 24

aSecretariatestimates.bImportsarevaluedf.o.b.cSingapore’sretainedimportsaredefinedasimportslessre-exports.dIncludessignificantre-exportsorimportsforre-export.



35

AppendixTable5:Leading exporters and importers in world trade in commercial services, 2010 (Billiondollarsandpercentage)

Rank exporters value shareAnnual

percentage change

Rank Importers value shareAnnual

percentage change

1 UnitedStates 515 14.1 8 1 UnitedStates 358 10.2 7

2 Germany 230 6.3 2 2 Germany 256 7.3 1

3 UnitedKingdom 227 6.2 0 3 Chinaa 192 5.5 22

4 Chinaa 170 4.6 32 4 UnitedKingdom 156 4.5 -1

5 France 140 3.8 -1 5 Japan 155 4.4 6

6 Japan 138 3.8 9 6 France 126 3.6 0

7 Spain 121 3.3 -1 7 India 117 3.3 …

8 Singapore 112 3.0 20 8 Netherlands 109 3.1 1

9 Netherlands 111 3.0 0 9 Italy 108 3.1 1

10 India 110 3.0 … 10 Ireland 106 3.0 2

11 HongKong,China 108 2.9 25 11 Singapore 96 2.7 21

12 Italy 97 2.6 3 12 Korea,Republicof 93 2.7 17

13 Ireland 95 2.6 3 13 Canada 89 2.6 15

14 Korea,Republicof 82 2.2 13 14 Spain 86 2.4 -1

15 Belgium 81 2.2 2 15 Belgium 76 2.2 4

16 Switzerland 76 2.1 6 16 RussianFederation 70 2.0 18

17 Luxembourg 68 1.9 13 17 Brazil 60 1.7 35

18 Canada 66 1.8 15 18 HongKong,China 51 1.5 15

19 Sweden 64 1.7 9 19 Australia 50 1.4 22

20 Denmark 58 1.6 7 20 KingdomofSaudiArabiab

49 1.4 …

21 Austria 53 1.5 -1 21 Denmark 49 1.4 -1

22 Australia 48 1.3 17 22 Sweden 48 1.4 6

23 RussianFederation 44 1.2 6 23 Thailand 45 1.3 21

24 Taipei,Chinese 41 1.1 29 24 UnitedArabEmiratesb 42 1.2 …

25 Norway 40 1.1 5 25 Norway 41 1.2 12

26 Greece 37 1.0 -1 26 Switzerland 38 1.1 -1

27 Thailand 34 0.9 15 27 Luxembourg 38 1.1 8

28 Turkey 33 0.9 0 28 Taipei,Chinese 37 1.1 28

29 Malaysia 33 0.9 13 29 Austria 36 1.0 -2

30 Poland 32 0.9 11 30 Indonesia 33 0.9 18

31 Brazil 30 0.8 15 31 Malaysia 32 0.9 18

32 Macao,China 28 0.8 51 32 Poland 27 0.8 16

33 Finland 25 0.7 -10 33 CzechRepublic 24 0.7 28

34 Israel 24 0.7 11 34 Mexico 23 0.7 8

35 Egypt 24 0.6 12 35 Finland 23 0.7 -11

36 Portugal 23 0.6 2 36 Nigeriab 20 0.6 …

37 CzechRepublic 22 0.6 10 37 Greece 20 0.6 2

38 Hungary 18 0.5 1 38 Iran,IslamicRep.ofb 19 0.5 …

39 Lebanonb 18 0.5 … 39 Angolab 18 0.5 …

40 Indonesia 17 0.5 25 40 Turkey 18 0.5 17

total of above 3,290 89.8 - total of above 3,035 86.7 -

World 3,665 100.0 8 World 3,505 100.0 9

aPreliminaryestimate.bSecretariatestimate.

Note:FiguresforanumberofcountriesandterritorieshavebeenestimatedbytheSecretariat.Annualpercentagechangesandrankingsareaffectedbycontinuitybreaksintheseriesforalargenumberofeconomies,andbylimitationsincross-countrycomparability.SeetheMetadata.



36

AppendixTable6:Leading exporters and importers of commercial services excluding intra-eu (27) trade, 2010 (Billiondollarsandpercentage)

Rank exporters value shareAnnual

percentage change

Rank Importers value shareAnnual

percentage change

1 EU(27)Extra-EU(27) 684 24.5 5 1 EU(27)Extra-EU(27) 598 22.1 6

2 UnitedStates 515 18.4 8 2 UnitedStates 358 13.2 7

3 Chinaa 170 6.1 32 3 Chinaa 192 7.1 22

4 Japan 138 4.9 9 4 Japan 155 5.7 6

5 Singapore 112 4.0 20 5 India 117 4.3 …

6 India 110 3.9 … 6 Singapore 96 3.5 21

7 HongKong,China 108 3.9 25 7 Korea,Republicof 93 3.4 17

8 Korea,Republicof 82 2.9 13 8 Canada 89 3.3 15

9 Switzerland 76 2.7 6 9 RussianFederation 70 2.6 18

10 Canada 66 2.4 15 10 Brazil 60 2.2 35

11 Australia 48 1.7 17 11 HongKong,China 51 1.9 15

12 RussianFederation 44 1.6 6 12 Australia 50 1.8 22

13 Taipei,Chinese 41 1.5 29 13 KingdomofSaudiArabiab 49 1.8 …

14 Norway 40 1.4 5 14 Thailand 45 1.7 21

15 Thailand 34 1.2 15 15 UnitedArabEmiratesb 42 1.5 …

16 Turkey 33 1.2 0 16 Norway 41 1.5 12

17 Malaysia 33 1.2 13 17 Switzerland 38 1.4 -1

18 Brazil 30 1.1 15 18 Taipei,Chinese 37 1.4 28

19 Macao,China 28 1.0 51 19 Indonesia 33 1.2 18

20 Israel 24 0.9 11 20 Malaysia 32 1.2 18

21 Egypt 24 0.9 12 21 Mexico 23 0.9 8

22 Lebanonb 18 0.6 … 22 Nigeriab 20 0.7 …

23 Indonesia 17 0.6 25 23 Iran,IslamicRep.ofb 19 0.7 …

24 Mexico 16 0.6 5 24 Angolab 18 0.7 …

25 Ukraine 16 0.6 20 25 Turkey 18 0.7 17

26 SouthAfrica 14 0.5 21 26 SouthAfrica 18 0.7 25

27 Argentina 13 0.5 18 27 Israel 17 0.6 3

28 Philippines 12 0.4 21 28 Lebanonb 15 0.6 …

29 Morocco 12 0.4 1 29 Argentina 14 0.5 17

30 Kuwaitb 11 0.4 … 30 Egypt 13 0.5 -1

31 Croatia 11 0.4 -7 31 Kuwaitb 12 0.5 …

32 UnitedArabEmiratesb 10 0.4 … 32 Algeriab 12 0.4 …

33 KingdomofSaudiArabiab 10 0.4 … 33 Ukraine 11 0.4 0

34 Chile 10 0.3 15 34 Chile 11 0.4 17

35 Cubab 9 0.3 … 35 Philippines 11 0.4 25

36 NewZealand 9 0.3 14 36 Kazakhstan 10 0.4 4

37 Iran,IslamicRep.ofb 8 0.3 … 37 BolivarianRep.ofVenezuela

10 0.4 10

38 VietNam 8 0.3 32 38 NewZealand 9 0.3 15

39 Panama 6 0.2 8 39 VietNam 8 0.3 24

40 Tunisia 5 0.2 -1 40 Colombia 8 0.3 17

total of above 2,655 95.0 - total of above 2,525 93.3 -

World 2,795 100.0 11 World 2,705 100.0 13

aPreliminaryestimate.bSecretariatestimate.

Note:FiguresforanumberofcountriesandterritorieshavebeenestimatedbytheSecretariat.Annualpercentagechangesandrankingsareaffectedbycontinuitybreaksintheseriesforalargenumberofeconomies,andbylimitationsincross-countrycomparability.SeetheMetadata.



37

AppendixFigure1: monthly merchandise exports and imports of selected economies, January 2006 - January 2011 (Billiondollars)

Source:IMFInternationalFinancialStatisitics,GlobalTradeInformationServicesGTAdatabase,nationalstatistics.

ImportsExports

250.0

100.0

200.0

150.0

50.0

0.0

United States Japan

2008 20082007 20072006 20062009 20092010 2010

100.0

80.0

60.0

40.0

20.0

0.0

150.0

60.0

120.0

90.0

30.0

0.0

Germany United Kingdom

2008 20082007 20072006 20062009 20092010 2010

70.0

60.0

40.0

50.0

30.0

20.0

10.0

0.0

250.0

100.0

200.0

150.0

50.0

0.0

European Union (27) extra-trade France

2008 20082007 20072006 20062009 20092010 2010

80.0

60.0

40.0

20.0

0.0


38

AppendixFigure1: monthly merchandise exports and imports of selected economies, January 2006 - January 2011 (Billiondollars)(continued)


ImportsExports

160.0

60.0

140.0

100.0

20.0

0.0

China Republic of Korea

2008 20082007 20072006 20062009 20092010 2010

50.0

40.0

30.0

20.0

10.0

0.0

40.0

120.0

80.0

50.0

20.0

40.0

30.0

10.0

0.0

Russian Federation South Africa

2008 20082007 20072006 20062009 20092010 2010

12.0

10.0

6.0

8.0

4.0

2.0

0.0

25.0

10.0

20.0

15.0

5.0

0.0

Brazil India

2008 20082007 20072006 20062009 20092010 2010

35.0

30.0

20.0

10.0

25.0

15.0

5.0

0.0


39

ImportsExports

30.0

10.0

25.0

20.0

5.0

0.0

Chinese Taipei Singapore

2008 20082007 20072006 20062009 20092010 2010

40.0

30.0

20.0

10.0

0.0

15.0

25.0

10.0

20.0

15.0

5.0

0.0

Turkey Mexico

2008 20082007 20072006 20062009 20092010 2010

40.0

30.0

20.0

10.0

0.0

25.0

10.0

20.0

15.0

5.0

0.0

Malaysia Thailand

2008 20082007 20072006 20062009 20092010 2010

20.0

16.0

12.0

8.0

4.0

0.0

AppendixFigure1: monthly merchandise exports and imports of selected economies, January 2006 - January 2011 (Billiondollars)(continued)


The World Trade Report 2011 describes the historical development of PTAs and the current landscape of agreements. It examines why PTAs are established, their economic effects, and the contents of the agreements themselves. Finally it considers the interaction between PTAs and the multilateral trading system.

II. The WTO and preferential trade agreements: From co-existence to coherence

Contents A. Introduction 42

B. Historical background and current trends 46

C. Causes and effects of PtAs: Is it all about preferences? 92

D. Anatomy of preferential trade agreements 122

e. the multilateral trading system and PtAs 164

F. Conclusions 196


42

The rapid increase in preferential trade agreements (PTAs) has been a prominent feature of international trade policy in recent times. PTAs constitute an exception to the general most-favoured nation (MFN) provision of the WTO, whereby all WTO members impose on each other the same non-discriminatory tariff. With the exception of Mongolia, all WTO members are party to at least one PTA. Interest in negotiating PTAs appears to have been sustained despite the global economic crisis. Indeed, the economic crisis itself may be spurring governments to negotiate new PTAs as much to preserve existing openness in the face of political pressure to reduce access as to generate new openness. The explosion of PTAs has triggered a parallel eruption of research on the subject. Nevertheless, this report provides fresh perspectives and insights into this important area of trade policy.

a. Introduction

II – tHe Wto AnD PReFeRentIAL tRADe AGReements

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Contents 1. PerspectivesandinsightsintheWorldTradeReport2011 44

2. Structureofthereport 45


44

Although the term “regional trade agreement” hasbecomewidelyused,thisreportusesthemoregenerictermPTA,sincealargenumberofagreementsarenotlimited tocountrieswithina single region.The reportonly covers reciprocal preferential agreements –regional, bilateral or plurilateral. Non-reciprocalagreements are certainly deserving of study, butalmost 90 per cent of the global trade-weightedpreference margin (i.e. the difference between thelowestapplicablepreferential tariffand theMFNrateapplied to other trading partners) is related topreferential tariffs under reciprocal agreements (seeSection B). PTAs may be free trade agreements, orcustomsunionswithcommonexternaltariffs.

1. PerspectivesandinsightsintheWorldTradeReport2011

(a) Internationalproductionnetworks

Some explanations for why countries enter into PTAshave not received enough attention and deserve to beexamined more closely. The international fragmentationof production, already present in the early 1960s, hasexpandedsignificantly.Datasuggestthatinthelasttwodecades offshoring in both intermediate goods andservices has grown at a faster pace than trade in finalgoods.Inparticular,growthinEastAsiaandtheeconomictransformation of Eastern Europe appear to havesignificantly intensified these phenomena (Jones et al.,2005).This report links the increasingnumberofPTAswith thegrowing importanceof internationalproductionnetworksanddelvescloselyintothisrelationship.

(b) Preferentialtradeflowsandtariffs

The explosion of PTAs is not being matched by anexpansion in trade flows that receive preferentialtreatment.Thisreportprovideswhatisprobablythemostsystematic estimation of the magnitude of preferentialtrade and the result proves to be an eye-opener. Only16 per cent of global merchandise trade receivespreferentialtreatmentiftradewithintheEuropeanUnionisexcluded.Perhapsthisresultshouldnotbesurprisinginlight of the huge reduction in tariffs that has occurredsince the end of the Second World War (half of globalmerchandisetradehasappliedMFNtariffratesofzero).Onerousrulesoforiginproceduressometimesassociatedwithfreetradeagreementshavecontributedtotheselowfiguresbymakingthecostsofcompliancerequirementshigher than the perceived worth of the underlyingpreferencemargins.

Benefitingfromanewlycreateddatabaseonpreferentialtariffs, this report establishes that preferential marginsare small when they are adjusted to account for thepreferential access enjoyed by other exporters. TheproliferationofPTAsmeansthatthedifferencebetweentheMFNrateandthePTArateoverstatesthecompetitiveadvantage of a PTA member, since increasingly its

competitors will also enjoy preferential access to themarket. The report estimates that in 2007, preferencemargins appropriately adjusted to take account of thepresenceofotherpreferentialsupplierswerenogreaterthan2percentinabsolutevalueforthebulk(morethan87percent)ofallmerchandisetrade.Theimplicationofthese results is that one has to look beyond tariffs toexplainwhycountriesenterintoPTAs.

(c) Beyondtradecreationandtradediversion

While nearly all trade agreements contain provisionson preferential tariffs, most PTAs now cover a widerange of issues beyond tariffs, including services,1investment, intellectual property protection, andcompetitionpolicy.Thesepolicyareasinvolvedomesticregulations (or behind-the-border measures). In someof these new areas, the agreements are “deeper”,either in the sense that they commit members to agreater degree of market integration than the WTO(e.g. theremovalofallbarrierstoserviceprovidersofPTA partners), or that some policy prerogative isdelegated from a national to a supra-national level(e.g.thecreationofregionalstandards).

Deepintegrationislikelytooccurforseveraldifferentreasons. First, trade openness increases policy inter-dependency(spillovers)thatmakesunilateraldecision-making inefficient compared with decisions takencollectively. A second reason is that deep integrationagreements may be necessary to promote trade incertainsectorsandeconomicintegrationmorebroadly.This second explanation applies to internationalproduction networks which require a governancestructure beyond low tariffs. If these agreementsresult primarily in changes to domestic regulations,onemayneedtothinkintermsofaframeworkdistinctfrom trade creation and trade diversion becausechanges todomestic regulationsaredifficult to tailorsoastofavouronlycertaintradepartners.

(d) AviableWTOagendaonPTAs

ThesignificanceofPTAs from theperspectiveof themultilateraltradingsystemisinadequatelycapturedbytheold idiomofstumblingblocksandbuildingblocks.The underlying question behind this approach waswhether preferential tariff opening would eventuallylead to multilateral opening. This analysis does not,however, mean that PTAs are an altogether benignphenomenon that can be ignored by the multilateraltrading system. More subtle forms of discriminationmay be embedded in PTAs, and PTAs can raisetransactioncosts.

AnumberofpossiblewaysfortheWTOtointeractwithPTAsarediscussedinthereport–someofwhichhavebeentriedmorethanothersinthepast.Theseoptionsincludei)fixingdeficienciesintheWTOlegalframework(i.e.a“hardlaw”approach);ii)adoptingamorenuancedand non-litigious approach to considering PTAs in the


45

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context of transparency and information exchange inorder better to understand mutual multilaterally basedinterests in relation to PTAs (a “soft law” approach);iii) accelerating a multilateral MFN-driven agenda ontrade opening; and iv) multilateralizing (aligning andconsolidating)PTA-related initiativesovertimeintotheWTO framework. This last approach could involverevisitingWTOapproachestodecision-makingsoastocontemplate non-discriminatory WTO-sanctionedagreementsamonggroupsofmembers(“criticalmass”)thatwouldsupportamultilateralizationprocess.Theseapproaches are not necessarily mutually exclusive.Moreover, they all aim to reinforce compatibility andcoherence between PTAs and the multilateral tradingsystem.

2. Structureofthereport

Thereportisdividedintofourmainparts.

Historical background and current trends

ThissectionprovidesbothahistoricalanalysisofPTAsand a description of the current landscape. ItdocumentsthelargeincreaseinPTAactivityinrecentyears,breakingthisdownbyregion,levelofeconomicdevelopment, and type of integration agreement. ItprovidesapreciseestimateofhowmuchtradeinPTAsreceivespreferentialtreatment.

Causes and effects of PtAs

This sectionsurveys thecausesandconsequencesofPTAs, with a focus on both economic and politicalexplanations.Animportantdistinctionismadebetweenshallow integration, which focuses solely or mostly onborder measures, and deep integration in whichcooperationextendsto“behind-the-border”measures.

Deep integration may be necessary to stimulate moretrade. At the same time, the decision to sign deepagreements may be the result of trade openness itselfand the structure of trade, such as the presence ofinternational production networks. To flourish, thesenetworks may require a degree of internationalgovernance that only deep integration can supply.Whateverthemotivationsfordeeperintegration,standardtheorybasedonthenotionsoftradecreationandtradediversion is inadequate forcapturing the fullpicture.TotheextentthatdeepintegrationinPTAsinvolveschangesto domestic regulations rather than already low tariffs,trade diversion may not pose as serious a risk. Thesection argues that traditional theories do not fullyexplain the emerging pattern of PTAs and that therelationship between trade agreements and productionnetworks, among other explanations, should beconsideredwhenanalysingPTAs.

Anatomy of PtAs

This section validates the hypothesis that more andmorePTAsgobeyondtariffsbyexaminingthecontentsoftheagreements.Itestablishesakeyempiricalresultof the report, namely that preferential tariff margins,adjusted to take account of the proliferation of PTAs,aresmall.Thesectionconfirmsthebroadeningsectoralcoverage of PTAs and examines how far they containlegally enforceable commitments in services,investment, technicalbarriers totradeandcompetitionpolicy, which are all likely to be crucial for productionnetworks. The commitments in these policy areas arealsodeeper–whethermeasuredrelativetomultilateralcommitments or in terms of the degree of marketintegrationaimedfor.

Using trade in parts and components as a proxy forthedegreeofproductionnetworkingamongcountries,empirical evidence is presented which demonstratesthe strong link between these networks and PTAs.DeepPTAs increasethevolumeof trade inpartsandcomponents among members. Finally, the sectionexamines several examples of preferential tradeagreements inEastAsia,LatinAmericaandAfricatoconsider how well they fit the hypothesis ofinternationalproductionnetworks.

the multilateral trading system and PtAs

Thissectionidentifiesareasofsynergiesandpotentialconflicts between preferential trade agreements andthe multilateral trading system and examines ways inwhich the two “trade systems” can be made morecoherent. Preferential tariffs, although less importantthan in the past, can erode the motivation formultilateraltradeopening.“Deep”PTAprovisionsoftenhave non-discriminatory effects and internationalproductionnetworkscanalterpoliticaleconomyforcesthatleadtothemultilateralizationofregionalinitiatives.The possibility of competing dispute settlementsystemscreateshazardsofitsown.Finally,thesectionreviewshowtheGATT/WTOhashistoricallydealtwiththe subject of preferential trade agreements. Takingthishistoryintoaccount,thesectionconcludeswithareflectiononwhat theWTO's futureagendaonPTAscouldlooklike.

Endnotes1 Someagreementsonlycoverservicesandthereforecontain

notariffcommitments.


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Preferential trade agreements (PTAs) have been around for centuries – long before the creation of the General Agreement on Tariffs and Trade (GATT) in 1947. This section provides a broad overview of the evolution of these agreements. It begins with a historical account of the process towards greater openness and economic integration that started with the trade networks of the mid-nineteenth century. It identifies the multiple setbacks and reversals along the way, and finally portrays the different “waves” of agreements that have accompanied the multilateral trading system since its creation. It highlights that there has been a creative tension between regional and multilateral approaches which, although often complicated, has generally advanced trade openness and economic integration.

B. Historical background and current trends


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Contents 1. TheformationofPTAs:ahistoricalperspective 48

2. TheevolutionofPTAs:stylizedfacts 54

3. TradeflowsrelatedtoPTAs 63

4. Howpreferentialistrade? 72

5. Conclusions 85

Some key facts and findings

• Almost 300 preferential trade agreements (notified and not notified)

were in force in 2010.

• 13 is the average number of PTAs that a WTO member is party to.

• Only 16 per cent of global merchandise trade receives preferential

treatment.

• Lessthan2percentofworldtradeiseligibleforpreferencemargins

above 10 percentage points.


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A variety of statistical information is presented tocharacterize patterns inPTA formationover timeandto describe the PTA landscape that we face today.These patterns include the rapid expansion andintensificationofPTAactivity,particularlyoverthepast20years.Thisexpansionischaracterizedbyincreasingdeveloping country participation, as well as thespanningof regional boundaries and theproliferationof bilateral deals. At the same time, evidence isprovided that the explosion of PTAs has not beenmatchedbyanexpansionofpreferentialtradeflows.

Whileonehalfofworldmerchandisetradetakesplaceamong PTA partners (including trade within the EU),onlyafractionofthisispreferential(e.g.onthebasisoflower tariffs for the trading partners) and, in addition,preference margins (i.e. the difference between thelowest applicable preferential tariff and the non-discriminatory most-favoured nation rate applied toother trading partners) are small. Specific factorsaffecting preference utilization are also examined. Bypointingoutcountries’continuedinterestinconcludingPTAs on the one hand and the reduced scope forpreferential market access on the other, this sectionsets thestage forsubsequentpartsof this report thatwill examine alternative rationales for the formation ofPTAsandtherelatedissueof“deep”integration.

SincetheEU’smemberstateshavecededresponsibilityfortradepolicytothefederallevel,itoftenmakesmoresensetotreattheblocasasingleentityandtoexcludetrade within the EU from share calculations. Hence,unlessotherwisestated,thisconventionwillbefollowedthroughmuchofthediscussioninSectionB.However,the relevant tables will continue to show figuresincludingandexcludingintra-EUtrade.

1. TheformationofPTAs:ahistoricalperspective

ThereisnothingnewaboutPTAs–noraboutthedebateon whether they have a positive or negative effect oneconomicrelations.Throughoutmodernhistory,countrieshave secured and strengthened their trade relationsthrough various arrangements – from colonialpreferences to bilateral commercial treaties to broaderregional agreements. These arrangements have alsooverlapped and interacted, creating a global tradelandscape defined less by clear-cut choices betweenregionalism and multilateralism than by the complexinterplay, even competition, among multiple traderegimes. Despite the system's complex and sometimesmessyevolution,severallong-termtrendsarediscernible.

First, international trade cooperation has generallybecomewiderandmoreinclusive–withmorecountriesentering intobindingagreements,andwithmore rulesbeing consolidated in the increasingly “global”architecture of the World Trade Organization (WTO).Secondly, trade agreements have generally become“deeper”,aswellas“wider”,byreachingintonewpolicy

areas such as services trade, foreign investment,intellectual property and government procurement – areflection of the deepening integration of the worldeconomy,andthegrowing“globalization”ofpoliciesthatwere once considered domestic. Thirdly, and mostsignificantly, world trade has become progressivelymoreopenandlessdiscriminatoryoverrecentdecades– with the paradoxical result that preferential bilateraland regional agreements continue to proliferate, evenasthesalienceofpreferencesisdiminishing,suggestingthat countries have motives other than simply marketaccessforenteringintosucharrangements.

While the historical trend has been towards moreopenness and deeper rules in international tradeagreements – and away from protectionist blocs –progresshasnotbeeninastraightline,andtherehavebeen major set-backs and reversals along the way.Although it is difficult to generalize, the pressure toslipbackwardsintomoreinward-lookinganddefensivetradearrangementshasbeenstrongestduringperiodsof economic contraction, financial instability andgeopolitical insecurity. For instance, the economicdepression of the early 1870s effectively brought toan end the rapid expansion of Europe's network ofbilateral tradetreaties, justas the “GreatDepression”oftheearly1930shelpedfuelthespreadofdefensiveandhostiletradeblocsintheinter-warperiod.

Conversely, the push for a more open and inclusivetrading order has been strongest during periods ofeconomic expansion and international peace – and inthe aftermath of the system's breakdown or collapse.The most striking example is the creation of the“multilateral” GATT in the post-war period in responseto the restrictive and discriminatory trade blocs of the1930swhichhadexacerbatedtheeconomicslumpandcontributedtotheoutbreakoftheSecondWorldWar.

The recent explosion of bilateral and regionalagreements has once again moved the debate aboutthe causes and effects of PTAs – both positive andnegative – to the fore. Some argue that it signals aweakening of international commitment tomultilateralism, and foreshadows a return to morefragmentedworldtrade.Otherssuggestthat it ispartofthepatternseensincetheSecondWorldWarwherebilateral and regional agreements provide an avenuefor“faster”and“deeper”rule-makingthanthebroaderWTO–spurringsubsequentprogressinthemultilateralsystem,andofferingacoherent,ratherthanconflicting,approachtomanagingmoreintegratedworldtrade.

(a) Fromempirestointernationalagreements

To view the history of the world trading system as astarkchoicebetweenregionalismandmultilateralism–or between preferential and non-preferentialagreements – is too simplistic. For most of modernhistory, tradeagreementsweremoreor less limited ingeographicscope–usuallytakingtheformofcolonial


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spheres of influence, associated with empires, orbilateral commercial treaties, mainly among Europeanpowers.OnlywiththecreationoftheGATTin1947didtheideaofawider,multilateralagreementmovetotheforefrontofinternationaltraderelations;andeventhenthe scope of the initial GATT system was modest,involving just 23 countries in a plurilateral agreement,and only gradually evolving to the near “universal”membershipofthemodernWTO.1

Similarly, the distinction between preferential and non-preferential trade arrangements is more a matter ofdegree than of kind. Strictly speaking, all tradeagreements – bilateral, regional, multilateral – arepreferential in the sense that their benefits andobligationsapplytomembersonly,andnon-membersareexcluded; this is true even of the modern WTO, wheremorethan30countries,includingRussia,remainoutsidethe system. What really defined the various historicalphasesof the international tradingsystemwaswhethercountries'underlyingpolicyobjectivewastoexpandandopenuptheirtraderelationsortorestrictandlimitthem.

Empireswereoneoftheearliestmeansofsecuringtradeinterests. Powerful states – from the Romans to theOttomans, to the British – used influence and force tocreate colonial empires or “spheres of influence” thatgave their traders and manufacturers secure access toforeign markets, often on an exclusive basis. Althoughbilateral commercial treaties have also existed forcenturies,2 the widespread idea that internationalagreements could secure trade interests is relativelymodern, dating mainly from the eighteenth andnineteenth centuries (Trebilcock and Howse, 1995).Early commercial treaties were concerned less withopeningupnewmarketsandliberalizingtradethanwithensuringthatacountry'stradersenjoyedprotectionfromarbitraryarrestandseizureinforeigncountries–hencethe focus on securing for their merchants (and theirproperty)thesametreatmentunderthelawsofanotherstate that were enjoyed by domestic merchants, aprecursoroftheWTO's“nationaltreatment”principle.

SincemostEuropeancountriesalso routinely restrictedthe extent to which foreign ships could carry goods toand from their ports, especially in their increasinglyimportant trade with overseas colonies,3 early bilateraltrade treaties did not attempt to dismantle thesedomesticprotections,butmerelysoughttoensurethataforeignmerchantmarinewastreatednolessfavourablythanotherforeignshipping–leadingtotheinclusionofa“most favoured nation” (MFN) clause in some earlytreaties(Brown,2003).

(b) Thenineteenthcentury:surgingtradeandexpandingagreements

The nineteenth century saw a major shift in the natureand scope of bilateral trade treaties in the direction ofmoreopennessandliberalization–promptedbyahugeexpansion in international trade and by Great Britain's

rapid rise as the world's pre-eminent economic powerandastaunchopen-tradeadvocate.Britishindustrialists,especiallyinrisingcentressuchasLondon,ManchesterandGlasgow,begantofeel that theyno longerneededprotectionfromforeigncompetitors,andarguedthatthecountry's restrictive trade policies only served toencourage other countries to exclude British exportsfromtheirmarkets.

British industrialists also believed that Britain'scompetitiveness could be strengthened by reducingdomestic labour costs – which, in their view, wereadversely impacted by Britain's high agricultural importbarriers, the so-called Corn Laws (Brown, 2003).Underpinning thispolicyandpolitical shiftwasgrowingsupportfortheopentradeideasthathadbeenadvancedbythetheoriesofAdamSmithandDavidRicardo.4

Inadditiontosignificantunilateraltariffreductionsduringthisperiod,BritainpassedtheReciprocityofDutiesActin1823 – which greatly eased restrictions on the Britishcarry trade (i.e. materials from the colonies that Britaincouldnotproduce),akeyfeatureoftheearlierNavigationActs, and allowed for the reciprocal reduction of importduties in bilateral treaties negotiated with like-mindedcountries.Anevenmore importantstepwasthesigningof the Cobden-Chavalier Treaty between Britain andFrancein1860,whichforthefirsttimeinvolvedsignificantreciprocal tariff reductions between the two countriesandincludedastrongMFNclause(i.e.theprincipleofnotdiscriminatingbetweenone’stradingpartners).

Aimed at improving political relations between Britainand France through strengthened economic ties, theCobden-ChavalierTreatyalsosparkedawaveofbilateralnegotiationsamongEurope'sother economicpowers–an early manifestation of the process of competitivetradeliberalization,or“dominoeffect”,seentoday.Thesenegotiationsweredrivenbytheneedtogainequivalentaccess to the French and British markets and by thepromise of non-discriminatory treatment. Whether theCobden-ChavalierTreatyand its successorsushered inthe“greatphaseofEuropeanfreetrade”(Bairock,1989)– or merely reflected continental Europe's growingacceptanceofthelogicofunilateraltradeliberalization–isamatterofongoinghistoricaldebate(AccominottiandFlandreau,2008).

WhatisclearisthatthetreatyhelpedsparkanexpandingnetworkofbilateralMFNtradetreatiesinEurope.Byoneestimate, tariff levels were cut by half in the wake oftheseagreementsand,becausetheylastedforaperiodof ten years, a greater measure of certainty wasintroducedintotraderelations(Shafaeddin,1998).Sincethis new network of treaties was both reciprocal andinclusive (via the MFN clause), it was also essentiallyinterlocking – creating an early form of “plurilateral”preferential trade agreement (i.e. unconditional MFNtreatment among all treaty-signers) and foreshadowingthe basic structure of the multilateral system that tookshapeacenturylater(Brown,2003).


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Bythelatenineteenthcentury,however,themomentumtowards a more open, less preferential trading systemwas beginning to slow. The worldwide depression from1873 to 1877 – possibly as severe as the GreatDepression60yearslater–increasedpressureformoredomesticprotectionandweakenedthedriveforaccesstoforeignmarkets(Shafaeddin,1998).TheunificationofGermany and Italy in the early 1870s also placedpressureonEurope'snon-discriminatorysystemoftraderelations, as both countries sought to consolidate theirnewly-achieved national unity by raising external tariffbarriers(TrebilcockandHowse,1995).

AnotherproblemwasthattheUnitedStatesrefusedtobecomepartofEurope'snetworkofnon-discriminatorytreaties, instead negotiating its own reciprocal andpreferential bilateral agreements. As United States'exports expanded, especially in grain andmanufactured goods, European trade partners grewlesswillingtoprovideunconditionalMFNtreatmenttoAmerican “free riders”without reciprocal treatment intheexpandingUSmarket(Brown,2003).

An even greater threat to trade openness and non-discriminationwastheraceamongtheleadingeconomicpowers, including the United States, at the end of thenineteenthandthebeginningofthetwentiethcenturytoestablishorexpandtheiroverseascoloniesandspheresof influence. The motivation was not just to carve outexclusivemarketsfortheirexportsbuttosecurenationalself-sufficiency in raw materials. Even in Britain, theprevailing open trade policy was being challenged bygrowingnumbersurgingthatpreferentialtrade,suchaslowertariffs,begrantedtoBritain'soverseascolonies.

Aseriesofisolatedtradewarsalsobrokeoutduringthisperiod,causingfurtherstrainwithinthetradingsystem.5Although trade flows continued to expand during thisperiod, the momentum towards building a network oftrade rulesand institutionshadclearlybeen lostby theoutbreakoftheFirstWorldWarin1914(Brown,2003).

(c) FirstWorldWarandtheGreatDepression:resurgentregionalism

The First World War shattered the more open andintegrated world trading system that had been built upoverthepreviouscentury.Despitevariousattemptsinthe1920storestorewhathadbeenachievedandtoadvanceinternationaleconomiccooperation–mostnotablyattheLeagueofNation'sWorldEconomicConferencein1927– the recovery of the international trade and paymentssystemwasslowandtentative.Thisslowrecoverywasareflectionof fragileeconomicgrowth,chronicexchangerateinstabilityandthereluctanceoftheUnitedStatestotake up the mantle of economic leadership graduallysurrendered by an economically weakened andoverstretchedBritain(Brown,2003).

Worse,anytentativeprogressachievedinthe1920swassoon rolled back by the Great Depression of the early

1930s and its disastrous aftermath. There is broadagreementamonghistoriansthattherecessionof1929was transformed into the Great Depression mainlybecause of a series of monetary and fiscal policyblunders.Thesefinancialmistakeswereexacerbatedbythe spread of “beggar-thy-neighbour"6 trade strategies,ascountries tried to insulate themselves fromshrinkingdemand and growing unemployment by raising importbarriers and carving out preferential export markets,resulting in the collapse of international trade and theriseoftradefrictions(Irwinetal.,2008).

Someofthesetradeblocsweredefensive.In1930,theNetherlands, Denmark, Norway and Sweden tried toshield themselves from the worst of the growingeconomic crisis with the creation of the Dutch-Scandinavian Economic Pact,7 while two years laterBritainand itscoloniesagreed toasystemof “ImperialPreferences”whichgavepreferential tariff treatment toone another's trade – signalling the end of Britain'scommitment to non-preferential open trade which hadexisted for over 100 years. Other blocs were morehostile. After 1936, Germany moved to create its ownrestrictive trade bloc as part of its drive for economicself-sufficiencyandresourcesecurity–byconcludinganetwork of bilateral agreements with Southern andEastern European countries. This had the effect oforienting these countries' trade towards Germany andaway from the rest of the world (Braun, 1990). At thesametime,JapanwasbuildingitsGreaterEastAsianco-prosperity sphere – explicitly aimed at creating a self-sufficient “block of Asian nations led by the JapaneseandfreeofWesternPowers”(William,2000).

OnebrightspotwasthedecisionoftheUnitedStatestoembarkonacautiouspolicyoftrade liberalizationthreeyearsafter implementing its1930Hawley-SmootTariffAct, which had raised US tariffs on imported goods torecord levels. The move towards liberalization signalledforthefirsttimeitsfutureleadershipoftheglobaltradingsystem.In1934,CongressenactedtheReciprocalTradeAgreement Act, which gave the new Rooseveltadministration authority to negotiate bilateral tariffreductionagreements (basedonanunconditionalMFNclause)inconcertwithothercountries.Withthisauthority,originally granted for three years and subsequentlyrenewed,thegovernmentconcludedmorethan20tradeagreements in the 1930s, initially with Latin Americancountries,butlaterwithBritainandCanada(Irwinetal.,2008). These bilateral agreements probably only had amarginaleffectonworldtradeduringthischaoticperiod,butmoreimportantlytheysignalledanewliberaldirectioninUStradepolicy,and laid thefoundationsformuchoftheGATTsystemaftertheSecondWorldWar.

(d) Most-favourednationandthebirthoftheGATT

The foundations of the modern multilateral tradingsystem were laid in the years immediately after theSecond World War. This was a period favourable for


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large advances to be made in international tradeliberalization and cooperation. The United States hademerged from the war as the unquestioned economicsuperpower, and it had strongcommercial and foreignpolicy reasons for pushing the international system inthe direction of multilateralism. Moreover, the wartimevictors,especiallyBritainandtheUnitedStates,largelyagreedontherootcausesofthepoliticalandeconomicchaosof the inter-warperiod,andwantedtoconstructan internationaleconomicsystemthatwouldpreventareturn to the financial instability and trade bloc rivalrythathadledtotheoutbreakofwar(Brown,2003).8

TheBrettonWoodsConferencein1944envisagedthecreation of three new international economicinstitutions thatwould formthepillarsofanewworldeconomic order: the International Monetary Fund(IMF), which would maintain exchange rate stability,the International Bank for Reconstruction andDevelopment,ortheWorldBank,whichwouldprovidereconstruction capital for war-torn countries, and theInternational Trade Organization (ITO), which wouldoversee the administration of an open and non-preferential multilateral trading order. Although theIMF and World Bank came into being, the ITO was“stillborn”, mainly because of concerns in the USCongressaboutalossofsovereigntytotheproposedtrade body (Trebilcock and Howse, 1995). Countriesreturned to theprovisionalGATTagreement that hadalready been negotiated among 23 “contractingparties” in 1947, and which was to provide thefoundation foranexpandingmultilateral tradesystemuntilitwassubsumedbytheWTOin1995.

Althoughtherewasasharedvisionaboutthepost-wartrading system – especially the need to lower tariffsandtodisciplineanyformsofdiscrimination–Britainand the United States clashed over how the newarchitecturecouldbereconciledwithexistingregionalarrangements. A major source of friction – whichsurfaced repeatedly during wartime and post-wareconomic negotiations – was Britain's desire topreserveitssystemof“ImperialPreferences”.TheUSSecretary of State, Cordell Hull, was critical of theadverse effects of Imperial Preferences on UnitedStates'exportstoBritainandCanada,twoofAmerica'smost important markets. The State Department triedto dismantle them, first during negotiations over theterms of the so-called “Lend Lease” programme in1941,andlaterinsuccessivemeetingsbetween1943and1948todiscusspost-wartradearchitecture.

BritainwasjustasdeterminedtoholdthelineonImperialPreferences. Although some policy makers wanted areturntoBritain'straditionalopentradeleadershipafterthe war, the majority, including renowned economistJ.M.Keynes,weremorecautious,andwantedtomaintainboth Imperial Preferences (seen as an essentialunderpinning of the Empire) and the freedom to useimport controls (seen as key to government economicplanning and to Keynesian “demand management”)

(Irwin et al., 2008). Complicating matters was the factthattheUnitedStates'positiononpreferentialtradewasnot entirely unambiguous. One reason they ultimatelyagreed toacceptanexemption forpreferential regionaltradeblocs in thenewGATT,embodied inArticleXXIV(they initially wanted an exemption from non-discrimination for customs unions only, not free tradeagreements), was its support for nascent plans forEuropeanintegration.

British and American officials also differed initiallyover the negotiating mechanism for achieving moreopen trade. Whereas the British proposed sweeping,across-the-board horizontal tariff reductions on auniform and non-selective basis, the Americanspressed for – and eventually won agreement on – alessambitiousapproachwhichmorecloselyresembledtheirpre-warReciprocalTradeAgreementAct(RTAA)negotiations.Theoutcomewasa“multilateral-bilateral”hybrid in which tariffs would be cut in bilateralnegotiations, and then multilateralized through theMFNprinciple,inlinewiththepre-warRTAAapproach(Irwinetal.,2008).

Even the basic principles of the resulting GATTreflected earlier bilateral models and approaches.Muchof its languagewasborroweddirectly from theRTAA arrangements, which in turn had taken theircore principles of reciprocity, non-discrimination andnational treatment from nineteenth-century Europe'snetworkofbilateralagreements.AmajorchangewasthatthenewGATTsubsumedthisbilateralarchitectureinasinglemultilateralconvention,bothreflectingandreinforcingthecommitmentamongmemberstowidertradecooperation thanhadexistedatany time in thepast. The biggest change represented by the newGATTwas thatmultilateralism(andMFN) for thefirsttime became the foundation or default, not thealternative,forinternationaltraderelations.

(e) Themodernera:threenew“waves”ofregionalism

Creationof theGATTdidnot diminish theattractionofbilateral or regional approaches to international traderelations. On the contrary, the push for new regionalagreements,especially inEurope,re-emergedlessthanfive years after the GATT was launched, ushering in alongperiodofcreativetensionbetweenregionalismandmultilateralism,andpavingthewayfordramaticadvancesinbothapproaches.Ifthemid-nineteenthcenturymarkedthe first major phase of regionalism, the last 60 yearshavewitnessedthreeadditionalphasesor“waves”.Eachhas been driven, at least in part, by a perceived needamong groups of countries to go “further and faster”than the broader GATT system in order to manage“deeper”tradeintegration(Carpenter,2009).

AlthoughthewideninganddeepeningoftheEuropeanUnionhasbeenatthecentreofeachsuccessivewaveof regionalism,NorthAmericaandnowAsiahavealso


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joinedtherace.Atthesametime,eachwavehastendedto coincide with – or be immediately followed by –significant advances in GATT negotiations, leadingsome to argue that there is a process of competitiveliberalization, or “domino effect”, not just among thevarious regional agreements, but more fundamentallybetweenregionalismandmultilateralism.

The first wave of regionalism occurred in the late1950sand1960s.Atitscentre,wasEurope'spushforcontinental integration – starting with the sectoralEuropeanCoalandSteelCommunity in1951, leadingto thebroaderEuropeanEconomicCommunity (EEC)in 1957, and building outwards to current or pastcolonial possessions through a complex network ofpreferential, but non-reciprocal trade arrangements(Winters, 1993). This evolving European Communityhelped spark the creation of the rival European FreeTrade Association (EFTA) in 1957 among countriesthat had chosen to stay outside the Community. TheEEC was also taken as a model by groups ofdevelopingcountries inAfrica, theCaribbean,Centraland South America which rushed to form their ownregional and subregional unions during this period.However, most of these arrangements – includingeventhemostpromising,theEastAfricanCommunityand the Central American common market – hadcollapsed or drifted into abeyance by the end of the1970s(deMeloandPanagariya,1993).9

At the same time, Europe's integration triggeredpressure forprogressat themultilateral level,asothercountries sought to mitigate the effects of Europeanpreferential trade by lowering MFN tariffs across theboard. The launch of the Dillon Round of tradenegotiationsin1960waspromptedinpartbecausetheadoptionof theEEC'scommonexternal tariff requiredtherenegotiationofcertainmembers'boundtariffrates(i.e.theupperlimitformembers'tariffrates)–aprocesswhich encouraged these members to seek reciprocaltariff reductions from trade partners in a broadermultilateral context. Likewise, the more ambitiousKennedy Round between 1964 and 1967 coincidedwithnegotiationstoexpandtheEECtoincludeBritain,Ireland, Denmark, Greece and Norway – and wasmotivatedinpartbyUSconcernsaboutbeingexcludedfromanever-broaderandmoreunifiedEuropeanmarket(Anderson and Blackhurst, 1993). Thus, GATT tariffcuttingandmembershipenlargementmovedintandemwiththewideninganddeepeningofEurope'sintegrationproject,aswellaswithotherregionalinitiatives

Thesecondwaveofregionalismbeganroughly inthemid-1980s and extended well into the 1990s. Onceagain Europe's drive to expand and deepen itseconomic integrationwasacentral impetus.Themid-1980s saw Europe embark on its “single market”programme, aimed at dismantling the remainingphysical, technical and tax barriers within thecommunityby1992–atransformationmarkedbytheorganization changing its name from the EEC to the

European Community (EC) with the passage of theMaastrichtTreatyin1993.TheECwasalsopushingtocreateanewclusterofbilateralPTAswithCentralandEastern European countries10 following the break-upoftheSovietUnionandthedissolutionoftheCouncilforMutualEconomicAssistance(COMECON)(Lesterand Mercurio, 2009). These latter agreements werefocusedon reducing tariffs, creatinguniform rulesoforigin(RoOs),anddevelopingEC-consistentregulatoryapproachestoservices,standards,andtransitionrulesin sectors such as agriculture. Their overarching aimwas to pave the way for the admission of ten newcountries (eight Central and Eastern Europeancountries and two Mediterranean countries) into theEU in 2004, and two additional ones (Bulgaria andRomania)in2007.

Inthemid-1990s,theEUalsoconcludedanumberofbilateralagreementswithcountriesintheMiddleEast– (with Israel, Jordan, Lebanon and the PalestinianAuthority) and North Africa (with Algeria, Egypt,MoroccoandTunisia)withtheintentionofforminganopen trade area similar to the North American FreeTradeAgreement(NAFTA)(Fiorentinoetal.,2007).

Europe was not alone in this approach. This time, themomentum behind regionalism also came from theUnitedStates, partly becauseof its ongoing concernsabout the EC's expansion, and partly because of itsfrustrationwithdelaysinlaunchingandthenadvancingthe Uruguay Round negotiations (Fiorentino et al.,2007). Having eschewed regionalism in favour ofmultilateralism for almost 40 years, the United Statessuddenlyshiftedstrategies,embarkingonanambitiousprogrammeofbilateralnegotiationsthat included,first,a free trade agreement with Israel in 1985, and then,more dramatically, the Canada-US Free TradeAgreementin1988,latertrilateralizedtoincludeMexicoinNAFTAintheearly1990s(AndersonandBlackhurst,1993).Muchofthe“new”tradepolicyagendathattheUnited States had been seeking in the multilateralarena–suchasinvestment,servicestrade,intellectualproperty rights, and government procurement – wasincorporated first in these bilateral and regional talks,andthentakenupintheUruguayRoundnegotiations.

Aswiththepreviouswaveofregionalism, thisnewestone had a demonstration effect, as groups ofdeveloping countries moved to establish andstrengthen their own regional groupings. In LatinAmerica, old integration arrangements, such as theCentral American Common Market and the AndeanCommunity,wererevivedinanefforttobuildabroaderandmoreambitiousLatinAmericanCommonMarket,effectively mirroring North America's and Europe'sown pan-continental projects. Even more ambitiouswas the MERCOSUR (Southern Common Market)project. Envisaged as a full customs union amongArgentina,Brazil,ParaguayandUruguay,MERCOSURwas perhaps the most prominent example of a newgenerationof“developing-developingcountry”PTAs.It


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reflected a desire partly to strengthen politicalrelations between Argentina and Brazil, partly tocounterbalanceotheremergingcontinentalintegrationagreements,andpartlytocreateastrongerandmoreunified trade policy voice for the partner countries inthemultilateralsystem(Mansfieldetal.,2000).

In Africa too, initiatives were launched to revitalizeexisting regional groupings and to form new ones –suchastheCommonMarketforEasternandSouthernAfrica(COMESA),theEastAfricanCommunity(EAC),the Economic Community of West African States(ECOWAS) and the Southern African DevelopmentCommunity(SADC)–withtheobjectiveofacceleratingindustrialization, diversifying economies, developingregional infrastructure, encouraging the adoption ofcommon negotiating positions, and promoting peaceand security on thecontinent. Inparticular,COMESAwas seen as a step towards the realization of anAfrican Economic Community, while SADCrepresentedaneffort to reintegrateSouthAfrica intothepost-apartheidregionaleconomy(Hwang,2007).

In Asia, regionalism gathered pace as well. TheAssociation of Southeast Asian Nations (ASEAN)embarked on plans for an ASEAN Free Trade Area(AFTA),inordertostrengthentheresilienceofASEANmembercountriestoeconomiccrisesandtoenhancecooperation in non-traditional trade areas, such asscienceandtechnology,agriculture,financialservicesand tourism (an extended discussion of the role ofinternational production networks appears inSection D.3). The South Asian Association forRegionalCooperationwasalsocreatedat this time–inparttotrytoreducepoliticaltensionsbetweenIndiaandPakistan(Dash,1996)–latertransformedintotheSouthAsianFreeTradeArea(SAFTA).

Most ambitious of all, the Asia Pacific EconomicCooperation (APEC) was launched in 1989 with thegoalof“pursuingfreeandopentradeandinvestment”amongitsfounding12membersonanon-preferential(i.e. “open regional”) basis (Pomfret, 2006).11 Aroundthesame time,AustraliaandNewZealanddeepenedtheir free trade area into the Closer EconomicRelations (CER). Proponents typically argued thatthese agreements represented new forms ofregionalism – justified on the grounds that memberscould go “further and faster” in areas of deeperintegration thanwas feasible in thewiderandslowerGATT system. Another common rationale wasconcerns about the slowpaceof theUruguayRoundandtheriseofotherrivalregionaltradeblocs.

Indeed, as with the previous wave, progress at themultilateral level coincided with – and, some argue,benefited from – this second wave of regionalism.Afterseveralfailedattempts,theUruguayRoundwaslaunched in 1986, including for the first time anegotiatingmandateonservices, intellectualpropertyand, to a more limited extent, investment. Despite

concerns about the GATT being eclipsed by regionaldeals–orbecauseofthem–theUruguayRoundwassuccessfully concluded in 1994, crowned with thecreation of the WTO, effectively taking some of theenergyoutofthissecondwaveofregionalism.

Overthepastdecade,anotherwaveofregionalismhasbeen gathering force, driven as before by key tradepowers,suchastheEUandtheUnitedStates,but forthefirst timealso includingmanyAsiancountries thathad previously been the strongest supporters ofmultilateralismandnon-discrimination.Theirconversiontoregionalismcanbetracedinparttotheinternationalcommunity's inadequate reaction to the collapse ofAsiantradefollowingtheAsianfinancialcrisisin1997,thehigh-profilecollapseoftheWTO'sSeattleMinisterialConferencein1999,andthediminishingsignificanceofpan-Pacific initiatives, especially the APEC Forum(AggarwalandKoo,2005).Evenmoreimportantly, theproliferation of regional agreements in Asia alsoappears toreflectandreinforceanunderlyingprocessof deep economic integration. This was caused bycountriesbeingwovenevermoretightlytogetherbythetradeandinvestmentflowsassociatedwithregionalandsubregionalproductionnetworks.

Key Asian countries that have launched (andconcluded) bilateral negotiations include Japan, theRepublicofKorea,Singapore,ChinaandIndia(Katadaand Solis, 2008). Even AFTA concluded bilateralagreements with major Asian economies, such asJapanandChina(LesterandMercurio,2009).Duringthesameperiod, theUnitedStates launchedbilateralnegotiationsandconcludedagreementswitha rangeofcountries,includingJordan,Bahrain,Chile,Morocco,Singapore, Australia, Oman, Peru, Panama, ColombiaandtheRepublicofKorea(Pomfret,2006).

Thismostrecent“wave”ofregionalismcoversamuchwider network of participants – including bilateral,plurilateral and cross-regional initiatives – andencompassescountriesatdifferentlevelsofeconomicdevelopment – including “developed-developed”,“developing-developing”, and “developed-developing”alliances. And although these new agreements, likeprevious PTAs, also involve preferential tariffreductions, they focus even more on WTO-plus typeissues, such as services, capital flows, standards,intellectual property, regulatory systems (many ofwhich are non-discriminatory) and commitments onlabourandenvironmentissues.

As these agreements grow more comprehensive andcomplex–asrule-makingmovesbeyondthereductionof border barriers into the challenges of “deeper”policy integration – they have begun to blur themeaning of discrimination. For example, the non-discriminatory harmonization of regulatory standardsin these new regional agreements can have a“preferential” effect when it effectively creates aregional regulatory “bloc” that benefits insiders more


54

thanoutsiders.Conversely,theliberalizationofcertainservices regulations in a “discriminatory” regionalagreement can have a non-preferential effect whenregulatory changes necessarily benefit all foreignsuppliers,notjustthepartnerstotheagreement.

Some trade experts take a pessimistic view of thelatest explosion of PTAs, arguing that there is a linkbetweenthesurgeofbilateralandregionaldealsandthe slow pace of the Doha Round (Bhagwati, 2008).Others are more optimistic, suggesting theproliferation of bilateral and regional deals willeventually, as in the past, have a domino effect, andforce the pace of the Doha negotiations. Still othersargue that there is no correlation or causal linkbetween thepaceofmultilateralismand regionalism,pointing to the fact that regional initiatives did not“take off” when the Uruguay Round stalled between1990 and 1994, and only accelerated after theRound's conclusion in 1994 (Freund, 2000). In fact,thereisevidencethatrecentregionalandmultilateralinitiatives have actually advanced in tandem. Thisadds weight to the view that they can, and do,represent complementary aspects of an increasinglycomplexandsophisticatedglobaltradearchitecture–one in which bilateral, regional and multilateralagreements coexist and cohere in a kind of “multi-speed”or“variablegeometry”system.

2. TheevolutionofPTAs:stylizedfacts

Inordertoidentifyrelevantpatternsintheevolutionofthe PTA landscape, this section sets out to classifyPTAs according to a range of criteria. The mainpurposeoftheseclassificationswillbetocharacterizetrends in the creation of PTAs and changes in theirnature over time. By looking at several PTAcharacteristics together, it may also be possible toconsider the extent to which certain PTA attributesmay be linked with one another. Possible ways tocategorizePTAsincludeclassificationby:

• level of development (participation of developed ordevelopingcountriesonlyorofbothdevelopedanddevelopingcountries);

• geographicalcoverage(intra-orcross-regionalPTAs)within/acrossregions,e.g.Asia(East,West,Oceania),theAmericas(North,South,Central,Caribbean),Europe,MiddleEast,AfricaandtheCommonwealthofIndependentStates(CIS);

• type(bilateral,plurilateralPTAsorPTAsbetweenregionalblocs);

• degreeofmarketintegration(e.g.FTA,customsunion)andissuecoverage(e.g.goods,services,regulatoryissues).

CharacterizingPTAsinthiswayallowsustohighlightarangeofstylizedfacts.12TheWTO'sdatabaseonPTAs

istheprimarysourceofinformationforthisanalysis.13ItconsistsofallPTAsnotifiedtotheWTOandtheGATT(notificationsunderGATTArticleXXIV,EnablingClauseandGeneralAgreementonTradeinServicesArticleV),boththosethatarecurrentlyinforceandthosethatareinactive. The database also contains information onPTAsthathavenotyetbeennotifiedtotheWTO,butforwhichanearlyannouncementhasbeenmade.

WTO statistics on active PTAs, based on notificationobligations,tendtooverestimatethetotalnumberofPTAsfortworeasons.First,foraPTAthatincludesbothgoodsand services, the database contains two notifications –one for goods and another for services.14 Second, thedatabase counts accessions to existing PTAs as newnotifications.Hence,thenumberof“physical”agreementsequals the total number of notified active PTAs minusEconomic Integration Agreements (EIA) in services andaccessions to existing PTAs. Another weakness in thecurrentWTOdatabasestemsfromthenon-notificationofmorethan100activePTAsamongdevelopingcountries.Hence, for thepurposeof this analysis, thedatabase issupplementedbyinformationavailablefromotherpubliclyavailablesources.15

(a) Levelofdevelopment

PTA participation has accelerated over time andbecome more widespread. From the 1950s onwards,the number of active PTAs increased more or lesscontinuously to almost 70 in 1990. Thereafter, PTAactivity accelerated noticeably, with the number ofPTAsmorethandoublingoverthenextfiveyearsandmore than quadrupling until 2010 to reach close to300PTAspresentlyinforce(seeFigureB.1).Therisein theabsolutenumberofPTAs shown inFigureB.1,and itsaccelerationfromtheearly1990sonwards, isnot really surprising in light of the fact that anincreasing number of countries have turned towardsoutward-oriented policies and experienced strongeconomicgrowth.Thismultipliedthedemandfortradeagreementscomparedwithprevioustimeperiodsthatwere dominated by inward-looking developmentstrategiesandloweconomicperformance.

Bergstrand et al. (2010) show that countries withhighergrossdomesticproducts(GDPs)aremorelikelytoconcludetradeagreementsandthatincreasedPTAactivity reinforces the demand for further tradeagreements by outsiders. However, the surge in PTAactivity isnotmerelydrivenbythe“extensivemargin”,i.e.byagrowingnumberofcountriestakinganinterestinreciprocaltradeopening.AsimilarpictureemergeswhentheevolutioninthenumberofPTAspercountryis considered, i.e. the increase in PTA activity at the“intensivemargin”(seeFigureB.1a).

Only about two-thirds of the agreements currently inforcehavebeennotifiedtotheWTO.TheoverallpictureofhighlydynamicPTAactivityinrecenttimesdoesnotchange when only notified agreements are taken into


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account. The intensification of PTA activity since theearly 1990s becomes particularly apparent when theaveragenumberofPTAparticipantsperWTOmemberisconsidered.Thisnumberhasrisenfromanaverageofabout twoPTA tradingpartners in1990 toover12atthepresentdate(seeFigureB.1b).16Thevariousfactorsthat might prompt countries to create PTAs andquestions of timing are discussed in more detail inSection C, while examples of the specific reasonsleading to the conclusion of PTAs have been given inthehistoricaldiscussioninSectionB.1.

DevelopingcountrieshavecontributedinnosmallparttotherecenthikeinPTAactivity.TheirparticipationinPTAsevolvedfromcontinuousgrowthinthenumberofpreferentialarrangementswithdevelopedcountriestoan accelerating pattern of agreements betweendeveloping countries (South-South agreements) (seeFigures B.1 and B.1a). From the late 1970s, whenagreements between developed and developingcountries (North-South agreements) representedalmost 60 per cent of all PTAs in force and South-SouthPTAsbarely20percent,thesetwoshareshave

FigureB.1: Cumulative number of PtAs in force, 1950-2010, notified and non-notified PtAs, by country group


Num

ber o

f PTA

s

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

300

250

200

150

100

50

0

developing-developing developed-developing developed-developed

FigureB.1a: Average number of PtAs in force per country, 1950-2010, notified and non-notified PtAs, by country group

Note:InthisfigurethetotalnumberofPTAsisdividedbythepresentnumberofcountriesintherespectivegroups.


Num

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f PTA

s

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1.2

1.4

1

0.8

0.6

0.4

0.2

0

developing-developingdeveloped-developingdeveloped-developed


56

evolved in opposite directions, with South-South nowrepresentingtwo-thirdsofallPTAsinforceandNorth-Southaboutone-quarter.

From the1960sonwards, theshareofPTAsbetweendevelopedcountries(North-Northagreements)hoveredmoreor lessaround30percentbefore itscontinuousdeclinefromthemid-1980stobarely10percenttoday.However, Figure B.1a shows that on average adeveloped country still participates in more PTAs withother developed countries than with developingcountries.Thisgaphasbeenclosingsince the1990s,buttherewasastatisticalcorrectionin2004owingtotheenlargementbytennewmembersoftheEU.17

Thesenumbersarenotonlyareflectionoftheincreasingparticipationofdevelopingcountriesinworldtrade.Theyalso underscore the shift of interest of developingcountriesfrompreferentialtariffsprovidedonaunilateralbasisbydevelopedcountries,forinstanceinthecontextoftheGeneralizedSystemofPreferences(GSP),towardsSouth-South trade supported by preferential tradingrelationships.TheemergenceofSouth-Southintegrationmay also reflect its usefulness as a policy tool forindustrialization by facilitating the inclusion of least-developed countries (LDCs) into regional productionnetworks and hence into the export process. South-Southintegrationalsoprovidesameansofstrengtheningdeveloping countries’ bargaining power in multilateraltrade negotiations (Wignaraja et al., 2010a) and ofaddressing region-specific issues, such as transit,migrationandwater(WorldBank,2005).

Adifferent(andprobablymisleading)pictureemergesif only PTAs notified to the WTO are considered.Acharya et al. (2011) find the opposite trend, where

PTAs concluded among developing countries rose inthe1990s,onlytoseemtoslowoverthelasttenyears,while PTAs between developed and developingcountrieshaveshownamarkedincreaseoverthelastdecade. The reason for this is that about 100 activePTAsamongdevelopingcountries,mostofwhicharefairlyrecent,havenotbeennotifiedtotheWTO.

ThenumbersinFigureB.1arebasedontheyearwhena PTA entered into force, yet these agreements werenegotiatedandsignedsometimebeforehand.Delaysinentry into force occur because ratification or approvalby Parliament is required and can sometimes takelongerthaninitiallyplanned.Thisimpliesthatfullaccessto partner markets is postponed and economicconditions may change and affect the anticipatedbenefits at the time of signature. On average, once aPTAissigned,itentersintoforceinthefollowingyear,withnomajordifferencesindelaysbetweenagreementsinvolvingonlydeveloped,oronlydeveloping,countries.

Although an agreement may enter into force for allpartners at the same time, not all participatingcountries open their markets to the same extent andaccording to thesame timeschedule.Such transitiontimesmayallowcountriesandindustriestoundertakethenecessaryadjustmentmeasures.Havingtransitionperiods of varying length is common in developed-developing country PTAs, but also among developingcountries if levelsofdevelopmentdiffer substantially.For example, within AFTA, Brunei Darussalam,Indonesia, Malaysia, the Philippines, Singapore andThailand (ASEAN-6) have brought down more than99percentof theproducts in theCommonEffectivePreferentialTariffSchemeInclusionListtothe0-5percent tariff range. However, Cambodia, Lao People’s

FigureB.1b: Average number of PtA participants per Wto member, 1958-2010, notified PtAs

Note: These figures include both GATT/WTO member and non-member trading partners in the context of PTAs per current WTOmembers(153).


Num

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s

1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

12

14

10

8

6

4

2

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DemocraticRepublic,MyanmarandVietNamhavesofar moved about 80 per cent of their products intotheir respective Common Effective Preferential TariffScheme Inclusion Lists, of which about 66 per centhavetariffswithinthe0-5percenttariffband.

Viet Nam was given until 2006 to bring down therespectivetariffsofproductsintheInclusionListtonomore than5percentduties,LaosandMyanmaruntil2008andCambodiauntil2010.18Unfortunately,dataon country-specific transition periods until fullimplementationofcommitmentsarenotsystematicallycollectedinthePTAdatabasesmentionedabove.Dent(2006)notes,however,thatsuchtransitionperiodsonaverage have become shorter over time, fromaroundten years in the mid-1980s to less than four years adecadelater.

Thereisconsiderablediversityinthetotalandaveragenumbersofagreementswithinandacrossregions(seeTable B.1). Europe is leading in terms of absolutenumbersofPTAs forbothagreementswithin itsownregion and with other regions. By contrast, Africancountries, despite their relatively large numbers ofagreements within Africa and with other regions, donot even count one PTA per country either withinAfrica or across regions. In particular, their cross-regional country average is significantly lower thanalmost all other regions. For cross-regionalagreements,thenumbersinbothabsoluteandaverageterms are particularly high for North, South andCentralAmerica.AmongAsiancountries,despitetheirincreasing economic importance and regionalproduction structures, the average number of PTAmemberships is still well below the averages in the

Western Hemisphere for cross-regional agreementsand below, for instance, the CIS average for intra-regionalagreements.19

OnereasonforthisisthatcountriesinAsiahaveonlyrecentlybecomemoreactiveinsigningPTAs.Overthelasttenyears,countriesinEastandWestAsiaaswellasOceaniahaveparticipated inalmosthalf thePTAsconcluded over that period (more than, for instance,European and CIS countries, which participated inabout one-third of agreements), while theirparticipation in PTA activities in the 1990s barelyreached5percent (onlysixoutof106agreements).Thehighoverallactivity inthe1990swaslargelydueto thedissolutionof the formerSovietUnionand theestablishment of new trading relationships in Europeand within the CIS, which at that time accounted foralmost50percentofnewPTAs.

All WTO members (with the exception of Mongolia)belongtoatleastonePTA.MapB.1showsthelevelofparticipation in PTAs for countries/territories aroundtheglobe.TheEUparticipatesinthelargestnumberofagreements (30), followedbyChile (26),Mexico (21),EFTAmembers(between20and22),Singapore(19),Egypt(18)andTurkey(17).Otheremergingeconomies,such as Brazil (13), India (12) and China (10) are nottoo far behind. Asian countries, however, showincreasing PTA activity, with Singapore and Indiaconcluding a majority of their agreements, 17 out of19 and 10 out of 12 agreements, respectively since2000. The contrast is even starker for latecomers,such as China and Japan, all of whose agreementshaveenteredintoforcesince2000.

TableB.1: total and average number of PtAs in force, 2010, notified and non-notified PtAs, by region, regional type and country group

Africa(58)

CIS(12)

Europe(40)

SouthAmerica

(12)

CentralAmerica

(7)

Caribbean(24)

WestAsia(8)

MiddleEast(13)

Oceania(30)

EastAsia(19)

NorthAmerica

(5)

Intra-regional

Total 24 29 36 13 7 0 7 7 5 17 1

Avg/ country

0.4 2.4 0.9 1.1 1.0 0.0 0.9 0.5 0.2 0.9 0.2

Cross-regional

Total 31 4 42 52 34 19 14 30 10 34 37

Avg/ country

0.5 0.3 1.1 4.3 4.9 0.8 1.8 2.3 0.3 1.8 7.4

Developed-Developed

Total 0 0 21 0 0 0 0 0 2 1 2

Avg/ country

0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.4

Developed-Developing

Total 12 2 41 11 3 3 1 15 11 22 18

Avg/ country

0.2 0.2 1.0 0.9 0.4 0.1 0.1 1.2 0.4 1.2 3.6

Developing-Developing

Total 43 31 16 54 38 16 20 22 2 28 18

Avg/ country

0.7 2.6 0.4 4.5 5.4 0.7 2.5 1.7 0.1 1.5 3.6

Note:Thenumberofcountriesconsideredperregionisgiveninbrackets.



58

IncreasedPTAactivity,however,isnotjustfoundintheAsianregion.Furtherafield,theUnitedStateshasalsobecomemoreactive,concluding9ofits11agreementssince 2000. In this regard, the numbers of recentlysignedPTAs(butnotyetinforce)andofthosecurrentlyundernegotiationarequitetellingaswell.20Despiteitsdominant position among existing PTAs, the EUcontinues towiden its rangeofpartners,with another17 agreements signed or currently under negotiation.Traditionally active countries, such as Singapore, theUnited States and Chile, continue to negotiate newPTAs(nine,eightandsixrespectivelyundernegotiationor signed). In addition, a range of “newcomers” to thePTA scene are currently engaged in a substantialnumber of negotiations. This is especially true for theGulf Cooperation Council countries (15 agreements,withtheUnitedArabEmiratesalsocurrentlynegotiating

an agreement with the United States), but also forCanada, China, India and the Republic of Korea (nineeach),Australia(eight)andThailand(six).

(b) Geographicalcoverage

PTAactivityhastranscendedregionalboundaries.Theterm “regional trade agreements” (RTAs) and“preferentialtradeagreements”(PTAs)areoftenusedinterchangeably in the literature, and the rise of“regionalism” is often referred to in order to describethe spread in PTA activity discussed in the previoussubsection. However, one half of PTAs currently inforce are not strictly “regional”, in that they includecountriesfromothergeographicalareas,accordingtothe regional definitions commonly employed in theWTOcontext(seeFigureB.2).Thisdevelopment is in

FigureB.2: Cumulative number of intra- and cross-regional PtAs in force, 1950-2010, notifi ed and non-notifi ed PtAs


Num

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f PTA

s

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

300

250

200

150

100

50

0

Cross-regional Intra-regional

MapB.1: membership in PtAs in force, 2010, notifi ed and non-notifi ed PtAs, by country


0 1 to 4 5 to 9 10 to 19 20 or more


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TableB.2: “network” of PtAs in force, 2010, notified and non-notified PtAs, by region

Africa CIS EuropeSouth

AmericaCentralAmerica

CaribbeanWestAsia

MiddleEast

OceaniaEastAsia

NorthAmerica

Africa 24 - - - - - - - - - -

CIS 0 29 - - - - - - - - -

Europe 16 4 36 - - - - - - - -

SouthAmerica 3 0 6 13 - - - - - - -

CentralAmerica 1 0 2 19 7 - - - - - -

Caribbean 2 0 3 16 11 0 - - - - -

WestAsia 4 1 3 4 1 1 7 - - - -

MiddleEast 13 1 12 3 1 1 4 7 - - -

Oceania 1 0 1 3 0 1 0 0 5 - -

EastAsia 3 0 5 8 6 1 9 3 7 17 -

NorthAmerica 4 0 6 16 9 4 2 7 2 5 1


TableB.3: Intra- and cross-regional PtAs in force, 2010, notified and non-notified PtAs, by region and time period

Africa CIS EuropeSouth

AmericaCentralAmerica

CaribbeanWestAsia

MiddleEast

OceaniaEastAsia

NorthAmerica

1950-59

Intra-regional

2 0 2 0 0 0 0 0 0 0 0

Cross-regional

0 0 0 0 0 0 0 0 0 0 0

1960-69

Intra-regional

1 0 1 0 1 0 0 0 0 0 0

Cross-regional

0 0 0 0 0 0 0 0 0 0 0

1970-79

Intra-regional

1 0 5 0 1 0 0 0 1 0 0

Cross-regional

2 0 3 3 1 2 2 2 1 2 2

1980-89

Intra-regional

5 0 1 1 0 0 0 0 2 0 0

Cross-regional

1 0 1 11 9 4 1 2 0 1 6

1990-99

Intra-regional

12 25 10 9 0 0 2 2 1 2 1

Cross-regional

11 1 12 10 8 3 1 14 0 0 8

2000-10

Intra-regional

3 4 17 3 5 0 5 5 1 15 0

Cross-regional

17 3 26 28 16 10 10 12 9 31 21


marked contrast to just over ten years ago, whenactivity within a region was dominant. The trendtowardsabroadergeographicalscopeofPTAsisevenmore pronounced for those PTAs that are currentlyunder negotiation or have recently been signed (butarenotyetinforce),practicallyallofwhicharecross-regional. The advent of cross-regional PTAs may

reflect the fact that several prospects of agreementswithin a region have already been exhausted(Fiorentinoetal.,2007).

Table B.2 shows the number of agreements within aregion and across regions for each regional group andpartnergroup.TableB.3 indicateshowthenumbersfor


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eachregionhavedevelopedovertime.WhileEuropehasastrongfocuson intra-regionalagreements, ithasalsofollowed the recent trend towards more cross-regionalintegration,notablywithAfricaand theMiddleEast.Bycontrast, CIS countries have so far confined their PTAactivities to other countries in the CIS region. Similarly,African countries feature a considerable number ofagreements with other African countries, but haveengaged in only a few PTAs with countries in theAmericasandAsia.Overtime,however,itisinterestingtonote that while African countries in the 1990s wereactiveinregardtoPTAswithinAfrica,thereverseistrueinthelastdecade.TheAfricancountriesbelongingtotheAfrica, Caribbean and Pacific (ACP) grouping havesigned a series of Economic Partnership Agreements(EPAs)withtheEU.TheEPAsareakeyelementoftheCotonouAgreement,whichisthelatestagreementinthehistory of ACP-EU development cooperation. Perhapsnot surprisingly, many cross-regional agreements arelocated in the Western Hemisphere, involving North,CentralandSouthAmericaaswellas theCaribbean invarious constellations. Also, the Western Hemisphere'scross-regional activity has received a major boost overthepasttenyears.

The situation is somewhat different in Asia, wheredespitesomeactivitywithinAsiaandacrossregions,thepictureismoregeographicallydispersedandbothtypesof activities took off only after 2000. For instance, inEast Asia the number of PTAs with countries in WestAsia and Oceania are quite similar to the number ofagreementswithCaribbean,SouthandCentralAmericanpartners.AswillbediscussedfurtherinSectionC,thesedifferences in the timing and orientation of PTAs aredriven by a multitude of possible explanations. It isnoteworthy that, for the moment, few PTAs involve

countriesfrommorethantwogeographicalregions,suchas the recent PTA between the United States, CentralAmerican countries (within the Central American FreeTrade Agreement) and the Dominican Republic in theCaribbean or the Trans-Pacific Strategic EconomicPartnership Agreement which encompasses countriesfromEastAsia,OceaniaandSouthAmerica,aswellascountriesfromotherregionscurrentlynegotiatingtojoin.

(c) TypesofPTAs

PTAs have seen opposing trends towards furtherrationalization on the one hand and a sprawling web ofnew bilateral and overlapping deals on the other. PTAscan be negotiated between two countries (bilateral),among several countries (plurilateral) or among one orseveral PTAs that have already been formed. Currently,twotrendscanbeobserved.Ontheonehand,therearegrowinginstancesofmultiplebilateralagreementsbeingconsolidatedintoaplurilateralagreementorofanexistingregionalblocnegotiatingonbehalfofitsmembers.

FigureB.3showsthat,apartfromthe1970s,accessionstoexistingPTAsandnewdealsamongPTAshavebeenparticularlyprominent inrecentyears.Examplesare,ofcourse, successive EU enlargements, but also theconsolidation of bilateral pacts between EasternEuropean countries in the context of the CentralEuropeanFreeTradeArea(CEFTA)ortheconclusionofa PTA between MERCOSUR and the AndeanCommunityintheLatinAmericanIntegrationAgreementframework.21Acharyaetal.(2011)documentthismovetowards further consolidation by contrasting thecumulative number of active PTAs, which dropped in2005 and 2007 following EU enlargement, with thespike in the number of notified PTAs that became

FigureB.3: Cumulative number of bilateral PtAs and types of plurilateral PtAs in force, 1950-2010, notified and non-notified PtAs

Note:“Bilateral”PTAsconsistoftwopartiesonly,“plurilateralagreements”ofthreeormore.Thecategory“PTA-PTA/country”denotesPTAs,whereanexistingPTAhasengagedinanagreementwithanothercountry,includingthroughaccession,orwithanotherexistingPTA.


Num

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f PTA

s

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

300

250

200

150

100

50

0

PTA-PTA/country Plurilateral Bilateral


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inactive in those years. From Table B.4 it is clear thatfurther PTA formation by existing PTAs has mainlyinvolved developed countries only so far, or bothdevelopedanddevelopingcountries,buthasbeen lesscommonamong justdevelopingcountries,especially inrelativetermscomparedwithbilateralagreements.22

On the other hand, there is a parallel trend beyondintegration within a region towards a multitude ofbilateraldealsacrosstheglobe.TableB.4revealsthatcross-regionalPTAsaretoalargeextentofabilateralnature,whileplurilateraldealsaremuchmorecommonwithina region. In fact,FiguresB.2andB.3 illustratethatthedoublingofcross-regionalPTAsoverthepastdecadehascoincidedwithasimilarlystrong increaseinthenumberofbilateraldeals.AsshowninTableB.4,many of these bilateral deals have been betweendeveloping countries, but large developed countries,such as the United States, have also been active inconcluding bilateral PTAs with a range of countries,suchasAustralia,Bahrain,MoroccoandSingapore.

Similarly, in East Asia, it has been both small andmedium-sized countries, such as Singapore andThailand, and larger ones, such as Japan (and morerecentlyChina), thathaveplayedacentral role in thismove towards increasing bilateralism (Aggarwal andKoo,2005).OnepossibleconclusionisthattherecentproliferationofbilateralPTAsdenotesashiftfromthetraditional concept of regional integration amongneighbouring countries to partnerships driven bystrategic (political and economic) considerations thatare not necessarily related to regional dynamics.23 Itmayalsoreflectthetechnicalcomplexityofnegotiatingwithagroupofcountriesonabroadrangeof issues,such as factor mobility, investment, intellectualpropertyrightsandgovernmentprocurement.

Finally, asnotedabove, thedisproportionate increasein the number of bilateral PTAs may also reflect thefact that opportunities for region-wide plurilateralPTAs are fewer given the past waves of regionalism(Fiorentino et al., 2007). An important side effect ofthesedevelopmentsistheincreasedfragmentationoftrade relations related to countries' membership inmultiple, sometimes overlapping PTAs. De la Rocha(2003)documents,forinstance,thatmostcountriesinEastern and Southern Africa belong to at least two

regionalgroupsandthat,inaddition,manyofthemareinvolved in overlapping bilateral trade and investmentagreements. For example, the author cites variousmembers of SADC that entertain up to ten separatebilateralagreementswithotherSADCcountries.

(d) Degreeofmarketintegration

ThedegreeofmarketintegrationmostlystaysattheFTAlevelandanumberofproductscontinuetobeexcludedfrompreferentialaccess.Nevertheless, thecoverageofPTAsintermsofissueareashaswidenedanddeepenedover time. The historical overview in Section B.1 notedtheoriginalintentofthedraftersoftheGATTtomakeanexception from non-discrimination for customs unions(CUs)ratherthanforFTAsthatultimatelywerecoveredaswellbyGATTArticleXXIV.Overtime,thenumberofCUshascertainlyproventobeminorcomparedwiththeproliferation of FTAs. Figure B.4 shows that currentlyFTAs(notcountingpartialscopeagreementsandmereservices agreements) account for three-quarters of allPTAsinforce.24Amongotherthings,countriesmayfindit less desirable to form CUs as these require theestablishment of a common external tariff andharmonizationofexternaltradepolicies,andhenceimplyamuchhigherdegreeofpolicycoordinationandalossofautonomy over national commercial policies (Fiorentinoetal.,2007).

Although,underGATTArticleXXIV:8,dutiesaretobeeliminated on substantially all the trade betweenparticipants inbothFTAsandCUs, it iscommon that“sensitive”productsareexcludedfromconcessions.25In a study covering 15 bilateral agreements betweenfourmajoreconomies–Canada,theEuropeanUnion,JapanandtheUnitedStates–andtheirmajortradingpartners,Damuri (2009)showsthatabout7percentoftarifflinesinthesample,comprisingaround11,000products,areclassifiedas “productsexcluded”,eithertemporarily or permanently.26 These products areconcentratedinlessthan15percentofthetarifflinescovered in the negotiations and mainly fall in theagricultureandfoodsectors.27

Damuri also highlights several factors related to thepattern of product exclusions, confirming theunderlyingpoliticaleconomymotivationofmaintainingheightened protection for certain industries. As

TableB.4: number of bilateral PtAs and types of plurilateral PtAs in force, 2010, notified and non-notified PtAs, by country group and regional type

Bilateral PlurilateralPlurilateral; at least one

party is a PtA

Developed-Developed 6 9 8

Developed-Developing 29 6 41

Developing-Developing 135 36 18

Intra-regional 81 39 26

Cross-regional 89 12 41



62

expected,hefindsthatthehighertheMFNtariff rateof reportingcountries, the less likely it is to includeaproduct in a PTA. Moreover, the higher the revealedcomparative advantage (RCA) of partner countries,which measures their capacity to export to reportingcountries’markets,thelesslikelyaproductisincludedin a PTA. By the same token, when products arealreadyheavilytradedbetweencountriesnegotiatinga

PTA (i.e. when import values are high), inclusion ismorelikely.

Most recent PTAs go beyond the traditional tariff-cutting exercises and cover, for example, services,investment, intellectual property, technical barriers totradeanddisputesettlement.Forinstance,aboutone-third of PTAs in force today contain services

FigureB.5: Cumulative number of PtAs, 1950-2010, notified and non-notified PtAs, by scope of coverage


Num

ber o

f PTA

s

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

300

250

200

150

100

50

0

Goods Goods and services Services

FigureB.4: type of PtAs in force, 2010, notified and non-notified PtAs

Note:Asexplainedintheintroduction,theterm“preferentialtradeagreement”(PTA)isusedinthisreporttodenotereciprocalpreferentialagreementsingeneral.Forthepurposesofthisfigure,wefollowtheclassificationinAcharyaetal.(2011):A“freetradeagreement”(FTA)denotesanagreementbetweentwoormoreparties inwhichtariffsandothertradebarriersareeliminatedonmostorall tradeandeachpartymaintainsitsowntariffstructurevis-à-visthirdparties.A“customsunion”(CU)isanagreementbetweentwoormorepartiesinwhichtariffsandothertradebarriersareeliminatedonmostoralltradeand,inaddition,thepartiesadoptacommoncommercialpolicytowardsthirdpartieswhichincludestheestablishmentofacommonexternaltariff.Theterm“partialscopeagreement"(PSA)isemployedtodescribeanagreementbetweentwoormorepartiesinwhichthepartiesoffereachotherconcessionsonaselectednumberofproductsorsectors.Economicintegrationagreements(EIA)refertoagreementsontradeinservicesthroughwhichtwoormorepartiesofferpreferentialmarketaccesstoeachother.


PSA & EIA 0.4% CU 5.7%

CU & EIA 2.3%

EIA 0.4%

FTA 44.1%

PSA 18.0%

FTA & EIA 29.1%

Note: As explained in the introduction, the term "preferential trade agreement" (PTA) is used in this Report to denote reciprocal preferential agreements in general.For the purposes of this figure, we follow the classification in Acharya et al. (2011):A "free trade agreement" (FTA) denotes an agreement between two or more parties in which tariffs and other trade barriers are eliminated on most or all trade and each party maintains its own tariff structure vis-à-vis third parties. A "customs union" (CU) is an agreement between two or more parties in which tariffs and other trade barriers are eliminated on most or all trade and, in addition, the parties adopt a common commercial policy towards third parties which includes the establishment of a common external tariff. The term "partial scope agreement"(PSA) is employed to describe an agreement between two or more parties in which the parties offer each other concessions on a selected number of products or sectors. Economic integration agreements (EIA) refer to agreements on trade in services through which two or more parties offer preferential market access to each other.Source: WTO Secretariat


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commitments, and this development has acceleratedin recent times (see Figure B.5).28 The top 25exporters and importers of services (on the basis of2008balanceofpaymentstatistics)areinvolvedinatleastoneservicesPTA.TheWTOmembersthathaveengagedinmostservicesPTAsincludeChile,Mexico,theUnitedStates,SingaporeandJapan.

Almost all services PTAs notified so far involveeconomies in Asia-Pacific, Europe and the Americas.Only a fewcountries inAfrica and theMiddleEast arepartiestosuchagreements(i.e.Morocco,Jordan,Oman,Bahrain,andallviaPTAswiththeUnitedStates)althoughmanyofthemarecurrentlyinvolvedinnegotiatingtradeagreements that may cover services. While largeeconomies, such as Brazil, China, the EU, India, Japanand the United States, have been involved in servicesPTAs,theyhavenotyetsignedsuchagreementsamongthemselves.29 These factsareborneoutby thefigurescontainedinTableB.5,whichindicatethatamajorityofPTAs between developed and developing countriescontaincommitmentsonservices,unlikePTAsbetweendevelopedcountriesorbetweendevelopingcountries.

A larger share of bilateral agreements compared withplurilateralonescontaincommitmentsonservices.Thisis perhaps a reflection of more complex issues beingdealtwithonaone-to-onebasis,andofthefactthattheprofusion of bilateral agreements, together with theincreased importance of services trade, are relativelyrecent phenomena. The coverage of services isparticularly conspicuous for cross-regional PTAs (seeTableB.5).AnincreasingnumberofbilateralPTAsacrosstheglobe,coveringmorethantraditionaltariffreductionsandservicesinparticular,maybeindicativeofthemorestrategicmotivationsofrecentPTAformation,notablyinthe context of international production networks (to befurtherdiscussedinSectionD).

New provisions on the enforcement of domestic labourand environmental lawshave also been incorporated incertain PTAs. NAFTA has placed environmentalprotectiononapedestalbyconcludingthatintheeventofan inconsistencywith itsprovisions, tradeobligations

specifiedunderdifferentenvironmentalandconservationagreementswouldprevail.TheEastAfricaCommunity,totakeanotherexample,seeksto promotethesustainableutilization of natural resources, demonstrating a non-legallybindingapproachtodealingwiththeseissues.

InmorerecentPTAs,therearecommitmentstocooperateacrossanevenwidersetofpolicyareas,suchaspovertyalleviation, rural development and tourism (Whalley,2008). Significantly, most of the “new” policy areas orregulatoryframeworksfound inPTAsarenotaddressedmultilaterally(anissuethatwillbediscussedinmoredetailinSectionD).Thismoveintonewerareasnotcoveredbycurrent WTO rules is reflected in the language used todescribe these PTAs. For example, the recent Japan-Singapore agreement is termed a “New Age EconomicPartnership” agreement, while the China-ASEANagreementisreferredtoasa“FrameworkAgreementonComprehensiveEconomicCooperation”(Whalley,2008).

3. TradeflowsrelatedtoPTAs

The reduction of tariff rates over time – throughmultilateral, preferential and unilateral processes – hasreduced the scope for securing meaningful tradepreferences. That this has coincided with a substantialincrease in the number of active preferential tradeagreements suggests that countries may have reasonsfor entering into these agreements beyond securingaccess to vital export markets. The following sectionlooksatthemagnitude,directionandevolutionofglobaltradeflowsinordertoshedsomelightonthisissue,andmoregenerallytodeterminetheimpactoftheexpansioninPTAs in recentyears.StatisticsonPTA-related tradeflowscanrevealanumberofimportantfacts,including:i)the total valueofworldmerchandise trade takingplaceamongPTAmembers;andii)thedegreetowhichtradehasbecomemoreorlessgeographicallyconcentratedasregionaltradeagreementshaveproliferated.

SectionB.3(a)addresses thefirstof thesequestionsby summarizing all available data on trade flowsbetweenpartiestotradeagreements,andbyprovidingabreakdownoftheseflowsbytypeofagreementand

Table B.5: number of goods and services PtAs in force, 2010, notified and non-notified PtAs, by country group, level of participation and regional type

Goods Goods and services services

Developed-Developed 13 9 1

Developed-Developing 36 40 0

Developing-Developing 145 41 1

Bilateral 104 64 0

Plurilateral 38 11 2

Plurilateral;atleast1partyisaPTA

52 15 0

Intra-regional 110 33 2

Cross-regional 84 57 0



64

product group. Focusing on total merchandise tradebetween PTA members significantly overstates theamount of world trade that is conducted on apreferential basis, since trade agreements generallydo not apply to all goods, and existing tradepreferencesmaynotbefullyutilized.However,figureson total intra-PTA trade do have certain advantages.Tobeginwith,theygiveamorecompletepictureofthetradingrelationshipsbetweenPTAmembers,which isparticularly importantwhenassessing thenotion thatcountriesmaybelessmotivatedbythedesiretoobtainpreferential market access through PTAs than theywere in the past. Also, the total value of intra-PTAtradecanbeseenasanupperboundestimateoftheamount of trade conducted on a preferential basis.SectionB.4providesadetailedestimateoftheamountof international trade receiving preferential tarifftreatment,whichweshallseeisquitesmall.

The second question – whether trade has becomemoreorlessgeographicallyconcentrated–istackledin Section B.3(b), using WTO statistics on tradebetween geographical regions. One compellingexplanation for the explosion in the number of tradeagreementssince1990isthattheseagreementsmayprovideaninstitutionalframeworkforthecreationandmaintenance of international supply chains, many ofwhichareregionalinnature.Ifthisisthecase,dataonthemagnitudeanddirectionoftradeflowswithinandbetween geographic regions could provide anindicationofwhethertradeagreementsarerelatedtothedevelopmentofglobalsupplychains.

ThedatainSectionB.3mostlypertaintomerchandisetraderatherthantotradeinservices,duetoalackofsufficientlydetailedinformationonbilateraltradeflowsforthelatter.Suchdatathatareavailablesuggestthatintra-PTAtradeinservicesisrelativelysmallcomparedwith trade in goods, and extremely small comparedwithtotaltradeingoodsandservices.SomeexamplesofservicestradeamonglargePTApartnersaregiventowards the end of Section B.3(a), but otherwise thedata in this part of the report deal exclusively withmerchandisetrade.

(a) WhatisthevalueofworldtradebetweenPTAmembers?

In this subsection, we estimate total world tradebetweenPTAmembers in1990and2008,aswell astheshareoftradewithinPTAs(intra-PTAtrade)inworldtrade. Intra-PTA tradeflowsarecalculatedas thesumof bilateral merchandise trade between PTA membersforallavailablereportersintheUNComtradedatabase,whiletotalworldtradeisapproximatedbythesumofallreporters inComtrade.Wefind that thedollarvalueoftrade between members of preferential tradeagreements has indeed grown faster than the worldaveragesince1990,andasaresulttheshareofintra-PTAtradeinworldtradehasincreasedfrom18percentin1990to35percentin2008(seeFigureB.6).30

The value of world trade between PTA members, asmeasuredbyexports,increasedfromUS$537billionin1990 toUS$ 4.0 trillion in 2008 (see Tables B.6 andB.7). The contribution of different types of tradeagreements to trade between PTA members has alsochanged as the landscape of preferential agreementshas evolved. In 1990, trade between parties toplurilateralagreementsmadeuparound10percentofintra-PTA trade in1990,but thisshare rose to50percentby2008.Oneofthemainreasonsfortheincreasedimportance of plurilateral agreements was theestablishment in 1994 of NAFTA, which replaced thebilateralCanada-USFreeTradeAgreementandwhosethreemembers(Canada,MexicoandtheUnitedStates)comprise the second-largest regional trade bloc byvalueofexportsaftertheEuropeanUnion.

Values and shares for imports are also shown inTablesB.6andB.7,andthesefiguresareverysimilartotheircounterpartsontheexportside.

Inadditiontototalmerchandisetradevalues,TableB.7also shows trade between PTA members inmanufactures, as well as in a category called “partsand components”. Trade in parts and components isoftenusedasanindicatorormeasureofinternationalproductionnetworks(theroleofthesenetworksintheestablishment of PTAs is discussed further inSectionsCandD).Manufacturesaredefinedhereasthe sum of sections 5, 6, 7 and 8 minus division 68and group 891 in the third revision of the StandardInternational Trade Classification (SITC Rev.3), inaccordance with the definition used in the WTO’sInternational Trade Statistics publication (World TradeOrganization (WTO), 2010). There is no broadly

Figure B.6: share of intra-PtA trade in world merchandise exports, 1990-2008 (Percentage)

Note:WorldisestimatedasthesumofallavailablereportersinComtrade.

Source:UNComtradedatabase.

Intra-PTA share in world including EC/EU

Intra-PTA share in world excluding EC/EU

60

50

40

30

20

10

0

1990 2008

28.0

17.8

50.8

34.5


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accepteddefinitionof parts andcomponents thatwecanappeal to, but for thepurposesof this reportwehavedefineditastheSITCRev.3equivalentofcodes42 and 53 in the Broad Economic Categories (BEC)classification, supplemented with unfinished textileproductsindivision65oftheSITCclassification.

Manufacturesrepresented65percentofmerchandisetrade among PTA members in 2008 and around64 per cent of intra-trade between parties toplurilateral trade agreements. The share ofmanufactures in total merchandise trade of allreportingcountriesinComtrade(aproxyfortheworld)wasonlyslightlyhigherat65percent.Thesharesofparts and components in total merchandise remainbetween17and18percentregardlessofthetypeoftrade agreement. Overall, it appears that productshares do not change much depending on whetheragreements are plurilateral, bilateral between twocountries,orbilateralinvolvingaPTA.

Although there is little difference in product sharesbased on the membership composition of tradeagreements,wedoseesignificant variation inproduct

shares and intra-PTA trade shares when we look atindividual agreements. Appendix Table 1 (see theStatistical appendix) shows exports and imports ofselectedplurilateralPTAsin2008brokendownbythetwoproductgroupsusedinTableB.7(i.e.manufactures,parts and components) as well as by origin anddestination: tradewithin thePTA(intra-PTAtrade)andtradeoutsidethePTA(extra-PTAtrade).Someproductsmakeupamuchlarger(orsmaller)percentageofintra-PTA trade than extra-PTA trade. Intra-PTA trade mayrepresentarelativelylargeorsmallpartofoveralltradeinparticularclassesofgoods.

Asanexampleofhowtoreadthetable,weshallexaminethe case of the ANDEAN Community (comprising thePlurinational State of Bolivia, Colombia, Ecuador andPeru).Wecanobservethatintra-PTAtradeplaysasmallrole in total ANDEAN trade on both the export andimport sides. Only 8 per cent of ANDEAN members'merchandise imports and 7 per cent of their exportseither originate in or are destined for other ANDEANcountries. Equivalently, we could say that extra-PTAsharesare92percentfor importsand93percentforexports, which amounts to the same thing. We can

TableB.6: World merchandise trade between PtAs, 1990 (Billiondollarsandpercentage)

valuesshare in total world preferential trade

share in total world merchandise trade

(Billion dollars) (Percentage) (Percentage)

exports Imports exports Imports exports Imports

Including intra-european union (12)

Totalworldplurilateraltrade 484 489 50 51 14 14

of which:

EC(12)intra-trade 429 429 44 45 12 12

Restofworld 55 60 6 6 2 2

Totalworldbilateraltrade 482 472 50 49 14 13

of which:

Canada–UnitedStates 178 169 18 18 5 5

EC(12)–EFTAcountries 143 145 15 15 4 4

Restofworld 161 158 17 16 5 4

Totalworldpreferentialtrade 966 960 100 100 28 27

Totalworldmerchandisetrade 3,449 3,550 - - 100 100

excluding intra-european union (12)

Totalworldplurilateraltrade 55 60 10 11 2 2

Totalworldbilateraltrade 482 472 90 89 16 15

of which:

Canada–UnitedStates 178 169 33 32 6 5

EC(12)–EFTAcountries 143 145 27 27 5 5

Restofworld 161 158 30 30 5 5

Totalworldpreferentialtrade 537 532 100 100 18 17

excludingEC(12)

Totalworldmerchandisetrade 3,020 3,121 - - 100 100

excludingEC(12)



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TableB.7: World merchandise trade between PtAs, 2008 (Billiondollarsandpercentage)

valueshare in all

commoditiesshare in total

PtA tradeshare in PtAs excl. eu (27)

share in all reporting countriesa

share in all reporters excl.

eu (27)a

(Billion dollars) (Percentage) (Percentage) (Percentage) (Percentage) (Percentage)

export Import export Import export Import export Import export Import export Import

Plurilateral agreements incl. eu (27)

Allcommodities 5,892 5,780 100 100 75 74 - - 38 36 - -

Manufactures 4,138 3,968 70 69 76 75 - - 40 38 - -

Partsandcomponents 988 1,002 17 17 73 73 - - 37 38 - -

Plurilaterals excl. eu (27)

Allcommodities 2,017 2,125 100 100 - - 50 51 - - 17 17

Manufactures 1,286 1,306 64 61 - - 49 49 - - 17 17

Partsandcomponents 368 394 18 19 - - 51 51 - - 18 19

Bilateral agreements

Allcommodities 2,005 2,083 100 100 25 26 50 49 13 13 17 17

Manufactures 1,334 1,348 67 65 24 25 51 51 13 13 18 17

Partsandcomponents 359 371 18 18 27 27 49 49 14 14 18 18

Bilaterals with one partnera

PtA

Allcommodities 1,565 1,616 100 100 20 21 39 38 10 10 13 13

Manufactures 1,057 1,075 67 67 19 20 40 41 10 10 14 14


other bilaterals

Allcommodities 439 467 100 100 6 6 11 11 3 3 4 4

Manufactures 277 273 63 58 5 5 11 10 3 3 4 4


total trade between PtAs incl. eu (27)

Allcommodities 7,897 7,863 100 100 100 100 - - 51 49 - -

Manufactures 5,471 5,316 69 68 100 100 - - 52 51 - -

Partsandcomponents 1,347 1,373 17 17 100 100 - - 51 52 - -

total trade between PtAs excl. eu (27)

Allcommodities 4,022 4,208 100 100 - - 100 100 - - 34 34

Manufactures 2,620 2,655 65 63 - - 100 100 - - 34 34

Partsandcomponents 727 765 18 18 - - 100 100 - - 36 37

total of all reporting countries incl. eu (27)a

Allcommodities 15,549 15,935 100 100 - - - - 100 100 - -

Manufactures 10,446 10,402 67 65 - - - - 100 100 - -

Partsandcomponents 2,656 2,650 17 17 - - - - 100 100 - -

All reporters excl. eu (27)a

Allcommodities 11,674 12,280 100 100 - - - - - - 100 100

Manufactures 7,595 7,740 65 63 - - - - - - 100 100

Partsandcomponents 2,035 2,042 17 17 - - - - - - 100 100

a Sumof all available reporters in theUNComtradedatabase, equal to roughly97%ofworld trade.WTO’sestimates for totalworldexportsandimportsin2008fromInternational Trade Statistics 2010are$16.1trillionand$16.5trillionrespectively,includingintra-EUtrade.Totalexportsandimportsin2008excludingintra-EUtradeareequalto12.1trillionand12.5trillion,respectively.



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also see that the intra-PTA share in exports ofmanufactures ishigher than that for totalmerchandiseat 20 per cent, which means that 20 per cent ofANDEAN countries' exports of manufactures go toother ANDEAN countries. One interesting feature ofANDEAN's trade is that the share of manufactures intotalexportsismuchlargerforintra-PTAexports(52percent)thanforextra-PTAexports(16percent).

TheEuropeanUnionisnotableforhavingthehighestintra-PTAshareandthelowestextra-PTAshareofanyregionaltradeagreement.Theshareofintra-EUtradein total merchandise exports in 2008 was equal to67percent,compared65percent formanufacturesand 63 per cent for parts and components. Bycomparison, the equivalent shares for NAFTA were49 per cent for total merchandise, 48 per cent formanufactures, and 46 per cent for parts andcomponents. The EU also has the second highestshareofmanufacturesinbothitsintra-exports(74percent,behindtheAsiaPacificTradeAgreement(APTA)with82percent)andextra-exports(81percent,againbehindAPTAwith90percent).

TheASEANfreetradearearecordedoneofthehighersharesofintra-PTAtradeintotalexportsofpartsandcomponents with 28 per cent. ASEAN was tied withAPTAfor thehighestshareofpartsandcomponentsin total merchandise exports, again with a share of28percent.

Appendix tables 2 to 6 in the Statistical Appendixprovidemoreinformationonintra-tradewithinselectedPTAs, including intra-PTAshares in totalexportsandimportsformembercountriesbrokendownbyproduct.Insomecases,notallmembersofthePTAareshownin the table, but unless otherwise indicated the totalalways refers to the sum of all available reporters inComtrade. Years are chosen to maximize countrycoverage and if possible to show some of the periodbefore agreements came into force. Intra-PTA tradeshares for different products and countries haveclearlychangedovertime.Forexample,withinASEAN,Thailand's exports of agricultural products areincreasinglydestined forASEAN tradingpartners, asthe share of intra-trade with these partners in thecountry'stotalagriculturalproductsexportsrosefrom9 per cent in 1992 to 14 per cent in 2000 andeventually to 19 per cent in 2008. Thailand has alsoseen its intra-PTA share of automotive productsexportsrisesharply,roughlydoublingfrom15percentin2000to30percentin2009.

Appendix tables 2 to 6 also show rising intra-PTAtradesharesforNAFTAcountriesbetween1990and2000, followed by declining shares from 2000 to2009. Surprisingly, the decline in intra-PTA tradeapplies to all three member countries and to mostproductsonboththeexportandimportsides,withtheexception of Mexican fuels and mining productsexports, which increased from 78 per cent to 82 per

cent.Despiteitsdecliningintra-PTAtradeshares,theoverallshareofintra-PTAtradeintotalNAFTAexportsremainsrelativelyhighcomparedwithotherPTAs(48percentforexports,33percentforimports).

The intra-PTA trade share of MERCOSUR for totalmerchandisehasalsodeclinedrecently,andcurrentlystands below its 1995 level on both the export andimport sides. All member countries have seen theirshare of exports to MERCOSUR partners in totalexports decline over time, while Argentina, Paraguayand Uruguay have increased their intra-PTA tradesharesontheimportside.

As a final example, despite the low intra-PTA tradeshares for total merchandise exports of Africa, intra-PTA trade within COMESA as a percentage of totalexports is quite high in certain categories of goods,including automotive products (41 per cent in 2009),partsandcomponents(39percent)andmanufactures(28percent).

Thefactthatagiventradeagreementhasahighoralow share of intra-PTA trade in its total exports mayhavelittlesignificanceifitsoverallweightinworldPTAtrade is small. Figure B.7 shows shares of selectedPTAs in world intra-PTA exports, both including andexcludingtradewithintheEU.TheEUmakesupnearlyhalf (49 per cent) of world intra-PTA exports, whentrade between its member countries is considered,followedbyNAFTA(13percent),ASEAN(3percent),APTA (3 per cent), the CIS (2 per cent) andMERCOSUR(1percent).TheEUalso leadsallothercountriesandPTAsinthetotalvalueof itstradewithbilateralpartners,whichcollectivelymakesup12percent of world intra-PTA trade (6 per cent for EFTAcountriesalone).Bycomparison,China'sbilateraltradewithASEANcountriesonlyaccountsfor3percentofworld intra-PTA trade, while US bilateral agreementsmakeupjust2percentoftheworldtotal.

The overwhelming weight of the European Union inworldexportsbetweenPTAmembersprovidesanotherargument for excluding trade within the EU, since itsinclusionmayonlyservetoseverelyunderestimatetheimportance of other preferential agreements in worldtrade. Without intra-EU trade entering into thecalculation of shares, NAFTA becomes the largesttradeagreementbyvalue,representing25percentofworld intra-PTA trade. However, EU bilateral tradeagreements collectively add up to24 per cent of thetotal,including12percentwithEFTAcountries.OtherPTAs all see their shares roughly double afterexcludingtradewithintheEU.

Dataonintra-PTAtradeinservicesarelimitedduetothe small number of countries reporting bilateralservicestradestatisticstointernationalorganizations,aswellasthedifferinglevelsofpartnerdetailacrossreporting countries. To get a rough idea of themagnitudeofglobalintra-PTAtradeinservices,itmay


68

suffice to look at the largest services traders forwhichpartnerdataareavailable,namelytheEuropeanUnionandtheUnitedStates.

AccordingtodatafromtheOrganisationforEconomicCo-operation and Development (OECD), EU exportsofservices toPTApartnerscametoUS$192billionin 2008, equal to 25 per cent of total extra-EUexportsofservicesand7percentofextra-EUexportsof goods and services. However, the above figureincludesexportstopartnersinPTAsthatcovergoodsaloneaswell those thatcovergoodsandservices. Ifonlyagreementsthatdealwithservicesexplicitlyareconsidered,exportstoPTApartnerstotalledjustUS$18.5 billion, equal to 2.4 per cent of exports ofservices outside the EU and less than 1 per cent ofgoodsandservicesexports.

On the import side, EU trade with PTA partnersoutsidetheEUamountedtoUS$167billionincludingagreements covering goods alone (equal to 26 percent of total EU services imports and 6 per cent ofgoods and services imports). This figure drops toUS$ 20 billion when only agreements that deal withservices are considered (equal to 3 per cent ofservices imports and less than 1 per cent of goodsand services imports). Meanwhile, the United States'exports and imports of services to and from PTApartners amounted to roughly US$ 80 billion andUS$ 45 billion, respectively, in 2008. Theseaccountedfor15percentoftotalUSservicesexportsand12percentofservicesimports.Sharesingoodsand services were 4 per cent for exports and 2 percentforimports.

ExportsandimportsoftheEUandtheUnitedStatesarealsosmallcomparedwiththesecountries'exportsand imports of merchandise to PTA partners. TheEU's US$ 192 billion in exports of services to PTApartnerswasonly20percentas largeasexportsofmerchandise outside the EU, while the US$ 167billion of imports was only equal to 17 per cent ofmerchandise imports.Thesesharesfall to2percentonboththeexportandimportsideswhenagreementsdealing with services are considered exclusively. Asfor the United States, its exports of services to PTApartners were only 7 per cent as large as itsmerchandise exports to PTA partners, while itsimportswereonly4percentaslarge.

The preceding tables and charts were intended toquantify the amount of world trade that occursbetweenpartiestopreferentialtradeagreementsandto give an indication of its composition. However, aswasnotedearlier, theamountof tradebetweenPTAmembersismuchlargerthantheamountoftradethatisonapreferentialbasis.AsexplainedinSectionB.4,around half of world merchandise imports (52 percent of 20 major economies considered), are MFNduty free and therefore ineligible for preferentialtreatment.Afurther19percentofimportsaresubjectto lowMFNtariffsof5percentor less,bringingthetotalshareofworldtradesubjecttoloworzeroMFNtariffs to 71 per cent. This leaves limited scope forlarge tariff reductions to be granted in PTAs – asubject that will be examined in Section B.4, whichprovidesmoredetailedestimatesofthebreakdownofpreferentialtrade.

(b) Hastradebecomemoregeographicallyconcentrated?

In examining trade between regions, existing WTOdatasetsonmerchandisetradewereused,particularlytheNetworkofMerchandiseTradethatappearsintheWTO's International Trade Statistics publication(WorldTrade Organization (WTO), 2010). These data covertrade by product for the world as well as within andbetween geographical regions in current US dollar

Figure B.7: shares of selected PtAs in total world exports between PtA members, 2008 (Percentage)


Other bilaterals 3% Including EU (27)US bilaterals 2%

Other bi-plurilaterals 2%

EU bilaterals 6%

EFTA-EU 6%

MERCOSUR 1%

CIS 2%

APTA 3%

ASEAN 3%

NAFTA 13%EU (27) 49%

ASEAN-Japan 3%

ASEAN-China 3%Other

plurilaterals 4%

ASEAN-Japan 5%

ASEAN-China 5%

Other plurilaterals 8%

MERCOSUR 1%

CIS 3%

Excluding EU (27)Other bilaterals 7%

US bilaterals 4%

Other bi-plurilaterals 4%

EU bilaterals 12%

EFTA bilaterals 1%

EFTA-EU 12%

NAFTA 25%

APTA 6%

ASEAN 6%


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terms. Network data are available back to 2000,according to theWTO'scurrent regionalandproductclassifications, and back to 1990, according to theWTO'soldcountryandproductgroupings.Thesehavebeen harmonized to the greatest extent possible inthetablesandchartstofollow.Fordatabefore1990and for individual countries, the UN Comtradedatabasehasbeenused.

Map B.2 shows total merchandise exports of WTOregionsfrom1990to2009,aswellastheirrespectivesharesoftradewithintheregion(intra-regionaltrade)and outside the region (extra-regional trade), basedonthenetworkdatadescribedaboveandsummarizedinAppendixtable7.Asia,NorthAmericaandEuropeare shown according to one scale, while the CIS,South and Central America, Africa and the MiddleEasthaveaseparatescale.

Although it is not clear from the map due to theexclusionofintra-EUtrade,theregionwiththelargestshare of intra-regional trade in its total exports isEurope. Europe's exports increased fromUS$ 1.7 trillion in 1990 to US$ 6.5 trillion in 2008beforefallingtoUS$5.0trillionin2010,buttheshareofintra-regionaltradeintheregion'stotalexportshasremained roughly constant at around 73 per centthroughout the entire period. However, when theEuropean Union is considered as a single entity andtradewithintheEUisexcluded,Europe'sintra-regional

tradesharefalls to thirdplacebehindAsiaandNorthAmerica. Intra-regional trade shares before 2000,whichcometoaround35percent,onlyexcludetradewithintheEU's15memberstatesatthatpoint.Sharesin subsequent years exclude trade among all 27currentEUmembers andaremeasuredat just under30percent.

Whether it makes sense to exclude trade within theEUinthiswaydependsonthequestionsbeingaskedof the data. The European Union is the latestincarnationofoneoftheearliestpost-warpreferentialtrade agreements, the European Coal and SteelCommunity. This agreement developed into theEuropeanEconomicCommunity (EEC), theEuropeanCommunity (EC) and eventually the European Unionbasedon theprincipleof supra-nationalism, inwhichnational sovereignty is pooled between countries incertainpolicyareas,notablytrade.Thisdecades-longprocessofintegrationhasservedasamodelformanyother trade agreements, and consequently tradewithin the EU arguably should be considered in anyhistorical account of regionalism.However, since thecreation of the “single market” in 1997 and theintroduction of a common currency in 2002, theEuropeanUnionhasclearlybecomesomethingmorethan just a customs union, let alone a preferentialtrade agreement. As a result, it is sometimespreferable to treat the EU as a single entity byexcluding intra-EU trade from regional and world

MapB.2: Intra-regional and extra-regional merchandise exports of Wto regions, 1990-2009 (Billiondollarsandpercentage)

Note:Graphsforregionsarenotshowntoscale.ColoursandboundariesdonotimplyanyjudgementonthepartofWTOastothelegalstatusofanyfrontierorterritory.

Source: Network of world merchandise trade tables from WTO International Trade Statistics 2010, supplemented with older networktablesandSecretariatestimatespriorto2000.

Intra Extra

56%

44%

1,225

41%

59%

548

1990 2000

48%

52%

1,602

2009 North America

86%

120

1990

26%

74%

198

2000

26%

74%

459

2009 South and Central America

35%

65%

706

1990

27%

73%

966

2000

29%

71%

1,957

2009 Europe (excl. EU-intra)

94%

106

1990

91%

149

2000 12%

88%

384

2009 Africa

100%

58

1990

80%

146

2000

19%

81%

452

2009 Commonwealth of

Independent States 94%

138

1990

91%

268

2000

15%

85%

690

2009 Middle East

42%

58%

739

1990

49%

51%

1,658

2000

52%

48%

3,575

2009 Asia


70

totals.Whereverpossible, statistics thatboth includeandexcludetradewithintheEUhavebeenpresented.

Even though the share of intra-regional trade inEurope's exports has been steady for nearly twodecades, it is conceivable that total merchandisetradefigurescouldobscureimportantchangesattheproduct level − for example, when falling intra-regional trade shares for one product cancel risingshares for other products. However, this is not thecase for Europe (with some minor exceptions).Europeanintra-regionaltradesharesaresteadybackto1990not just foragricultureand fuelsandminingproducts but also for a wide range of manufacturedgoods, including automotive products, office andtelecomequipment,clothingandchemicals.Theintra-regionalsharefor ironandsteeldidrisefrom75percentin1990to80percentin2000,butthisfellbackto 77 per cent in 2008 and then to 73 per cent in2009followingthefinancialcrisis.Thelackofchangeinintra-EUtradesince1990isperhapsnotsurprising,since much of the work of reducing trade barriersbetween member countries was completed decadesago.

AfterEurope,theregionwiththenextlargestshareofintra-regional trade in its total exports is Asia. Itsintra-regionaltradesharehasrisenovertime,from42per cent in 1990 to 52 per cent in 2009. However,mostofthisincreaseoccurredatthebeginningofthisperiod,andthesharesforAsiahaveremainedcloseto50percentsince themid-1990s.UnlikeEurope, thesteady share of intra-regional trade in total exportsdoes indeed mask significant shifts at the productlevel.

Asia's intra-regional share of agricultural productsexportsdroppedfrom65percent in1990to57percent in 2009, but since agriculture only representsaround6percentofAsia'sexportsinvalueterms,theimpact of this change on the share for totalmerchandise trade was barely discernible. Moresignificantly, its intra-regional share of office andtelecomexports jumpedfrom30percent in1990to55 per cent in 2009. This rise was countered byfalling intra-regional shares for iron and steel (downfrom 80 per cent in 1995 to 64 per cent in 2009),textiles (down from 65 per cent in 1995 to 46 percentin2009),andclothing(downfrom29percentin1995 to 22 per cent in 2009.) The share of intra-regional trade in Asian automotive products exportshasfluctuatedovertimewithnoobvioustrend.Thesecontrary movements left the intra-regional share inexports of manufactures nearly unchanged between1995and2007ataround47percent.

Developments for Japan and China merit specialattentiongiventheirweight inAsianandworldtrade.Between 1995 and 2008, China's exports to Japangrewmore slowly than China's overall exports to theworld, and this trend was especially pronounced in

office and telecom equipment. On the other hand,growthinJapan'sshipmentstoChinahasbeenmuchstronger than Japanese exports to the world.Furthermore, the share of Japan's exports going todeveloping Asia (including China) increased from31 per cent in 1999 to 54 per cent in 2009. At thesame time, the share of developed economies inChina'sexportsincreasedfrom29percentto36percent between 2000 and 2009. These changessuggest the development of regional productionnetworks involving Japan and China, which mayconsistofpartsandcomponentsbeingshippedfromJapan to China, and later from China to othercountriesaftersomeelaboration.

The share of intra-regional trade in North America'stotalmerchandiseexportsjumpedfrom41percentin1990 to 56 per cent in 2000 before falling back to48percentin2009.Thelowersharein2009wasnotmerely a product of the trade collapse that followedtheglobalfinancialcrisis,sincethesharewasalmostthesameasin2008(49percent)whenglobaltradepeaked. Several important sectors displayed fallingshares of intra-regional trade between 2000 and2009, including automotive products (down from 89percent in2000to72percent in2008and76percent in 2009). The falling intra-regional shares werenotlimitedtomanufactures,asintra-regionaltradeofagricultural products and fuels and mining productsalsodeclined.Officeandtelecomequipmentwastheonlysectortorecordan increase, from27.5percentin1990to50.1percentin2009.

Theremainingregions(i.e.theCIS,Africa,theMiddleEastandSouthAmerica)allhavemuchsmallerintra-regional trade shares in their total merchandiseexports,mostlyduetothefact thattheyexport largequantities of natural resources, mostly to developedeconomymarketsinEurope,NorthAmericaandAsia.Intra-regional trade shares for the CIS, Africa, theMiddleEastandSouthAmericain2009were19percent, 12 per cent, 15 per cent and 26 per cent,respectively. Although these shares are quite smallcompared with other regions, most are up sharplysince1990.Forexample,Africancountries'exportstootherAfricandestinationsrepresentedjust6percentofthecontinent'stotalmerchandiseexportsin1990,butthissharenearlydoubledto12percentby2009.Whether this increase had anything to do withpreferential tradeagreements isunclear,but thefactthat it occurred in the face of rising oil prices isnoteworthy. Africa's intra-regional trade shareexcluding fuels and mining recorded an even largerincrease, from 9 per cent in 1990 to 22 per cent in1999. Intra-regional trade inmanufacturesalsomorethan doubled its share in total exports during thesameperiod,risingfrom13percentto28percent.

Despite similarities to other resource-exportingregions,SouthandCentralAmerica'scaseisdifferentdue to the fact that the region's exports are more


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diverse.Forexample,fuelsandminingproductsmadeupnearly70percentofMiddleEastexportsin2009,whereas the share of these products in South andCentral America's exports was just 30 per cent. Theshare of intra-regional trade in South and CentralAmerica's total merchandise exports increased from14percentto26percentbetween1990and2009,butaggregationobscuressomeofthemoredramaticchanges taking place at the product level. Theregional component of South and Central America'sexports of manufactured goods increased sharplyfrom17percentin1990to44percentin2009.Thisriseispartlyattributabletoanevenlargerincreaseforautomotiveproducts,from25percent in1990to73percentin2009.Theshareof intra-regionaltradeiniron and steel exports also more than doubled, from15percentto31percent.

Theshareofintra-regionaltradeinworldtradecanbeestimated by taking the sum of intra-regional tradevalues for all regions and dividing by worldmerchandiseexports.Thiswasequalto54percentofworld merchandise exports in 2009, or US$ 6.6trillion.Thissharehaschangedverylittlesince1990,whenitstoodat53percentofworldexports,orUS$1.8trillion.

Figure B.8 illustrates intra-regional trade shares intotalworldexports for selectedmanufacturedgoodsbetween1990and2009.Theshareof intra-regionaltrade in world manufactures exports is quite stableover time, fluctuating between 56 and 59 per cent.Office and telecom equipment recorded the largestincrease, as its intra-regional share increased from41percentin1990to58percentin2009.Theintra-regional component of world automotive productsexports also increased from 65 per cent to nearly

70per cent in2000before falling to63per cent in2008.

Figure B.9 shows shares in world merchandiseimports based on available reporters in the UNComtradedatabaseatfive-yearintervalsbeginningin1965 (the CIS region is excluded due to insufficientdata).Theshareof intra-regional trade inEastAsia'stotal imports rose inexorably between 1965 and2005, from 35 per cent to 60 per cent. During thesameperiodtheEuropeanUnion(15)sawanincreasein its intra-trade share, which advanced from 53 percent in 1965 to 65 per cent in 1990 before fallingbackto56percentin2005.Europe(whichexcludesintra-EU trade) recorded an increase in its intra-regional tradeshare from26percent in1965 to40percentin2005.NorthAmerica'sintra-regionaltradeshare in total imports started out at 39 per cent in1965,thenroseslightlyto42percentin1970beforeslidingtoalowpointof33percentin1980.Beginningin 1990, the share of intra-regional imports in totalimports increased to nearly 40 per cent in 2000before dropping to 35 per cent in 2005. South andCentral America saw its intra-trade share jump from16percentin1975to29percentin2005.

In summary, the share of intra-regional trade in totalexportsofNorthAmericahasdeclined inthe lasttenyears,whileAsiahasrecordedasmallincrease.Duringthe same period, Europe's intra-regional trade shareincluding intra-EU trade was flat. Resource-exportingregions have tended to increase their (undeniablysmall) intra-regional trade shares in recent yearsdespite rising prices and strong demand growth forfuelsandminingproducts,especiallyinAsia.However,theshareofintra-regionaltradeinworldtradein2009waseffectivelythesameasin1990.

FigureB.8: Intra-regional trade shares in world by manufacturing sector, 1990-2009

Source:WTOInternationalTradeStatistics2010,Secretariatestimates.

Per

cen

t

1990 20001995 2005 2008 2009

75

70

60

65

55

50

45

40

Textiles

Manufactures

Iron and steel

Clothing

Automotive products

Office and telecom equipment


72

4. Howpreferentialistrade?

Trade between PTA members is growing as thenumber of agreements increase. About one half ofworld tradenowtakesplaceamongPTAmembers.31However, examining total trade flows between PTApartners overstates the amount of trade that takesplace on a preferential basis. This is partly becausetariff schedules of many PTA members increasinglycontainduty-freeMFNratesonwhichnofurthertariffreduction can be given. Hence, while the number ofPTAs has been increasing, the importance ofpreferentialtradehasnotkeptpace.Thisdevelopmentreflectsasubstantial reduction inMFNtariffsduringthepasttwodecades,eitherthroughmultilateraltradenegotiationsorunilateralreductions.

Even when preference margins are positive,preferentialratesavailableinthecontextofPTAsmaynot always be utilized (i.e. products may continue tobe traded under applicable MFN rates). Actualutilizationofpreferentialratesdependsonarangeoffactors. These relate both to the benefits of usingpreferences (notably the size of the preferencemargin) and the costs (e.g. rules of origin and otheradministrative requirements to be fulfilled).32 As thelatterare likely toconstitutesomesortof fixedcost,transactionsizemayalsoplayarole.Thisimpliesthatfirm-specificcharacteristics,suchassize,experience,ownershipandaccesstoinformation,mayalsoplayarole.

This subsection uses three different data sources toestimate the amount of trade that receives PTAconcessions in various ways. Each source also

contains information that allows for an analysis ofsome of the factors that can explain utilization ofpreferential rates. To begin with, matched tariff lineand trade data for 20 countries covering large partsof world merchandise imports are examined. Fromthis, theamountof tradealready receivingMFNzerotariff rates can be determined, with the remainingtrade constituting the upper bound for the size ofpreferential trade assuming full utilization of tariffpreferences.Theamountoftradeeligiblefordifferentranges of preference margins as well as the overallaverage trade-weighted preferential margin can alsobecalculated.Thesizeofthepreferentialmarginisanimportant determinant for the utilization of availablepreferentialrates.

Next,customsdatafromtheEUandUSonthevalueof imports under different preferential regimes areconsidered. On the basis of this information, actualaggregate preference utilization rates can becomputed.Using these ratesat theproduct-exporterlevel, the significance of the size of preferencemargins and trade flows in explaining preferenceutilization can be formally tested. Finally, data fromfirm surveys on the utilization of preferences byindividual companies can be obtained for selectedregions.Whilethesedatadonotcontaindisaggregateinformation on the size of preference margins andactualtradeflows, itshedslightonthedifferentcostfactors affecting firms' decisions to make use ofavailablepreferences.Thedatacanalsobesortedinorder to identify firm attributes, such as firm size orexperience,thatareassociatedwithhigherutilizationofpreferentialrates.

FigureB.9: shares of intra-regional trade in total imports by region, 1965-2005

Source:UNComtrade.

Per

cen

t

60

70

50

40

30

20

10

01965 1970 1975 1980 1985 1990 1995 2000 2005

European Union (15)

Africa West Asia

North America

East Asia

Europe

South and Central America

Middle East


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(a) Matchedtarifflineandtradedata33

The analysis conducted in this subsection uses dataonimportsbythe20largestimportersfromallpartnercountries.34Thesamplecoversaround90percentofworld trade in 2008. The bilateral import flows arematched with tariff data of the same year.35 Highlydisaggregated tariff-line import and tariff data areusedwhereverpossible, rather than thedataat sub-heading (HS-6) level underlying many previousstudies.36 The main source for import data at thetariff-line level is the TradeMap dataset of theInternational Trade Centre (ITC). Tariff schedules orcommitments are taken from the World IntegratedTradeSolution(WITS).37

The principal output of the analysis is the share oftrade that is preferential (by different ranges ofpreferencemargins),38theshareoftradethatisnon-preferential (and applicable MFN duties using thesame ranges) as well as the share of trade at MFNzerotariffrates,forwhichnofurtherpreferencescanbe granted. From this, the overall trade-weightedpreferentialmargincanalsobedetermined.39Inorderto give a complete picture regarding the extent towhichtradeispreferential,thedatasetconsidersbothreciprocal and non-reciprocal preferences. However,in light of the focus of this report, the discussionconcentrateson trade between PTA partners. In anyevent,theanalysisshowsthatmostpreferentialtradeoccursunderreciprocalregimes.

Inthefollowingsubsections,theextentofpreferentialtradeandpreferentialmarginsareshownbyimporter,exporter, tariff regime, country group and productgroup. Finally, some observations are offered onrecent developments in PTAs and their implicationsforpreferentialtradeandaveragepreferencemargins.The results of this analysis show that the share ofpreferential trade is surprisingly small. Only 16 percentofworld trade ispotentiallypreferential (30percentiftradewithintheEUisincluded),andlessthan2percentofworld trade (4percent including tradewithintheEU)iseligibleforpreferencemarginsabove10percentagepoints.This is in largepartduetothefactthatformosttradeditemsMFNratesarealreadylow or zero, which limits the scope for grantingpreferences.40 Assuming static trade flows and fullutilization of preferences, all preferences togetherreduce the global41 trade-weighted average tariff byone percentage point (from 3 to 2 per cent),42 and90 per cent of this reduction, i.e. 0.9 percentagepoints,isduetoreciprocalpreferenceregimes.

(i) Preferential trade by importer

On aggregate, 50 per cent of imports by the 20countries examined here (excluding intra-EU trade)originate in countries with which some sort ofpreferentialagreementexists(seeAppendixtable8).Only a third of that (16 per cent of all trade) is

potentiallypreferential,whichcaneasilybeseenfromFigure B.10.43 There are two reasons for thisdifference:first,overonehalfofworldtradeisalreadysubject to zero MFN rates, implying that nopreferencescanbegranted.Forexample,63percentofSingapore's importsoriginate inPTApartners,butpractically all of its imports enter under MFN zeroduties.44 Second, preference regimes often featureproductexemptions,suchthattradeintheseproductsstilloccursatMFNrates.

Forsomecountries,theshareofpreferentialimportsishigh. In Figure B.10, it is shown that 64 per cent ofintra-EUtrade,48percentofMexico’simportsand54per cent of Switzerland’s imports are preferential, i.e.face a positive preference margin, but these marginsaremostlyfairlysmall.Onlyasmallshareofimports–lessthan2percentacrossall20countries(excludingintra-EUtrade;theshareamountsto4percentiftradewithintheEUis included)– iseligibleforpreferenceswherepreferencemarginsare10percentormore.Themain exception is Mexico (15.8 per cent of imports).Brazil also grants high preference margins to arelatively large share of imports (7 per cent), and 9.4per cent of trade within the EU enjoys a preferencemargin of over 10 per cent. Not surprisingly, MFNdutiesfornon-preferentialimportsareusuallylow.TheshareofMFNzeroimportsisintherangeof40-50percent in most countries. Notable exceptions includeIndiaandRussiawithsmallsharesofMFNzeroimports,andSingaporeandHongKong,whichgenerallyapplyno duties. On aggregate, only 3.8 per cent of globalnon-preferential imports have MFN duties above 10percent(2.8percentiftradewithintheEUisincluded).

In Appendix table 9, a counterfactual value of MFNduties iscalculatedthatwouldneedtobepaid in theabsence of preferential arrangements, assuming thevalue of trade remains unchanged.45 This figure canbecontrastedtoactualduties,assumingthatavailablepreferences are fully used. The differences betweenthese two numbers constitute “duties saved” throughpreferences.

Overall, preferential rates reduce global tariffs byapproximately one-third (almost two-thirds includingtrade within the EU), assuming trade flows were thesame in the absence of preferences. For somecountries, this ratio is considerably higher. Forexample,inMexicodutiespaidwithpreferentialtariffsconstitute only about 16 per cent of the statutoryMFN duties. Among other things, this is due to thelargeshareofMexico’simportsunderNAFTAanditsextensive product coverage. From this information, itis also possible to calculate the trade-weightedaveragepreferencemargin,whichoverallisratherlow,just 1 per cent on aggregate (excluding trade withintheEU;withEUintra-tradeitisabout2percent)andlessthan1percentformostcountries individually.46Theaveragemargin is fairlyhigh for tradewithin theEU (4.9 per cent), especially in comparison to the


74

margin grantedby theEU to third countries (0.9 percent),aswellasforMexico(9.3percent).

(ii) Preferential trade by exporter

Figure B.11 (together with Appendix table 10)provides the preferential margins received by the 30largest exporters in the 20 importing countriesincludedinthedataset.47Inaggregate,aboutonehalfofexportsgotopartnerswithwhomtheexporterhassometypeofpreferentialarrangement.However,thisdoes not always mean that preferential tariffs arereceivedfora largeproportionofexports,orthatthepreferentialmarginissubstantial.

Forinstance,95percentofexportsfromChile,oneofthe most active negotiators of PTAs in recent years,are destined for countries giving at least somepreferences to Chilean goods. However, only 27 percent of Chile’s exports are eligible for preferentialtariffs, with just 3 per cent of its exports benefitingfromamarginabove10percent.Sixty-fourpercentofChile’sexportsfacezeroMFNratesandonly7percentaresubject topositiveMFNduties.Bycontrast,Mexico,with98percentof itsexportsgoing toPTApartners, enjoys preferences on over 60 per cent ofitsexports;evenso,lessthan6percentofitsexportsobtainapreferencemarginofmorethan10percent.

Theproportionofexportsgoingtodestinationswherepreferencesaregrantedisconsiderably lowerforthethree largest developed country exporters, namely39 per cent for the US, 21 per cent for the EU andonly5percentforJapan.Again,theshareofexportsreceivingsubstantialpreferencemarginsislow.Whilefor the US, at least about 20 per cent of its exportsenjoy a preference margin above 5 per cent, only3.7 per cent of exports benefit from a preferencemarginofmorethan10percent(seeFigureB.11).

Amongthe30largestexporters,thecountrywiththehighest share of exports (21 per cent) enjoying apreferencemarginofmorethan10percentisTurkey,and its overall trade-weighted preferential margin isthehighestwithinthisgroup(5percent).Atthesametime,whilebetween40and70percentofexportsareduty-freeunderMFNratesforallmajorexporters,thisisthecaseforonly18percentofTurkey'sexports.48Overall, it appears that for most large exporters,preferential tariffs matter little for the bulk of theirexports.This isnotalwaystruefor individualsectors,someof which enjoy substantial preference margins,but only account for a small share of exports. As aresult,theaveragepreferencemarginisfairlylow.

A number of mostly smaller countries exporting anarrow set of commodities (mainly sugar, rice,

Figure B.10: Preferential trade by importer, 2008, shares by preference margin and mFn rates (Percentage)

Note:Insomecases,tradeand/ortariffdatarefertotheyear2006,2007or2009,dependingondataavailability.

Source:ITCTradeMap,WITS(TRAINS),UNComtrade,USITC,TARIC.

0 2010 30 40 50 60 70 80 90 100

PM above 10% No preference, MFN 0.1% to 5.0%

MFN zeroPM 5.1% to 10.0% PM 0.1% to 5.0% No preference, MFN above 5%

Total with intra-EU

Total without intra-EU

EU-intra

EU-extra

United States

China

Japan

Korea, Rep. of

Canada

Hong Kong, China

Mexico

Singapore

Taipei, Chinese

India

Russian Federation

Australia

Turkey

Switzerland

Brazil

United Arab Emirates

Malaysia

Thailand

Indonesia


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bananas, fish and garments) to preference-grantingmarkets, in particular the EU and to a lesser extenttheUnitedStates,enjoymoresubstantialpreferencemargins.Formostcountries,reciprocalpreferences,ifmeasured, for instance, by the shareof duties savedthrough reciprocal schemes in all preferencesreceived, are now far more important than non-reciprocal regimes. This is especially true since, forexample, the EU has signed EPAs with most of theACP countries that used to benefit from unilateralpreferencesgivenbytheEU.

Figure B.12 shows the 25 countries with the highesttrade-weighted preferential margin.49 Mauritius isleading the list with a trade-weighted averagepreferencemarginof24percentfacedbyitsexports.ThiscanbeexplainedbythecompositionofMauritianexports which, to an important extent, consist ofgarments, fish and sugar, i.e. items subject to high

MFN duties in its main export market, the EU. Whileothercountries,suchasGuyana (preferentialexportsofsugarandricetotheEUandgarmentstotheUnitedStates), may depend on preferential tariffs in thesesectors as well, they also export minerals and otherraw materials that do not face high MFN tariffs, and,therefore,featuresmalleraveragepreferencemargins.Overall, around 40 exporters have a trade-weightedpreferentialmarginof5per centormoreandalmostallofthemareACPand/orLDCcountries.50

(iii) Preferential trade by type of regime

As noted above, it is possible, subject to certainassumptions,toallocatetradetodifferentpreferentialregimes, in particular in order to distinguish betweennon-reciprocal and reciprocal preference schemes inthe dataset, given the focus of this report.51 From

FigureB.11: Preferential trade by exporter (30 largest exporters), 2008, shares by preference margins and mFn rates (Percentage)



0 2010 30 40 50 60 70 80 90 100

PM above 10% No preference, MFN 0.1% to 5.0%

MFN zeroPM 5.1% to 10.0% PM 0.1% to 5.0% No preference, MFN above 5%

Total

China

EU-extra

United States

Japan

Canada

Korea, Rep. of

Russian Federation

Taipei, Chinese

Kingdom of Saudi Arabia

Mexico

Malaysia

Switzerland

Australia

Singapore

Thailand

India

Brazil

Norway

Indonesia

United Arab Emirates

Turkey

Iran, Islamic Rep.

Nigeria

South AfricaVenezuela,

Bolivarian Rep. ofKuwait

Philippines

Algeria

Chile

Qatar


76

Table B.8, it is clear that some regimes are morepreferential than others. Intra-EU trade clearly ispreferential,withalmost64percentoftradeenjoyingpreferential tariffs and the remainderbeing tradedatMFNzerorates.Bycontrast,thepreferentialshareforintra-ASEANtradeisjustabout20percent.Althoughtariffs in ASEAN member countries, when measuredonasimpleaveragebasis,arehigher than in theEU,goods traded among ASEAN countries tend to beproducts,whereMNF tariffsarealready zero (73percentoftradeflowswithinASEAN).52

Measured in terms of the trade-weighted averagepreference margin, the “most preferential” regime istheonegoverningtradebetweenBrazilandtherestofMERCOSURwithamarginofover16percent.Eighty-fivepercentofimportsfromMERCOSURpartnersaregivenapreferentialtariffbyBrazil,andfor63percentof trade the preference margin is above 10 per cent.Thetrade-weightedpreferentialmarginisalsohighfortrade between Brazil and Mexico (14 per cent) andEPAs(8percent)aswellasfortradebetweenTurkeyand the EU, intra-EU trade and trade within NAFTA,withmarginsofaround5percent.

The lastcolumn inTableB.8showstheshareofdutiesremaining with full use of preferences, compared withMFNdutiesthatwouldotherwiseapply.Thiscanbeseenasanindicatoroftheproductcoverageofthepreferentialagreementwithregardtotradeditems,withalowerrateindicatingalargercoverage.53Coverageisveryhighformost regimesshownhere,except forJapan-Singapore,Japan-Mexico and India-Singapore, which are fairlyrecentPTAsandmaynotbefullyimplemented.Thisisin

stark contrast to non-reciprocal regimes, which oftenhaveaverylowcoverage.Forexample,boththeEUandUS Generalized System of Preferences schemes waivedutiesforlessthan20percentoftheamountotherwisedue.Anotherwaytolookatthisistoconsidertheshareofnon-preferentialtradewithinapreferentialregime.Forexample,almostnotradeamongNAFTAcountries,andonly 1.3 per cent of trade between the EU andSwitzerland, is non-preferential.54 On the other hand,22percentof tradebetweenJapanandMexico isstillsubject to positive MFN duties, which can be seen asevidenceofsignificantproductexclusionsatthecurrentstageofimplementation.

Taking into account the complete list of regimesincluded in the database and distinguishing betweenreciprocal and non-reciprocal schemes, it turns outthat about 80 per cent of preferential trade takesplace under reciprocal preference regimes, i.e. PTAsasdefined in this report.Evenmorestrikingly,almost90 per cent of the global trade-weighted preferencemarginisrelatedtopreferencesunderPTAs.55NAFTAalonecontributes43percent toglobal tariff savingsfrompreferences,whichcorrespondstoaboutonehalfof all duties saved in reciprocal agreements (notincludingtradewithintheEU).Inlargepart,thisisdueto Mexico’s comparatively high statutory MFN rates.TradewithintheEU,withapreferentialmarginsimilartothatoftradewithinNAFTA,butwithamuchhighertrade value, “saves” EU members duties of US$ 185billion, which is twice as much as all duties saved byotherpreferentialagreementstakentogether.

Figure B.12: Preferential trade by exporter (25 exporters with highest trade-weighted preferential margin), 2008, preference margins (Percentage)

Note:Insomecases,thedatarefertotheyear2006,2007or2009,dependingondataavailability.Formanyofthecountriesshownhere,thetrade-weightedpreferencemargindependsheavilyonthead valoremequivalentforkeyexport itemstotheEU(e.g.rawsugarandbananas).Countriesshowningreenhavelessthan70percentoftheirexportsgoingtothecovered20importers.InthecaseofBarbadosandBelize,verylargeexportsarereportedtoNigeria,whichseemstobeanerrorintheComtradedata.AhighshareofMalawi’sexportshasanunknownad valoremequivalent.Theaffectedproductistobacco,exportedtotheEU.


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Sey

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Guy

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Luci

a

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e Ve

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El S

alva

dor

Afg

hani

stan

Bar

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Hon

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30

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TableB.8: Preferential trade by agreement/type of regime, 2008, selected regimes

Regime

share of trade by preferential margin (Pm) and mFn rate (in per cent of total trade)

total trade

(billion dollars)

trade-weighted

pref. margin

(percent-age

points)

Duties “saved” (billion dollars)

Pref. duties

over mFn duties

(per cent)

Preferential trade non-preferential tradeMFNzero

n/a

totalPM

above20%

PM10.1%

to20%

PM5.1%

to10%

PM2.6%to5%

PM0.1%

to2.5%

totalMFNabove20%

MFN10.1%

to20%

MFN5.1%

to10%

MFN2.6%to5%

MFN0.1%

to2.5%

total

MFN 0.0 0.0 0.0 0.0 0.0 0.0 44.8 1.1 3.8 11.7 15.6 12.7 53.9 1.3 4,874.4 0.0 0.0 100.0

EU-intra 63.7 3.9 5.5 16.7 19.6 18.0 0.0 0.0 0.0 0.0 0.0 0.0 34.4 1.8 3,807.4 4.9 185.4 0.0

Reciprocal regimes 43.7 1.8 4.0 12.5 9.3 16.1 7.6 0.3 0.7 2.5 2.9 1.2 47.0 1.7 2,802.8 3.0 83.9 23.5

NAFTA 60.9 2.7 3.6 21.5 8.3 24.9 0.1 0.0 0.0 0.0 0.0 0.0 38.2 0.8 912.3 4.5 40.7 0.3

EU-Switzerland

56.9 1.1 2.8 8.7 12.7 31.6 1.3 0.3 0.2 0.5 0.2 0.1 41.0 0.8 261.4 2.2 5.7 16.4

intra-ASEAN*

20.1 2.0 2.0 2.6 4.7 8.7 3.6 0.3 0.0 0.0 1.7 1.6 72.9 3.4 140.8 1.7 2.3 27.4

EU-Turkey 78.4 0.6 14.6 23.7 26.4 13.1 0.9 0.2 0.3 0.3 0.0 0.1 20.0 0.7 140.7 5.1 7.2 4.4

EU-Mexico 51.2 3.5 10.0 30.1 3.5 4.1 0.9 0.2 0.4 0.3 0.0 0.0 43.2 4.7 58.0 6.1 3.6 3.8

Singapore-USA

7.2 0.2 0.2 0.6 4.8 1.4 0.0 0.0 0.0 0.0 0.0 0.0 92.7 0.0 34.1 0.3 0.1 4.7

Australia-USA

45.7 0.0 0.1 3.6 29.5 12.5 2.4 0.1 0.0 0.0 0.4 1.9 51.6 0.3 32.9 1.9 0.6 6.8

EU-EPA* 42.5 11.3 7.2 11.7 10.8 1.5 0.0 0.0 0.0 0.0 0.0 0.0 56.2 1.3 27.8 7.5 2.1 0.0

Japan-Singapore

3.1 0.0 0.0 0.1 2.4 0.6 1.9 1.5 0.1 0.1 0.3 0.0 94.0 1.0 25.2 0.1 0.0 76.8

Japan-Mexico

22.4 7.9 1.5 5.1 5.4 2.5 21.7 0.7 0.5 18.9 1.6 0.0 50.7 5.2 19.6 3.9 0.8 47.8

Australia-Singapore

6.4 0.0 0.0 0.2 6.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 93.6 0.0 16.6 0.4 0.1 0.0

Brazil-MERCOSUR*

85.4 25.4 37.1 21.1 1.0 0.8 0.1 0.0 0.1 0.0 0.0 0.0 13.9 0.7 15.1 16.4 2.5 0.1

India-Singapore

20.0 0.0 0.0 8.7 6.6 4.6 16.2 0.1 0.0 15.0 1.0 0.0 59.6 4.3 13.9 1.0 0.1 68.4

Brazil-Mexico 83.2 23.7 13.8 18.0 12.6 15.1 2.3 0.6 1.4 0.2 0.1 0.0 14.2 0.3 7.9 14.2 1.1 19.2

non-reciprocal regimes

17.6 0.1 0.9 1.4 6.3 8.9 26.3 1.0 4.4 4.3 7.2 9.5 55.6 0.5 2,067.3 0.6 11.8 77.2

EU-GSP 13.3 0.0 0.1 0.7 7.3 5.2 23.0 0.6 5.1 3.8 7.8 5.7 63.4 0.3 1,011.9 0.4 4.2 82.7

US-GSP 8.3 0.0 0.2 1.8 3.9 2.4 62.4 0.9 4.7 4.5 2.4 49.9 28.8 0.4 257.9 0.3 0.9 82.2

US-AGOA 90.1 0.3 1.2 0.4 1.0 87.2 0.1 0.0 0.0 0.0 0.0 0.0 9.9 0.0 83.6 0.5 0.4 1.2

EU-GSP-PLUS

29.7 3.0 8.3 10.0 5.7 2.7 9.7 9.0 0.0 0.0 0.4 0.2 60.1 0.4 38.0 2.9 1.1 53.8

EU-GSP-LDC

33.0 0.9 27.4 3.1 1.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 66.0 0.9 32.8 4.1 1.4 0.0

US-Andean 72.0 1.2 4.2 4.9 1.9 59.9 0.6 0.0 0.3 0.2 0.1 0.0 27.0 0.4 29.0 1.5 0.4 4.6

US-CBTPA 40.9 0.6 3.5 12.1 0.7 24.0 0.0 0.0 0.0 0.0 0.0 0.0 58.9 0.2 11.2 1.6 0.2 0.0

US-LDC 34.1 0.0 0.0 1.8 0.4 31.9 61.9 7.1 44.4 9.7 0.7 0.0 3.9 0.1 10.2 0.2 0.0 98.5

US-CBERA 4.5 0.0 0.1 3.5 0.6 0.3 90.7 0.0 0.0 0.0 0.0 90.7 4.8 0.0 4.4 0.3 0.01 27.0

Note:Insomecases,tradeand/ortariffdatarefertotheyear2006,2007or2009,dependingondataavailability.EU-intratradeisshownseparatelyfromotherreciprocalregimes.TheaggregatefigureforreciprocaltradeisthereforewithoutEUintra-trade.Onlyaselectionofregimesisshownhere.Foronething,thisisduetogapsinthedataset,forinstancemissingdataonpreferentialratesappliedbyThailandfor FTA partners outside ASEAN. Such regimes are therefore not shown. Some regimes are incomplete (marked by an asterisk ‘*’),becauseonlyoneoftwopartnersiscoveredbythedatasetasanimporter,whichmakesindicatorsforsuchregimesdifficulttointerpret.Intra-ASEANfiguresonlyincludesimportsfromthefourASEANmembersthatarecoveredbythedata(Indonesia,Malaysia,SingaporeandThailand).EU-EPAonlycoversEUimportsfromEPApartners,nottheirimportsfromtheEU.Brazil-MERCOSURonlycoversimportsfromBrazil.

Sources:ITCTradeMap,WITS(TRAINS),UNComtrade,USITC,TARIC.


78

TableB.9: Preferential trade by country group, 2008

Country group

share of imports

from countries receiving prefer-

ences (in per cent of total trade)


total trade

(billion dollars)

trade-weighted

pref. margin

(percent-age

points)

Preferential imports non-preferential imports mFn zero n/a

totalPM

above20%

PM10.1%

to20%

PM5.1%

to10%

PM2.6%

to5%

PM0.1%

to2.5%

totalMFNabove20%

MFN10.1%

to20%

MFN5.1%

to10%

MFN2.6%

to5%

MFN0.1%

to2.5%

totalwithpref.

nopref.

TOTAL 50.0 16.3 0.5 1.3 3.9 4.0 6.5 30.2 0.8 3.0 7.5 10.2 8.7 52.3 25.3 27.0 1.2 9,744.5 1.0

Importer – exporter

North-North

42.0 21.3 0.3 0.6 6.2 3.8 10.4 26.5 0.5 0.6 4.9 6.9 13.7 51.7 20.1 31.6 0.4 2,265.5 0.8

North-South

74.3 18.9 0.5 1.5 2.4 6.3 8.1 24.9 0.7 3.6 4.3 6.2 10.2 55.6 40.8 14.8 0.5 3,399.5 0.9

North-LDC 99.6 51.8 1.1 13.7 2.7 1.8 32.5 8.0 0.9 5.8 1.3 0.1 0.0 39.6 39.6 0.0 0.6 82.1 2.7

South-North

21.2 12.0 1.0 1.9 6.7 1.7 0.7 45.8 1.6 5.9 18.6 15.3 4.4 39.0 8.2 30.8 3.1 1,628.9 1.8

South-South

43.1 10.2 0.5 1.0 2.0 2.8 3.9 30.9 0.8 2.7 7.4 16.7 3.3 57.1 20.1 37.0 1.8 2,169.0 0.7

South-LDC 46.3 5.0 0.3 0.8 1.1 2.4 0.5 13.3 0.6 0.3 1.1 10.0 1.2 81.1 33.3 47.8 0.6 64.3 0.4

exporter

North 33.3 17.5 0.6 1.2 6.4 2.9 6.4 34.6 0.9 2.8 10.6 10.4 9.8 46.4 15.1 31.3 1.5 3,894.4 1.2

South 62.2 15.5 0.5 1.3 2.3 4.9 6.5 27.3 0.7 3.2 5.5 10.3 7.5 56.2 32.7 23.5 1.0 5,568.5 0.8

LDC 76.2 31.3 0.7 8.0 2.0 2.1 18.5 10.3 0.8 3.4 1.2 4.4 0.5 57.9 36.8 21.0 0.6 146.4 1.7

ACP 78.7 32.6 1.1 1.3 2.7 3.2 24.3 8.3 0.2 0.3 1.4 5.4 1.1 58.4 41.5 16.8 0.7 352.0 1.1



(iv) Preferential trade by country group

TableB.9showspreferential tradebycountrygroups(excluding intra-EU trade).56 Imports by developedcountriesfromLDCsenjoyrelativelyhighpreferences,with15percentofsuch importshavingapreferencemargin of 10 per cent or more. The trade-weightedpreferentialmarginof2.7percentfortheseimportsiswellabovetheglobalaverage.ThisdoesnotmeanthatLDCs generally face lower duties. As is well known,some LDCs pay higher duties on average comparedwith developed-country trading partners, as LDCsoften export products subject to tariff peaks(i.e.relativelyhightariffs)andexemptfrompreferentialtreatment, suchasgarments.Forexample,Cambodiawouldpaya15percentdutyonitstotalmerchandiseexportswithoutpreferentialtariffs,butstillpays11percent, assuming full utilization of preferences. Bycontrast,theEUandUnitedStatespayonaveragea3per cent duty on their exports after preferences aretakenintoaccount.

Such differences in tariff treatment, owing to thedifferent product composition of developed- anddeveloping-country exports and limitations in LDCpreferential tariffs, have repeatedly been highlightedfor specific markets in trade policy discussions. Forexample, Switzerland, which does not have apreferential tariff regime with the United States,

exports seven times more to the United States thanCambodia,butpayslessthanhalfofthedutiesleviedon the latter (US$ 194 million vs. US$ 429 million).Totalduties forSwiss importsare low,asSwitzerlandsuppliestheUnitedStateswithawiderangeofitems,such as pharmaceuticals, medical technology andmachinery, that face low or even zero MFN rates,unlike Cambodia that exports mainly textiles, only afractionofwhichqualifyforpreferentialtariffs.

(v) Preferential trade by product group

TableB.10shows that tariffsandpreferencemarginson traded items (excluding intra-EU trade) areconsiderably higher for agricultural products than fornon-agriculturalproducts.57Owingtotherelativelylowshare of agriculture in international trade, large tariffreductions on certain agricultural products have littleimpactontheoverallshareofpreferentialtrade,globalaverage tariffs and the average trade-weightedpreference margin. Relatively high tariffs andpreference margins also exist for certain non-agriculturalgoods,suchasfish,textilesandtransportequipment.For trade inpartsandcomponents,whichplays a role in regional production networks (seeSection D), MFN tariffs and the share of preferentialtradeinoveralltradearenotverydifferentfromoverallaverages.


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TableB.10: Preferential trade by product group, 2008

Product group


total trade

(billion dollars)

trade- weighted

pref. margin

(% points)

Preferential trade non-preferential trade mFn zero n/a

totalPM

above20%

PM10.1%

to20%

PM5.1%

to10%

PM2.6%

to5%

PM0.1%

to2.5%

totalMFNabove20%

MFN10.1%

to20%

MFN5.1%

to10%

MFN2.6%

to5%

MFN0.1%

to2.5%

totalwithpref.

nopref.

TOTAL 16.3 0.5 1.3 3.9 4.0 6.5 30.2 0.8 3.0 7.5 10.2 8.7 52.3 25.3 27.0 1.2 9,744.5 1.0

By Ag. vs non-Ag.

Ag. 24.1 2.9 4.5 6.2 5.3 5.2 36.4 8.3 5.0 7.5 10.4 5.1 35.1 20.2 14.8 4.5 519.0 4.0

Non-Ag.–All 15.9 0.4 1.2 3.8 3.9 6.6 29.8 0.4 2.9 7.5 10.2 8.9 53.3 25.6 27.7 1.1 9,225.5 0.8

Non-Ag.–Textiles(ch.61-64) 30.7 1.8 16.1 3.7 3.5 5.6 59.7 4.1 34.3 18.6 2.6 0.2 8.5 0.8 7.6 1.1 329.6 3.2

Non-Ag.–Fuel(ch.27) 12.9 0.0 0.0 0.3 1.6 11.0 23.4 0.0 0.0 0.7 8.9 13.9 63.4 39.2 24.3 0.2 2,230.0 0.1

Non-Ag.–Fish 36.7 3.1 7.1 10.8 8.6 7.2 33.5 0.3 5.9 8.7 13.1 5.6 29.5 18.6 10.9 0.2 72.8 3.1

Non-Ag.–Other 15.9 0.4 0.7 4.9 4.7 5.2 30.4 0.3 2.3 9.2 10.9 7.7 52.3 22.3 30.0 1.3 6,593.0 0.9

By Hs section

01'–Animalproducts 28.6 3.6 6.6 6.8 4.4 7.3 41.9 10.4 6.7 6.4 12.8 5.6 27.3 14.6 12.7 2.2 123.4 4.9

02'–Vegetableproducts 23.1 2.7 3.6 5.9 5.0 5.9 32.4 7.9 2.2 5.0 14.0 3.3 41.1 25.0 16.1 3.4 208.1 4.4

03'–Fatsandoils 30.5 1.0 1.6 11.9 13.9 2.0 47.8 4.8 1.6 29.1 8.9 3.3 19.7 13.2 6.5 2.0 43.3 2.4

04'–Prep.food,bev.,tob. 27.7 3.5 6.4 7.0 5.9 5.0 33.9 5.3 8.4 6.6 6.3 7.4 33.5 19.7 13.8 4.8 191.1 3.6

05'–Mineralproducts 12.1 0.0 0.0 0.3 1.5 10.3 21.8 0.0 0.0 0.6 8.2 12.9 65.8 39.6 26.3 0.3 2,446.0 0.1

06'–Chemicalproducts 15.2 0.0 0.9 5.9 4.2 4.4 33.6 0.1 1.4 13.7 10.5 7.9 50.6 20.1 30.5 0.6 754.8 0.7

07'–Plasticsandrubber 33.6 0.1 2.0 15.7 11.3 4.5 47.3 0.3 4.2 22.8 16.2 3.8 15.9 7.6 8.2 3.2 336.7 2.0

08'–Leather 22.7 0.4 0.3 2.7 12.0 7.3 53.1 0.7 11.5 17.9 21.1 1.9 24.2 4.7 19.5 0.0 63.1 0.9

09'–Woodandarticlesofwood 20.9 0.0 1.0 5.6 11.2 3.1 20.4 0.0 1.3 7.4 11.3 0.5 58.3 35.9 22.5 0.3 71.8 1.1

10'–Paper 8.9 0.2 1.8 5.1 1.3 0.5 12.6 0.1 1.9 4.4 5.7 0.6 77.6 41.5 36.1 0.9 129.1 0.8

11'–Textiles 31.1 1.6 14.6 5.4 2.6 6.9 54.9 3.4 28.2 16.6 5.8 0.8 12.5 2.3 10.2 1.5 382.3 3.1

12'–Footwear 21.7 0.6 0.9 5.7 13.3 1.1 62.1 3.9 14.8 35.7 7.4 0.3 12.4 1.4 11.0 3.8 70.6 1.3

13'–Stone,cement 25.5 0.2 2.3 7.0 9.3 6.7 50.9 1.0 7.7 21.2 15.7 5.4 22.8 11.1 11.6 0.8 74.3 1.4

14'–Preciousstones,jewellery 7.3 0.0 0.3 1.2 1.7 4.0 21.8 0.1 0.6 9.9 8.0 3.2 70.9 34.6 36.2 0.0 257.1 0.3

15'–Basemetals 18.4 0.1 0.6 5.8 7.7 4.2 32.1 0.9 2.1 8.1 16.1 4.9 48.6 26.8 21.9 0.9 744.5 0.9

16'–Machinery 10.8 0.0 0.5 2.1 3.8 4.4 24.1 0.0 2.4 6.0 8.0 7.7 63.8 25.7 38.1 1.3 2,547.9 0.5

17'–Transportequipment 32.0 3.6 0.8 11.4 3.7 12.5 47.1 1.3 2.0 11.9 11.1 20.8 17.8 7.0 10.8 3.1 724.1 2.7

18'–Opticalandotherapparatus

9.8 0.0 0.3 1.6 3.0 4.9 36.8 0.0 1.8 8.3 19.2 7.5 51.8 15.2 36.6 1.5 340.5 0.3

19'–Armsandammunition 12.9 0.0 0.5 2.9 5.5 4.0 45.6 0.5 0.7 8.6 21.7 14.0 38.4 7.6 30.8 3.1 6.6 0.6

20'–Miscellaneousarticles 11.3 0.0 0.9 2.9 6.1 1.3 26.1 0.5 3.4 4.5 16.4 1.3 62.4 27.1 35.3 0.2 213.1 0.6

21'–Artandantiques 0.4 0.0 0.0 0.1 0.0 0.3 1.2 0.0 0.0 0.4 0.7 0.0 98.4 19.5 78.9 0.0 16.1 0.0

Parts and components

BEC-42-53 18.3 0.1 0.5 5.3 5.0 7.4 34.0 0.3 2.5 8.4 10.5 12.4 45.9 16.1 29.8 1.7 1,158.0 0.8

SITC-Textiles 31.1 0.3 2.6 12.6 6.6 9.0 47.6 0.3 5.8 26.4 13.3 1.8 20.5 2.8 17.7 0.9 83.4 1.9

BEC-42-53&Textiles 19.1 0.1 0.6 5.7 5.1 7.5 34.9 0.3 2.7 9.5 10.7 11.7 44.3 15.3 29.0 1.7 1,238.7 0.9




80

FigureB.13: Preference utilization rate (PuR) of us preferential regimes (sorted by eligible exports), 2008 (Percentage)

Sources:ITCTradeMap,WITS(TRAINS),USITC,TARIC.

US

Tot

al

Can

ada

Mex

ico

AG

OA

GS

P

And

ean

CA

FTA

CB

TPA

Chi

le

Aus

tral

ia

Isra

el

LDC

Sin

gapo

re

Jord

an

Bah

rain

CB

I

Mor

occo

Mic

rone

sia

100

90

70

50

30

80

60

40

20

10

0

PUR by import value PUR by import duty PUR – simple average

(vi) Recent trends

Whiletheshareofpreferentialtradewithhighmarginsis relatively small, it seems to have increased overrecent years. A number of PTAs have been signedsince 2008 that are not covered in the dataset. Interms of bilateral trade flows, the “largest” PTAs thathave recently been signed are the agreementsbetweenChina-ChineseTaipei,EU-RepublicofKorea,US-RepublicofKorea,Australia-NewZealand-ASEANandASEAN-Japan.Theseagreementsareatdifferentstages in the process towards full implementation.Detailedtariffscheduleswouldbeneededtoseehowthese agreements would affect the overall share ofpreferentialtradeflows.Intheabsenceofsuchdata,aroughestimationcanstillbemade.

Assumingconstanttradeflows,PTAsconcludedafter2008would increasetheshareofworldtradeamongpreference-granting countries from 50 to around 54per cent (excluding trade within the EU). If bilateraltariffs were fully eliminated within these PTAs, theshareofworldtradecoveredbyapositivepreferentialmarginwouldincreasefrom16to18percent.Hence,while non-discriminatory liberalization in recent yearshas not kept pace with the proliferation of PTAs,furtherunilateralMFN tariff liberalizationandnotablytheconclusionof theDohaRoundwouldcounter therecentupwardtrendofpreferentialtrade.

(b) CustomsdatafromtheEUandUS58

Data on the actual import values under differentpreferential regimes are available from the EuropeanCommission and the US International TradeCommission.59Thepreferenceutilization rate (PUR) iscalculated as imports under a preferential regime

divided by eligible imports.60 For both the EU and theUnited States, the PURs are surprisingly high at anaggregate87and92percentrespectively,weightedbypreferentialimportvalues(seeFiguresB.13andB.14).61Utilizationratesarehigh,notonlyinaggregate,butalsofor most exporting countries, preferential regimes andtypes of products. Both developed and developingcountry exporters have high utilization rates in bothmarkets,withtheformerfeaturingslightlyhigherrates.

From Figure B.13, it can be seen that United States'importsfromSingaporeandMoroccoshowsomewhatlower utilization rates. At the sectoral level, this ismainlydrivenbyUSimportsofchemicals, inthecaseof Singapore, and garments and footwear fromMorocco.Forchemicals,arelativelylowutilizationmaybe due to a combination of low preference marginsand the exigencies of rules of origin, while the lattermayplay themain role in thegarmentsand footwearsectors.For theEU,utilization ratesare relatively lowfor imports from Algeria and Jordan, which canprincipally be explained by imports from thesecountriesbeingconcentrated inoilproducts(Algeria)andplasticsandchemicals(Jordan),wherepreferencemarginsarelow(seeFigureB.14).

FromTableB.11itcanbeseenthatpreferenceutilizationrates do not vary much across product groups. Notsurprisingly, utilization is generally a bit higher foragricultural items (99 per cent in the United States),since tariffs are higher for these products. If utilizationrates are examined for different ranges of preferencemargins, itappearsthatproductswithsmallpreferentialmarginsandsmalltradeflowshavelowerutilizationrates.Sinceusingpreferencescanbecostly(dependingontherulesoforiginandotherrequirementsrelatingtoproofoforigin),traderswouldincurthesecostsonlyifbenefitsintermsofpreferencemarginsweresufficientlyhigh.


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Asitisreasonabletoexpectthatpreferenceutilizationincludes a fixed cost element, the rate of use shouldincreasewithhighertradevalues.Theserelationshipsare tested more formally by Keck and Lendle (2011).Using customs data from the EU and the UnitedStates,theauthorsestimateasimpleempiricalmodelof preference utilization at the product-country levelusing thepreferentialmarginand import valueas themain explanatory variables.62 As expected, they findthat the preference margin has a positive andsignificantimpact(atthe1percentsignificancelevel)on preference utilization, and similar results areobtainedforimportvalues.63

Such factors seem to have less of an effect onutilization rates in the United States compared withtheEU.IntheUnitedStates,55percentofallproduct-country observations for which the duties saved arebelow US$ 10 are still imported under a preferentialregime.TherespectivefigurefortheEUisonly13percent. However, many individual items imported to theEU and the United States facing tariffs well below 1percentstillexhibithighutilizationrates.Forexample,the PUR for EU imports of Swiss luxury watchesranges between 94 and 98 per cent, despite an ad valoremequivalentofonly0.02to0.08percent.Thisseems to imply that either the cost of usingpreferencesincertaincasesisnegligibleorthatotherbenefits linked to using preferences exist, perhapsrelated to privileged customs clearance, qualificationunder specific security measures or advantages incase of re-export to other PTA partners. This wouldrequirefurtherresearch.

(c) Datafromfirmsurveys

In2007-08,anAsianDevelopmentBank(ADB)teamrandomlysurveyed841export-orientedmanufacturingenterprises,acrossavarietyofindustries,64insixEastAsian economies65 to gather firms’ views on theutilizationofPTAs(KawaiandWignaraja,2011).Atthesame time, the Inter-American Development Bank(IADB), inaprojectcoordinatedwiththatoftheADB,commissioned a survey of 345 firms in four LatinAmericancountries(HarrisandSuominen,2009).66Inthe context of PTAs, Latin America and East Asiarepresent two important regions of the world. Whilethe former has a long history of preferentialagreements,thelatterhaswitnessedarapidspreadofPTAs over the last decade, with the number ofagreements ineffecthaving increasedfromlessthanhalf a dozen to about 50 between 2000 and 2010(KawaiandWignaraja,2011).67

It is important to highlight the fact that these firmsurveysestimateutilizationofPTApreferencesbasedon the incidence of firms – i.e. the share of samplefirms in a given country that say they use FTApreferences.Dataonsharesofexport valueenjoyingpreferencesarenotavailablefromthesefirms'surveys.Giventheabove,thesedatacannotbecomparedwithpreference utilization rates based on customs data.Furthermore, it is worth noting that in these surveys,firms were selected from a sample that comprisedexporters fromkey industries ineacheconomy,usinga simple random sampling method (Kawai andWignaraja,2011).Thiscouldaffecttheaggregationofdataacrossthedifferenteconomies.

FigureB.14: Preference utilization rate (PuR) of eu preferential regimes (sorted by eligible exports), 2008 (Percentage)


EU

tota

l

GS

P

Sw

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land

Turk

ey

Nor

way

EPA

GS

P-L

DC

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P-P

LUS

Sou

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Tuni

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Mor

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Isra

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Mex

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Bal

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Egy

pt

Cro

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Icel

and

Chi

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Alg

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A

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T

Mac

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Syr

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Leba

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Rep

.

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Jord

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Pal

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Terr

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80

60

40

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PUR by import value PUR by import duty PUR – simple average


82

ResultsfromtheADBsurveysrevealthat“preferenceutilization” by exporting firms in some PTAs are nothighper se.Forthesampleof841firmsinEastAsia,the study by Kawai and Wignaraja (2011) shows thataround 28 per cent currently use PTA preferences.However, this number nearly doubles to 53 per centwhenplansforusingPTApreferencesinthefuturearefactoredin(seeTableB.12).

Table B.12 shows that Chinese, Japanese and ThaifirmsarethehighestusersofPTApreferences,whileplansforheightenedpreferenceuse in thefuturearepresent inallsixcountries.Thehigh levelofPTAuseamong firms in China can be attributed to thedeterminedbuild-upofnewandexpandingproductionnetworks that required channelling resources acrosstheregion.InJapan,arelativelyhighPTAuseratemaybeattributedto itsgiantmanufacturingfirmsthatareanchorsforregionalproductionnetworks,aswellastothe many networks of private sector industryassociationsandpublictradesupport institutionsthatprovide services to help businesses adapt to PTAguidelines. Thailand’s relatively high use of PTAs islikelytobetheresultofthecountry’semergenceasa

regional production hub (e.g. for automotives), highrates of export-oriented foreign direct investment(FDI) and the government’s reliance on PTAs as atradepolicytool.

In Latin America, the IADB survey of 345 firmssuggeststhatonly18percentarenotusinganyPTA,and that on average firms are using more than one(Harris and Suominen, 2009). These figures vary asone breaks down the sample by country, firm size, orindustry. The least likely firms to be making use ofPTAs were large textile firms in Panama (no use ofPTAs), whereas large food and agriculture firms inChileweremost likely tobe takingadvantageofPTAtariff preferences (using 3.5 PTAs on average).Furthermore,ofthefirmsnotusinganyagreement,theoverwhelmingmajorityof themwerePanamanian (57of61firmswerenotusingtariffpreferences),whichiseasilyexplainedbythefactthatPanamadoesnothavePTAsinforcewithanyoftheirprimarytradingpartners.A total of 98 per cent of firms surveyed in Chile,MexicoandColombiawereusingpreferences (HarrisandSuominen,2009).

TableB.11: Preference utilization rate (PuR) by product group, 2008 (Percentage)68

eu us

PuR by import value

PuR by import duty

PuR – simple average

PuR by import value

PuR by import duty

PuR – simple average

Ag./non-Ag.

Ag. 93 96 69 99 99 91

Non-Ag. 87 90 44 91 93 68

Hs section

01'–Animalproducts 85 93 81 100 99 91

02'–Vegetableproducts 93 97 71 99 100 91

03'–Fatsandoils 96 96 61 98 98 89

04'–Prep.food,bev.,tob. 91 96 70 98 99 93

05'–Mineralproducts 80 79 48 89 91 67

06'–Chemicalproducts 85 91 55 92 92 76

07'–Plasticsandrubber 93 94 52 97 98 69

08'–Leather 91 91 52 94 94 70

09'–Woodandarticlesofwood 91 93 59 97 98 83

11'–Textiles 85 88 54 87 87 67

12'–Footwear 90 92 55 93 89 70

13'–Stone,cement 92 93 53 96 96 79

14'–Preciousstones,jewellery 85 85 35 93 92 79

15'–Basemetals 95 96 46 95 94 75

16'–Machinery 83 84 29 90 91 57

17'–Transportequipment 91 93 37 97 98 60

18'–Opticalandotherapparatus 82 79 20 76 80 57

19'–Armsandammunition 88 89 59 94 93 79

20'–Miscellaneousarticles 86 87 41 95 96 77

Note:AllproductsofHSSections10and21havezeroMFNdutiesinbothEUandUSandarethereforenotshown.



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These firm surveys identify a number of factors thatinfluencethepreferenceutilizationpatternsdescribedabove.Thefollowingisabriefreview.

(i) Margins of preference

The 2007-08 ADB survey of exporting firms in EastAsiashowsthat36percentof reportingfirms intheRepublic of Korea and 14 per cent in China cited“havinghadnosubstantialtariffpreferenceorhavinghadnoactualbenefitsfromsuch”asthemajorreasonfor not utilizing the PTA preferential tariffs. TherelativelylowrateofpreferenceutilizationinPTAsforthePhilippinesandSingaporecanbeattributedtothecountries' overwhelming export concentration inelectronics,which ischaracterisedby lowMFN tariffrates(KawaiandWignaraja,2011).69

(ii) Rules of origin

Rulesoforigin(RoOs)areformulatedinthecontextofPTAagreementstoprevent“tradedeflection"70,inaneffort to support a process of preferential tradeliberalization. This is particularly important in thecontextofglobalproductionnetworks,which,throughtrade in intermediate goods, involve two or morecountries in the production of a single final good. Inreality, however, RoOs may result in far less tradeliberalization than is implied by the preferencesgranted. This is because RoOs, when restrictive andcomplex, may raise transaction costs for firms to adegree that makes utilization of FTA preferencesuneconomical (Manchin and Pelkmans-Balaoing,2007;Tumbarello,2007).Itbecomesespeciallylikelygiventhelowmarginsofpreferencedescribedabove.Furthermore,asthenumberofconcludedagreementsincreases, different RoOs in multiple, overlappingPTAs can pose an additional burden on firms. Thisphenomenon isreferredtoasthe“spaghettibowl”oftradedeals(seeBoxB.1forabriefoverview).

For a sample of 221 firms, Wignaraja et al. (2010b)show that around 15 per cent reported that RoOs in

Thailand's PTAs were an obstacle to using PTApreferences.Inaddition,another22percentreportedthat RoOs might be an obstacle in the future. In thesurvey of 345 Latin American firms, 36 per centreported that compliance with RoOs was not easy.This varied across countries, with nearly half ofMexican firms reporting difficulty with compliance,whereas only 27 per cent of Colombian firmsencountered difficulties. However, when askeddirectlyiftheRoOsofanagreementhadcausedthemto not use the available preferences, only about 10per cent answered in the affirmative (Harris andSuominen,2009).

Furthermore,studiesbasedonfirm-surveydatafoundthat relative to small and medium-sized enterprises(SMEs) and “giant” firms, large firms have morenegative perceptions about RoOs (Kawai andWignaraja, 2009; Wignaraja et al., 2010b). This maybeexplainedby the following.First,as firmsbecomelarger initially, they begin exporting to multiplemarkets and hence meeting RoOs requirementsbecomes costly. Subsequently, however, as theybecome even larger, they acquire wider and deepermarket penetration and hence greater wealth, whichallowsthemtoproveoriginofgoodsmoreeasily.

Survey results from East Asia also show that firmsprefer greater flexibility and being able to choosebetweenRoOsforthesameproductfortworeasons.First, if they cannot meet one requirement, havinganother RoO increases their likelihood of using PTApreferences. Second, some RoOs may be betteraligned than others with the technology, productionprocesses and business strategies of particularindustries (Kawai and Wignaraja, 2011). Of the 841samplefirms,48percentofrespondentspreferredtobegiven theoptionofchoosingbetweenadomesticvalue content (VC) rule and a change in tariffclassification (CTC) rule. Another 28 per cent chosetheCTCruleonlyand24percentchosetheVCruleonly (KawaiandWignaraja,2011).TheCTCrulemaybe preferred to the VC rule because calculating thelatter is time-intensive, and hence costly, and oftenrequires thedisclosureofconfidential informationoncosts,componentsandprocurementsources.

Based on a survey of 841 firms in six East Asianeconomies, Kawai and Wignaraja show that only 20percentof respondents reported thatmultipleRoOssignificantly added to business costs. Singaporeanfirmshadthemostnegativeperceptions(38percent)while Chinese firms had the least negative (6.3 percent). National PTA strategies, industrial structures,and the quality of institutional support may underliedifferences in perceptions of RoOs across Asiancountries. As the number of PTAs in the regionincreases,however,theremaybeagreaterriskofanAsian“noodlebowl”effectinthefuture.Forinstance,Hirastukoetal.(2009)reportthatinJapan,while28per cent of the surveyed firms indicated that the

TableB.12: Firms’ utilization of PtA preferences (Percentageofrespondents)

use PtAsuse or plan to

use PtAs

% %

All firms 28.4 53.0

Japan 29.0 47.4

China 45.1 77.9

Korea,Rep.of 20.8 54.2

Singapore 17.3 28.0

Thailand 24.9 45.7

Philippines 20.0 40.7

Source:KawaiandWignaraja(2011).


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existenceofmultipleRoOs leads to increasedcosts,this number rises to 61 per cent when the future isfactoredin.InLatinAmerica,30to45percentofthesurveyed firms rated the “spaghetti bowl” costs frommediumtoveryhigh.

Recognizingtheabove,around41percentoffirmsinthe ADB survey see the benefits from harmonizedRoOs75 inreducing“spaghettibowl”costsandhenceincreasing preference utilization (Kawai andWignaraja, 2011). In the IDB survey, this process ofharmonized RoOs was recognized as having thehighestpotentialforcostsavings.Nearlyaquarteroffirms rated this as generating “high” or “very high”savings(rangingfrom13percentoffirmsinChileto46percentinPanama)(HarrisandSuominen,2009).

Whatismore,the“spaghettibowl”costsofPTAsmaymake it harder for firms to organize internationalproductionnetworks.Consider,forexample,Japanesemultinational companies (MNCs), which are a majordriverofproductionnetworksintheEastAsianregion.In a firm survey carried out by the Japan ExternalTrade Organization (JETRO) in 2006, of the 97Japanese MNCs using (or planning to use) PTA

preferences inEastAsia,about30percent felt thatthe existence of multiple RoOs leads to increasedcoststoexporting,whileanother33percentthoughtthat it would do so in the future (Hirastuko et al.,2009).

Thailandisatthecentreofproductionnetworksintheautomobiles and electronics sectors, with five majorPTAs ineffect. In a2007ADBsurveyof118MNCsand domestic firms, 22 per cent report that multipleRoOs in Thailand’s FTAs were an obstacle to usingFTA preferences while another 23 per cent saidmultiple RoOs might be an obstacle in the future.Furthermore, it is worth noting that auto firms, withlarge amounts of components and parts trade,perceived multiple RoOs to be more of a problem(Wignarajaetal.,2010b).

In sum, it is both the design (the “transformationcriterion” used and flexibility for firms to choosebetween different criteria) and the coherence(multipleRoOsinmultipleoverlappingPTAs)ofRoOsthataffecttransactioncostsandhencetheutilizationof preferences in PTAs. Furthermore, productionnetworks that rely on international trade in

BoxB.1: Rules of origin in PtAs: transaction costs and the spaghetti-bowl phenomenon

Rulesoforigin(RoOs)arelikelytoincreasethetransactioncostoftradebecausefirmswillhavetoaltertheirproduction methods (for example, source more inputs from PTA partners) from what may have been theleast-costchoiceandduetotheadministrativeandbureaucraticcostsassociatedwithadministeringRoOsregimes.Theselattercostsrelatetothefactthatforagoodtobegrantedoriginatingstatus,theexportingfirm needs to provide detailed documentary evidence in order to obtain the relevant certification. RoOsprescribe a detailed way in which a good needs to be transformed in the partner country in order to beexportedtoanotherPTApartneratthepreferentialrate.However, there isnosingleapproachfordefining“substantialtransformation”(Estevadeordal,2000).

Theleveloftransformationisusuallyspecifiedintermsofaminimumpercentageofthefinalproductvaluethat has been added in the originating country,71 changes in tariff headings for a product under theHarmonized Commodity Description System in the originating country72, or through specific technicalrequirements relating to specific production process operations that a product must undergo in theoriginatingcountry73.Thedifferentmethodsdescribedabovehavebeenusedindifferentways,withdifferentdegreesofprecisionunderdifferentPTAs74.Forexample,thereistheLatinAmericanIntegrationAgreementwhereageneralrule,basedonachangeintariffclassificationattheheadingleveloraregionalvalueaddedof at least 50 per cent of the f.o.b. export value, is used for all items. In contrast, NAFTA incorporates ageneral rule combined with specific rules at the six-digit Harmonized System level, combining the threemethodsdescribedaboveinavarietyofways(Estevadeordal,2000).Importantly,thedesignofRoOschosendeterminestheextenttowhichtheyincreasethetransactioncostoftrade.

Furthermore, in the current sea of PTAs, there is often little consistency in the underlying RoOs acrossdifferentproductsanddifferentagreements.Thesetwoseparate,butrelated,dimensionsareanadditionalcosttofirms.First,ifthespecificationoftheruleforaparticularproductdiffersacrossagreementssignedbyacountry,firmsmustbeabletounderstandthedifferentrules,andthenadapttheirproductionnetworkstocomplywitheachdifferentrule.Second,evenwherethespecificationoftheRoOforagivenproduct isharmonized across agreements, each agreement covers a different set of partner countries. Hence, thematerials that count as “originating” under one agreement may not be “originating” under another. Forexample, a Moroccan firm wanting to export a given product will have different RoO requirements anddifferent administrative procedures depending on whether it is exporting the good to the United States,Europe or countries in the Arab region. This lack of compatibility between different RoOs in multiple,overlappingPTAs,referredtoasthe“spaghettibowl”effect(Bhagwati,1995),islikelytofurtherincreasethetransactioncostsoftradeforfirms.


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intermediateinputsfortheproductionofasinglefinalgoodarelikelytobeparticularlyaffectedbystringentandcomplicatedRoOsinPTAs.TheADBfirmsurveyin East Asia reveals that 31 per cent of respondentfirms in the Philippines cite RoOs as the biggestimpediment for not utilizing PTA preferences (Kawaiand Wignaraja, 2011), while the IDB survey in LatinAmerica shows that29per cent identifyRoO issuesas being “restrictive”.76 These numbers suggest thatwhilecompliancewithoriginisasignificantissue,therules of origin are far from being a universalimpediment.

(iii) Other firm-specific factors

Firm size

A classic firm size effect is visible in the underlyingpatternofPTApreferenceusefromtheADBandIDBfirm surveys in East Asia and Latin Americarespectively.Relative toSMEs, largefirmsweremorelikelytouseFTApreferences(CheongandCho,2009;Hirastuko et al., 2009; Harris and Suominen, 2009;Wignaraja et al., 2010b). For example, Kawai andWignaraja (2011) report that the size of Japanesefirms that use PTA preferences have an average of30,104workers,whiletheaveragefirmsizeis3,542inChina;1,098inSingapore;591inThailandand395inthe Philippines. In contrast, the average number ofemployeesfornon-usersismarkedlysmallerat7,020inJapan,2,226 inChina;291 inThailand;269 in thePhilippinesand142inSingapore.

The higher utilization rates among large firms can beattributedtothefollowing.First,usingPTAsislikelytoentaillargefixedcosts–learningaboutPTAprovisions,adjusting business plans to complex tariff schedules,obtaining certificates of origin, etc. – and larger firmsarebetterablethansmallfirmstomusterthefinancialand human resources to address these issues (KawaiandWignaraja,2011).Second, largefirmsare likely torealize larger gains from tariff preferences becausethey export more, often being a part of MNC-basedproductionnetworks(CheongandCho,2009).

Firm experience

FirmsurveyscarriedoutbytheADBandIADBinEastAsia and Latin America respectively show a positiverelationshipbetweenexperienceandthe likelihoodofa firm using a PTA. For example, Wignaraja et al.(2010a)showthatinthePhilippines,theprobabilityoffirms in the sample that are less than ten years oldusing the ASEAN Free Trade Agreement (AFTA) isabout 10 per cent or less, while the probability forfirmsinoperationformorethan25yearsismorethan25 per cent. This may be because more experiencedfirms develop core capabilities, extensive supplynetworks and administrative capacity over time tobettercompeteintheworldmarketandtakeadvantageofPTAs.

Foreign ownership

FirmsurveyresultsfromEastAsiashowthatusersofPTA preferences in Japan and Thailand both havesignificantlyhigher foreignequity thannon-users.Onaverage, users in Japan have 9.8 times more foreignequitythannon-users,whileusersinThailandhave1.5timesmore foreignequity thannon-users (KawaiandWignaraja, 2011). It is likely that access to themarketing know-how of their parent companies —including dealing with multiple tariff schedules andRoOs—makesforeignaffiliatesbetterplaced tousePTAsthandomesticfirms.

Lack of information

PTAtextsarecomplexlegaldocumentswhichrequirelegal expertise to improve understanding of thebusiness implications of agreements. Hence, havingdetailed knowledge of how PTA provisions affectbusinessesislikelytohaveasignificanteffectontheuse of PTA preferences. The ADB survey of firms inEastAsiashowsthatPTAusersinJapan,whichhasarelatively high preference utilization rate, have thehighestknowledgelevels(64percent).Incontrast,inthe Philippines, which has a relatively low preferenceutilizationrate,only7percentofusersclaimthoroughknowledge (Kawai and Wignaraja, 2011). In fact,Wignaraja et al. (2010a) report that firms in thePhilippines that are “aware” of FTA provisions have apredicted AFTA use rate of 40 per cent, comparedwithamere11percentforthosethatareless“aware”.

Furthermore, theADBfirmsurveyrevealsthat70percentofrespondingfirmsinthePhilippines,45percentinChinaand34percentintheRepublicofKoreacited“lack of information about the conditions of theexisting PTAs or about how to utilize them” as thebiggest impediment for not utilizing PTA preferences(KawaiandWignaraja,2011).

5. Conclusions

PTAsexistedlongbeforetheadventofthemultilateraltradingsystem.Alreadyin1860theCobden-ChevalierTreaty introduced a stronger trade relationshipbetween France and Britain, helping to trigger anetwork of reciprocal and inclusive trade treaties –perhaps an early prototype of the GATT/WTO. Thisdemonstrates that no simple divide exists between“regionalism” and “multilateralism”. Not surprisingly,therefore, the establishment of the GATT and itssuccessor, the WTO, has not diminished theattractiveness of bilateral and regional approaches.The three waves of “regionalism” in the era after theSecondWorldWarwerealldriven,at least inpart,bythedesiretogo“furtherandfaster”thanwasoccurringatthemultilaterallevel.

OnthebasisofWTOdata,thissectionhashighlightedanumberofstylizedfactsabouttheevolutionofPTA


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activity.TherecentproliferationofPTAstoasignificantdegree comprises agreements between developingcountries, cross-regional PTAs and bilateralarrangements. Growth has taken place both on the“intensive”and “extensive”margin, i.e. it involvesbothtraditionally active PTA participants, such as the EU,Chile and Mexico, and “newcomers”, such as Japan,other countries fromAsia and theMiddleEast.Manyof these agreements go beyond traditional marketaccess commitments and cover a range of “behind-the-border”areas,suchasintellectualpropertyrights,product standards, competition and investmentpolicies.Several reasons for thesedevelopmentscanbe put forward and will be further explored in thisreport,but theemergenceof internationalproductionnetworksiscertainlyonecompellingexplanation.

The need to look for alternative motivations forcountries' unabated interest in PTAs has beendemonstrated by statistics on the surprisingly lowshare of preferential trade in global trade, as well asthe low preference margins involved. While tradebetween PTA members is growing as the number ofagreements increases, the analysis presented in thissection shows that given the considerable number ofzerodutyMFNratesinmanycountriesandwidespreadproductexclusions,only16percentofworld trade iseligibleforpreferentialtariffsandlessthan2percentis eligible to receive preferences with margins above10percentagepoints (30percentand4percentagepointsrespectivelyiftradewithintheEUisincluded).

Inotherwords,despitetheexplosionofPTAsinrecentyears,84percentofworldmerchandisetradestilltakesplaceonanMFNbasis(70percentifintra-EUtradeisincluded).Theglobaltrade-weightedpreferencemarginamounts to no more than 1 per cent (2 per cent

includingtradewithintheEU).Eventheselownumbersmust be seen as an upper limit, since preferenceutilizationusuallyentailscostsrelatedtorulesoforiginandotheradministrativerequirementsthatmayfrustratetheactualuseofavailablepreferences.

Simple empirical estimations using customs data fromthe EU and United States confirm higher utilizationrates for higher preferential margins and trade values.Thispointstotheinfluenceoffixedcostsontheuseofpreferences. However, preference utilization in the EUandtheUnitedStatesoverallisfairlyhigh,whichseemstosuggestthatcostsinvolvedarerathermodestand/orthatdemonstratingoriginmaybeassociatedwithotherbenefits.Atthesametime,firmsurveysfromEastAsiarevealthattheuseofPTApreferencesisnotuniformlyhigh.Thissuggeststhatcostsrelatingtothedesignandcoherence of origin rules, a lack of information, andother impediments affecting preference utilization arenotuniversal.Rather, theyare likely tovarybycountry,sectorandfirm.

In light of the limited scope for meaningful tradepreferences, the ever-increasing number of PTAspoints to other objectives beyond traditional marketopeningasdriversofPTAformation. It isamatterfordebate as to how far the recent surge in PTAs isrelated to the slow pace of the Doha Round of tradenegotiationsandthecomplexitiesinvolvedinreachingagreement in a multilateral setting. Some PTAsobviouslygo further than theWTO,both in thedepthand breadth of their coverage. Subsequent parts ofthisreportseektoshedfurtherlightonwhatmotivatescountries to pursue “deep integration” through PTAs,thepolicyareascovered,andthewaythesestrategiesoperateinpractice.


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1 Multilateralismininternationalrelationsistypicallydefinedasmultiplecountriesworkinginconcertonspecificorgeneralissues.Thefirstmoderninstancesofmultilateralismoccurredinearlynineteenth-centuryEurope,withthecreationoftheConcertofEuropeaftertheNapoleonicWars,andthenagainintheperiodbetweentheFirstandSecondWorldWars,withthecreationoftheill-fatedLeagueofNations.However,themostsuccessfulmodernexamplesofmultilateralismaregenerallyconsideredtobetheUnitedNationssystem,theBrettonWoodsinstitutions,andtheGATT/WTO,allofwhichtracetheiroriginstoeffortstoreconstructtheinternationalsystemafterthedevastationoftheSecondWorldWarandtheperceivedfailuresoftheLeagueofNations.

2 Anearlyexamplewasthe1703MethuenTreatybetweenEnglandandPortugalwhich,amongotherthings,stipulatedthatPortuguesewinesimportedtoEnglandwouldbesubjecttoathirdlessdutythanwinesimportedfromFrance,andthatEnglishwoollenclothimportedtoPortugalwouldenterdutyfree.

3 FairlytypicalwereEngland’sNavigationLawsof1712–whichweredesignedexplicitlytorestricttheuseofforeignshippingbetweenEnglandanditscolonies,aswellastosecurecolonialmarketsforEnglishmanufacturing,andtograntmonopoliestocolonialcommoditysuppliers(Dickerson,1951).

4 ThefactthattheAmericanRevolutionwassparkedinpartbycolonialresentmentoftherestrictiveNavigationLawswasanotherfactorwhichledtothesystem’sdemise–andthegrowingsupportforfreetrade–intheearlynineteenthcentury.

5 Forexample,theFranco-Italianconflict(1886-95);theFranco-Swissconflict(1892-95);theRussian-Germanconflict(1893-94);theSpanish-Germanconflict(1894-99);theRomania-Austro-Hungarianconflict(1886-93).

6 “Beggar-thy-neighbour”isanexpressionineconomicsdescribingpoliciesthatseekbenefitsforonecountryattheexpenseofothers.

7 Belgium,Luxembourg,andFinlandhadalsojoinedthePactby1933.

8 AkeyfigurebehindthisshiftinUStradepolicytowardsgreaterliberalizationandcooperationintradewasCordellHull,theUSSecretaryofStateformuchofRoosevelt ’spresidency,whotirelesslyassertedhisbeliefthat“warswereoftenlargelycausedbyeconomicrivalryconductedunfairly”andthatiftheworld“couldgetafreerflowingoftrade–freerinthesenseoffewerdiscriminationsandobstructions–(then)onecountrywouldnotbedeadlyjealousofanotherandthelivingstandardsofallcountriesmightrise”(Irwinetal. ,2008).

9 Inpart,theseregionalagreementsfailedbecausetheywerebasedonaregionalformofimportsubstitutionthatinevitablyledtoconflictovertradediversion–eachmemberwantedaregionalmarketforitsowninefficientindustries,butwasunwillingtobuytheexpensiveorpoor-qualityimportsubstitutesoftheirpartners–whilenothavingthepoliticaldeterminationoftheEECwhichbeganlifewiththeoverarchingobjectiveofconsolidatingpeaceintheregion(Pomfret,2006).

10 Bulgaria,theCzechandSlovakRepublics,Estonia,Hungary,Latvia,Lithuania,Poland,RomaniaandSlovenia.

11 ThefoundingmembersofAPECwereAustralia,BruneiDarussalam,Canada,Indonesia,Japan,theRepublicofKorea,Malaysia,NewZealand,thePhilippines,Singapore,Thailand,andtheUnitedStates.

12 Ineconomics,astylizedfactisasimplifiedpresentationofanempiricalcommonfinding.

13 Thedatabaseispubliclyaccessible.Fordocumentationofthedatabase,seetheWTO’sRegionalTradeAgreementsInformationSystem(RTA-IS),availableathttp://rtais.wto.org/UI/PublicMaintainRTAHome.aspx.

14 Inthesummarytablesofthedatabase,thetotalnumberof“physical”agreementsareprovided.

15 Forexample,thewebsite“bilaterals.org”(accessedon17January2011)claimstoprovideinformationon“everythingthat’snothappeningintheWTO”.TheTuckSchoolofBusinessatDartmouthUniversityalsohasasearchableglobaldatabaseonPTAsavailableathttp://www.dartmouth.edu/~tradedb/trade_database.html,accessedon14January2011.PTAdatabaseswithadistinctregionalfocusincludetheonesbytheInter-AmericanDevelopmentBankavailableathttp://www.iadb.org/dataintal/Default.aspx,accessedon17January2011,andtheAsianDevelopmentBankavailableathttp://aric.adb.org/ftatrends.phpforPTAtrends,andhttp://aric.adb.org/indicator.phpfortradedatabycountriesandgroupings,accessedon17January2011.Authorsofempiricalstudiesusuallyassembletheirownup-to-datedatasetonPTAsfromavarietyofsuchsources.Seeforinstance,HufbauerandSchott(2009),asupdatedbyBaldwinandJaimovich(2010).

16 SeealsoFreundandOrnelas(2010)whofindthesamepattern,albeitwithanextendedversionoftheWTOdatabaseofnotifiedPTAsand,therefore,reportslightlydifferentfiguresfortheaveragenumberofPTApartnersovertime.

17 ForabreakdownofPTAsbycountrygroup(developed,developing)andregionseeTableB.1insubsectionB.2(b)below.

Endnotes


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18 SeeASEANwebsiteathttp://www.aseansec.org/19585.htm,accessedon19November2010.

19 OfcoursethecontentofPTAsalsomatterswithmostCISagreementsinvolvingonlygoods,whereasarangeofAsianagreementscoverbothgoodsandservices.Theissueofdeeperintegration,notablyinrelationtotherecenttrendstowardsinternationalproductionnetworks,isdiscussedfurtherbelowinSectionD.

20 WhilethereisalargedegreeofcertaintyaboutthenumberofPTAsinforceespeciallyiftheyarenotifiedtotheWTO,figuresonagreementsundernegotiationorsignedagreementsdependlargelyonwhetherthepartiestothesePTAsmakesuchinformationavailablepublicly.Informationgatheredonthelatteristhereforelesscomplete.

21 Also,theTrans-PacificStrategicEconomicPartnership(TPP)Agreementwillconsolidateasignificantshareofworldtrade.

22 ThedeclarationtointegrateCOMESA,EACandSADCattheTripartiteSummiton22October2008inKampala,Uganda,withtheultimategoaltoformanAfricancommonmarketby2028mightforeshadowareversalofthistrend.See,forinstance,SADCTodayVolume11No.3ofDecember2008athttp://www.sardc.net/editorial/sadctoday/view.asp?vol=720&pubno=v11n3,accessedon3March2011.

23 Foranoverviewofstrategicexplanationsofwhycountriesdecidetointegratethroughtradeagreements,includingacrossregions,seeRavenhill(2008:2010).Forfurtherexamples,seealsoBox1inSectionCprovidingPTAcasestudiesbasedoninformationcollectedinthecontextofWTOTradePolicyReviews.

24 FreundandOrnelas(2010)showthatthegapbetweenCUsandFTAsmaybemuchlesssevereif,forexample,theaveragenumberoftradingpartnersperWTOmemberiscalculated.TheyfindthatFTAparticipantscurrentlyhaveaboutninepartnersonaverage,comparedtosixforCUmembers.TherelativelyhighaverageforthelatterisdrivenbythefactthattheEU,asoneofthelargestPTAs,isacustomsunion.

25 ProductexclusionsaremorecommoninPTAsnotifiedundertheEnablingClause,whereasimilarprovisiondoesnotapply.Foranalyticalpurposes,PTAscoveringonlyaselectednumberofproductsorsectorshavebeenlabelled“partialscopeagreements”inFigureB.4.

26 Thelistof“productsexcluded”isconstructedbyclassifyingproductsthatdonotreceivepreferentialtarifftreatmentinthefirstyearofthePTA’simplementation.

27 Forinstance,ofallagricultureandfoodproductsrepresentedin20,915tarifflinesrecordedinthesample,around27percentareexcludedfromtheprovisionoftariffconcessions.Incomparison,onlyaround1percentofmanufacturingproducts(mostlylabour-intensiveproductssuchasfootwearandtextiles)areexcludedintherespectivePTAs.Thissectoralpatternmaybeattributabletothefactthatagriculturalproductsaresensitiveproductsinthesecountries,intricatelylinkedtothedomesticpoliticaleconomyprocess(GrossmanandHelpman,1995).

28 Reviewingcommitmentsundertakenby36WTOmembersundermode1(cross-bordersupply)andmode3(commercialpresence),Royetal.(2007)suggestthatPTAcommitmentstendtogosignificantlybeyondthoseintheGATS.

29 Agreementsbetweenimportantservicesexporters–apartfromEuropeanintegrationagreements-include,forexample,NAFTA,US-Australia,Japan-Switzerland,Singapore-US,China-Singapore,orChina-HongKong,China.

30 ThesharesinthissubsectiondiffersomewhatfromthoseinTableB.8,butthedataarenotstrictlycomparable.Sharesinthissectiononlyincludereciprocalregimes,whereasbothreciprocalandnon-reciprocalregimesareconsideredinTableB.8.Also,TableB.8isbasedonreporteddatafrom20countries,whereassharesinthissectionarebasedonallavailablereportersinComtrade.However,sharesinbothsectionsareofroughlysimilarmagnitude.

31 SeeSectionB.3.Thisfigurecoversonlyreciprocalagreementsandexcludestradeundernon-reciprocalpreferenceschemes.Ifnon-reciprocalpreferencesareincludedaswell,theshareoftrade(includingintra-EUtrade)betweencountriesthathavesomekindofpreferentialrelationshipamountstoalmosttwo-thirdsofworldtrade(seeAppendixTable1).

32 Foranestimateoftheaveragecostmarginrelatedtothefulfilmentofrulesoforiginrequirementssee,forexample,FrancoisandManchin(2007).

33 ForamoreextensivediscussionofthesedataseeCarpenterandLendle(2010).

34 Thesampleof20countstheEUandits27membersasone.Throughoutthediscussion,figuresaregivenbothwithandwithoutintra-EUtrade.

35 Forsomecountries,tradeand/ortariffdataaretakenfromtheyear2006,2007or2009,dependingondataavailability.

36 IfonlysometariffswithinanHSsub-headingarezero,thecalculationofaveragesattheHS-6levelwouldunderestimatetheshareofMFNzeroimports.This,inturn,impliesthattheshareofpreferentialimportswouldbeoverestimated.Forinstance,usingtariff-linedata,theshareofMFNzeroimportsis57percentfortheEUand43percentfortheUS(seeAppendixtable8intheStatisticalappendix).IfHS-6averagetariffsareusedinstead,thesesharesdropto46percentfortheEUand37percentfortheUS.

37 WITSisasoftwaredevelopedbytheWorldBank,incollaborationwithvariousinternationalorganizationsincludingUNCTAD,ITC,WTOandtheUnitedNationsStatisticalDivision.WITSprovidesaccesstomajorinternationaltrade,tariffsandnon-tariffdatacompilations.Seehttp://wits.worldbank.org/wits.

38 Itisnotshownwhetherthepreferentialrateisazerorateoronlyareducedrate.However,zeropreferentialratesarefarmorecommonthanreducedrates.


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39 Thepreferentialmargin(abbreviated“PM”inthetables)isthedifferencebetweenthelowestapplicablepreferentialtariffandtheMFNrate.Thetrade-weightedpreferentialmargincansimplybecalculatedasdutyreductiondividedbytotaltrade,with“dutyreduction”beingthedifferencebetweenMFNdutiesapplicableifnopreferencesexistedanddutiesapplicablewithfulluseofpreferences.Preferentialtradeflowsmaybeslightlyoverestimated,astheanalysisassumesthatpreferencesarefullyutilized,whichisnotalwaysthecase.Ontheotherhand,preferentialtradeunderquotaregimes,includingpreferentialquotaregimes,isnotcoveredbythedata,whichleadstoanunderestimationofpreferentialtradeflows.Thereareanumberofotherreasonswhyestimatesshownheremaynotalwaysbeexact.Althoughthemarginoferrorislikelytobeverysmallforaggregatedfigures,moredetailedresultsmustbeinterpretedwithcare,astheymaydependstrongly,forexample,ontheestimatedad valoremequivalentforindividualproducts.

40 Inmanycountries,highMFNtariffsexistforitemsthatarenotheavilytraded–oftenpreciselybecauseofthesehightariffsorothertradebarriers.

41 "Global”hereimpliesthattheaverageiscalculatedonthebasisofthe20importingcountriesexaminedhereinrelationtoalloftheirtradingpartners.

42 WithEUintra-trade,theglobaltrade-weightedaveragetariffisreducedbytwopercentagepoints(fromabout3.5to1.5percent).

43 ThecorrespondingnumberswithEUintra-tradeare64percentofworldtradethatiswithcountriesreceivingpreferencesandabouthalfofthis(30percentofalltrade)thatispreferential.

44 SingaporeappliesazeroMFNdutyforallproductsexceptforahandfulofalcoholicbeverages,whichthenusuallyenterduty-freeunderSingapore’sPTAs.SeeAppendixTable1forSingaporeandmorecountry-specificdata.

45 Ofcourse,thisassumptionisunrealistic,astradeflowswouldchangeintheabsenceofpreferences.However,proceedinginthiswayallowsforthecalculationofacounterfactualestimateof“dutiessaved”duetopreferentialagreements.

46 Thetrade-weightedpreferentialmargingivestheaveragemarginoverallexportsorimports,andnottheaveragemarginoverpreferentialtrade.However,thelattercanbeeasilycalculatedbydividingsaveddutiesoverpreferentialtrade.Onagloballevel(withoutintra-EU),thetrade-weightedpreferencemarginis1.0percent,buttheaveragemarginforpreferentialtrade(whichis16percentofalltrade)is6.0percent.

47 Thedataarebasedonimportsfromtradingpartners(mirrordata).Sincethedatasetonlyincludesimportsfrom20countries,notallexportsfromthe30listedcountriesareincluded.Overall,approximately89percentofexportsarecovered.CoverageofindividualcountriescanbeseeninAppendixtable8(seetheStatisticalappendix).Allindicatorsarecalculatedusingtheavailabledataandarenotadjustedforthedegreeofcoverageofthedata.Itshouldalsoberecalledthatherethefocusisonlyonthe

preferentialmarginfacedbyindividualexporterswithouttakingintoaccountthemarketaccessconditionsforcompetingproductsfromthirdcountries.ThisisdoneinSectionD(seeBoxD.1),where“competition-adjusted”preferencemarginsarecalculatedasthepercentage-pointdifferencebetweentheweightedaveragetariffrateappliedtotherestoftheworldandthepreferentialrateappliedtothebeneficiarycountry,withweightsbeingthetradesharesinthepreferencegrantingmarket.

48 MostoftheBolivarianRepublicofVenezuela’sexportsarenon-preferentialandfacelowMFNtariffs.ThesearemainlycrudeoilexportstotheUS,whicharesubjecttoaverylowspecifictariff(AVE<1%).

49 InFigureB.12,non-reciprocalregimesmatteronlyforBangladesh,CapeVerde,Haiti,Lesotho,Madagascar,Malawi,theMaldives,SamoaandSenegal,takingasacriterionthatatleast40percentofdutiessavedarerelatedtonon-reciprocalpreferencesreceived.Overtime,thesepreferencesmaybeerodedasthecountriestowhichtheyexportenterintomorePTAs.SeethediscussioninSectionD.1whichexaminestheeffectofentryofmorepreferentialcompetitorsonanexporter’smarginofpreference.

50 Again,itshouldbenotedthatthedatacoveronlyexportstothe20largestimporters.Somecountriesenjoyadditionalpreferencesinsmallermarketsintheirregionthatarenotcoveredinthedataset;hencetheaveragemarginforthesecountriescouldbehigher.

51 Thetradebetweeneachcountrypairandineachdirectionislabelledasbelongingtoaspecificregime.Inthecaseofoverlappingpreferences,themostgenerouspreferenceschemeisconsideredforlabellingpurposes.However,allexistingpreferencesareincludedinthedatasetanditisassumedthatthebestapplicabletariffrateisusedforeachproduct.

52 ItshouldberecalledthatthedatasetonlycoversimportsfromfourmajorASEANmembers(Indonesia,Malaysia,SingaporeandThailand).

53 Thisiswhythisindicatoris100forMFNandzeroforEUintra-trade.ItshouldalsoberecalledthatinPTAspreferentialratesarecommonlyzeroratherthansimplyreducedrates.

54 Evenwithaverylowshareofnon-preferentialtrade,apreferentialregimecouldstillhavemanyexemptionsonitemsthatarenotheavilytraded(e.g.becauseofhightariffs).OneexampleistheEU-SwitzerlandFTA,whichexcludesmanyagriculturalproducts.

55 Inotherwords,reciprocalregimesaccountfor0.9percentagepointsofthe1percentglobaltrade-weightedpreferencemargin,whilenon-reciprocalregimesonlycontribute0.1percentagepoints.Theindividualnumbersforthe20importingcountriescontainedinthedatasetareprovidedinAppendixtable11(seetheStatisticalappendix).Ingeneral,withtheexceptionofJapan,reciprocalpreferencesgrantedaremuchmoreimportant.IntheAppendix,besidestheshareofdutiessavedduetoreciprocalregimes(88percent),theshareofreciprocalpreferentialtradeinpreferentialtradeisalsoprovided,whichissomewhatlower,butstillhighat77percent.


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56 Forthepurposeofthiscalculation,thefollowingcountriesandterritoriesareconsidereddevelopedcountries(“North”):Andorra,Australia,Canada,theEUanditsmembers,FaroeIslands,Gibraltar,Iceland,Japan,NewZealand,Norway,Switzerland(withLiechtenstein)andtheUnitedStates.Theremainingcountriesareconsidereddevelopingcountries(“South”)orLDCs.Thecategory“South”comprisesonlynon-LDCdevelopingcountries;LDCsareshownseparately.ACPsandLDCsoverlap.LDCsdonotappearasimportersbecausenoneofthe20importersincludedinthisdatasetisanLDC.CapeVerde,althoughgraduated,hasbeenincludedinthelistofLDCsbecauseitcontinuestoreceiveLDCpreferences.

57 ThepictureissimilarwithintheEU.Agriculturalproductshavetrade-weightedmarginsofwellabove10percent.Othersectorswithhighmarginsaretextilesandfootwear(9percent)andtransportequipment(8percent).Thereisafairlyhighshareoftradeforwhichdutiesarenotavailable,mainlyduetospecifictariffs.Thismeansthatthetrade-weightedmarginislikelytobeunderestimated.Importsunderquotaregimesarereflectedinthedata.

58 ForamoreextensivediscussionseeKeckandLendle(2011).

59 FortheEU,disaggregatedimportdatabypreferenceeligibilityandimportregimeistakenfromEurostat.TheimportdataisthenmatchedwithMFNandpreferentialtariffsfromtheTARICdatabase(asofmid-2008).SimilarlydisaggregatedimportdatafortheUSisprovidedbytheUSITC,whichisthenmatchedwiththeUStariffschedulefor2008andcomplementedfromothersources,notablyMacMap.

60 Animportisconsideredeligibleforaparticularpreferenceiftheproductfromtheexportingcountrycanreceiveapreferenceaccordingtothetariffschedule.See,forexample,alsoDeanandWainio(2006).Country-andproduct-specificexemptionsaretakenintoaccount.

61 Preferenceutilizationrates(PUR)canbeaggregatedoverexportersandproductsindifferentwaysinordertodetermineaverageutilizationrates.First,averageutilizationrates“byimportvalue”areweightedbythevalueofpreferentialimportsdividedbythevalueofeligibleimports.Secondly,averageutilizationrates“byimportduty”areweightedbythedutiessavedforpreferentialimportsdividedbythedutiesthatcouldbesavedforalleligibleimports.Finally,simpleaverageutilizationratesarecalculatedastheaverageofallobservedutilizationratesattheproduct-exporterlevel.Thelattermeasureissomewhatproblematic,sincesimpleaveragesshouldonlybedeterminedacrossindividualtransactionsinordertoobtaintheactualshareofimporttransactionsusingpreferences,andnotacrossproduct-exportercombinations.Thus,thesimpleaveragehereistypicallyupwardbiased,sincepreferencesarenotusedinmanysmalltransactions.

62 WhenPURintheEUandUS(calculatedasdescribedinfootnote47above)isusedasthedependentvariable,valuesrangefrom0to100percent.Thedatasetusedcontainsaround126,000observationsfortheEUandaround38,000fortheUS.Forty-twopercentoftheobservationsfortheEUshowzeroutilizationand18percentfullutilization.TheexactreverseistruefortheUS,

whichimpliesaround40percentuncensoredobservationsoverall.Moreover,intheabsenceoftransactionleveldata,theauthorsobtainasa(rough)proxyazero/oneindicatorforpreferenceutilizationbyusingaggregatedpreferentialaswellasaggregatedMFNflowsattheproduct-countrylevel.Thistransformationofthedatabringsthenumberofobservationstoover175,000fortheEUand53,000fortheUS.However,itneedstobekeptinmindthattheseobservationsarebasedonanaggregateofanunknownnumberofindividualtransactions.Product-specificaswellasregime-specificeffectsarecontrolledfor.

63 Resultschangelittlewhenoutliersareremoved,i.e.observationswitheitherverylargepreferentialmargins(>50percent)orverysmallimportflows(<$or€10,000)orboth.Arangeofpapersexistthatobtainsimilarresultsfindingthatpreferenceutilizationratesaregenerallyratherhighandvarypositivelywithexportsizeandpreferentialmargins.Seeforinstance,Hakobyan(2011),DeanandWainio(2006),Manchin(2005),CandauandSebastien(2005)andBrentonandIkezuki(2004).However,mostoftheexistingpapersfocusonaspecificpreferenceregime.Themaindisadvantageofdefiningutilizationratesforspecificregimesisthatitcangivethemisleadingimpressionthatitsoverallutilizationislow,eventhoughitmaybeusedalotmoreifanalternativeschemedidnotexist.Bycontrast,KeckandLendle(2011)takeintoaccountthewholearrayofpreferentialregimesbytheEUandUS.

64 Themulti-countrysurvey’sparticipatingfirmswerefromtheelectronicssector(33percent),followedbytheautomotive(21percent)andtextileandgarments(17percent)sectors.Theremainingfirmswereexportersofchemicalsandpharmaceuticals,metalsandmachinery,andprocessedfoods.

65 Japan,China,theRepublicofKorea,thePhilippines,SingaporeandThailand

66 Chile,Colombia,MexicoandPanama

67 SeealsoTableB.3.

68 AllproductsofHSSections10and21havezeroMFNdutiesinbothEUandUSandarethereforenotshown.

69 Butitcouldalsoreflectaself-selectionbias,ifahighproportionofthesamplefirmsinthesecountriesbelongedtotheelectronicssector.

70 Referstothereroutingofgoods,wherebyinPTAswhicharenotcustomsunions–membersmaintaintheirownexternaltariffs–importsofanyparticularproductwouldenterthecountrywiththelowestimportdutyontheiteminquestionandbere-exportedtoothercountriesinthePTA.

71 Defined,relativetounitcostorprice.

72 Forexample,intheUS-CanadaFTA,theproductionofagedcheesefromfreshmilkdoesnotconferorigin(KrishnaandKrueger,1995).


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73 Forexample,inthecaseofAmericanimportsofapparelunderNAFTA,preferentialtreatmentisgivenonlyifeachstepofthetransformationfromrawmaterialtofinishedgarmenthasbeenundertakenwithintheFTA(KrishnaandKrueger,1995).

74 Inthecaseoftradeinservices,PTAprovisionshavemainlysoughttoestablishtheoriginofserviceprovidersbecausetheneedforphysicalproximitybetweenserviceproducersandconsumersimpliesastronglinkbetweentheserviceanditssupplier.Forexample,PTAsoftenrequirethatenterpriseseligibleforconcessionsareincorporatedunderthelawsofoneofthepartnercountries,andthateligibleindividualsbecitizensorresidentsofoneofthecountries.Alternatively,enterprisesmayberequiredtohave“substantivebusinessactivities”withintheregionandindividualsareexpectedtohavetheir“centreofeconomicinterest”there(FinkandJansen,2009).

75 Thisisreferredtointheliteratureas“diagonalcumulation”(EstevadeordalandSuominen,2004;Gasioreketal. ,2009)–seeSectionC.

76 AlargerpercentageoffirmsinChileandMexicothathaveFTAswithlargedevelopedcountries(theUSandtheEU,amongothers)reportRoOstobe“restrictive”,relativetoColombiaandPanama.


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A vast literature in economics and political science focuses on the causes and effects of preferential trade agreements – and in particular on the way that border measures, such as tariffs, impact trade flows among countries both inside and outside such agreements. Often referred to as the “standard analysis of preferential trade agreements”, this literature is discussed in detail in Sections C.1 and C.2. However, many recent regional agreements have moved beyond border measures to include deeper forms of rules and institutions that can only be partly understood by the standard analysis of preferential trade. An examination of the economic motives – and the key issues – that lie behind these deeper integration agreements is discussed in Section C.3.

C. Causes and effects of pTas: Is it all about preferences?


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Contents 1. MotivesforPTAs 94

2. ThestandardeconomicsofPTAs 100

3. Goingbeyondthestandardanalysis 109

4. Conclusions 114

TechnicalAppendix:SystemiceffectsofPTAs 118


• PTAs now cover a wider number of issues – beyond tariffs – and

involve more structured institutional arrangements.

• Global production networks increase the demand for deep

agreements since they provide governance on a range of regulatory

issues that are essential to the success of the networks.

• Deep integration agreements can complement rather than substitute

for the process of global integration.

• Economic theory needs to go beyond the standard trade-creation

and trade-diversion analysis of PTAs, which is about the impact of

preferential tariffs.


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1. MotivesforPTAs

Economists and political scientists have identifiedseveral rationalesforpreferential tradeagreements–abriefoverviewofwhichisprovidedbelow.

(a) Neutralizingbeggar-thy-neighbourtradepolicies

Economistshavelongrecognizedthattradepolicycanhave “beggar-thy-neighbour” effects. That is,protectionist trade measures can be unilaterallyattractive but multilaterally destructive. Specifically,the beggar-thy-neighbour problem is based on theidea that tradepolicydecisionsofonecountryaffectthewelfareofanothercountrythroughaninternationalexternality (i.e. a cross-border effect). The economicliteraturehashighlightedtwomaineffectsassociatedwith trade policy: the terms-of-trade effect and theproduction relocation effect. These are discussed inmoredetailbelow.Independentlyofhowonecountry'strade policy affects its trading partners, a tradeagreement is ameansofneutralizingnegativecross-bordereffects.

The main logic of the terms of trade (or traditional)approach is that countries that have market power(i.e. that can influence their terms of trade) cannotresist the temptation to act non-cooperatively. Asnoted by Johnson (1953), each country sets tradepolicy in an attempt to improve its terms of trade(i.e. lower thecostsof its imports relative toexports)and increasenational income.1However, theresultingnon-cooperative (Nash) equilibrium is inefficient, aseach country's terms-of-trade-enhancing unilateralactions are cancelled out. More restrictive tradepolicies by all countries have little net effect on theterms of trade, but lead to a contraction of tradevolumeswhichreducesaggregatewelfare–asituationreferred to as a terms-of-trade-driven Prisoners’Dilemma(BagwellandStaiger,1999).

Theterms-of-tradeeffectmaynotbetheonlyrelevantexternality associated with trade policy. Trade policymayalsotrytoexpanddomesticproductioninasectorto the detriment of foreign production by changingrelative prices. This is referred to as the “productionrelocation effect” (Venables, 1987). Like a terms-of-trade-driven Prisoners’ Dilemma2, if all governmentschoose trade policies aimed at attracting moreproduction, no government actually succeeds. Inequilibrium, production does not relocate acrosscountries, but trade falls in response to the rise inrestrictive trade measures. To put it differently,countries are stuck in a production relocationPrisoners’Dilemma.

These non-cooperative situations can be avoidedthrough a trade agreement among countries whichencourages them to cooperate rather than to act

unilaterally.3Animportantquestioniswhethersuchanagreement should be at the regional or at themultilateral level. Studies by Bagwell and Staiger(2003) and by Ossa (2010) show that a multilateraltrade agreement based on simple rules that allowcountries to coordinate tariff reductions andreciprocate market access is the first-best option toneutralize negative (terms-of-trade or productionrelocation)externalities.

If a multilateral trade agreement such as the GATT/WTO is in place, there is no rationale for signing apreferential trade agreement (PTA)4 – and WTOmembers would have little incentive to form PTAs tosolvethesetypesofcoordinationproblems.5However,in the absence of multilateral trade cooperation,countries may seek a preferential agreement to limitcross-bordereffectsassociatedwithtradepolicy.

(b) Gainingcredibility

Aside fromavoiding the temptation toadopt “beggar-thy-neighbour”tradepolicies,preferentialagreementsmay also serve as instruments to stop governmentsfrom implementing“beggar-thyself”policies.By this itis meant that a government may choose to “tie itshands”andcommititselftotradeopennessthroughaninternational agreement in order to prevent futurepolicy reversal that might be convenient in the shortrun,butinefficientinthelongterm.Inotherwords,thegovernmentunderstands that anagreement canhelpit to make more credible policy commitments than itwouldotherwisebeabletomake.

Specifically, a government might sign a PTA to solvesome form of time-inconsistency problem.6,7 Thedifferent mechanisms through which a time-inconsistent trade policy may lead to inefficiencieshavebeenhighlightedinanumberofstudies(StaigerandTabellini,1987;Matsuyama,1990;Amin,2003).Inthese models, the government wants to usediscretionary trade policy to increase social welfare(for example, in response to an unexpected event, toallow temporaryprotection toan infant industry,etc.).However, theuseof tradepolicycanalter thenormalbehaviourofparticipants inaneconomysinceagentscan anticipate the policy change, and react to it inwaysthatwillreducethepolicy'simpactonthem.Thisimplies that the government will not be able to usediscretionary trade policy as originally intended,resultinginasociallyinefficienttradepolicy.

Similar credibility problems emerge when agovernment is exposed to political pressures fromdomestic interest groups lobbying for protection(Maggi and Rodriguez-Clare, 1998). The presence ofimport restrictions will reward import-competingproducers and will divert investments from othereconomicactivities.Thecostofthisdistortionmaybelarge in the long run, but in the short run domesticlobbying by the import-competing sector will prompt


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the policy-maker to set high restrictions. In thesecircumstances, Maggi and Rodriguez-Clare (1998)identify two reasons why a government may want tocommittoaPTA:first,tominimizethecostlylong-termdistortions involved with protecting a politicallyorganized sector, where the country has nocomparative advantage and it is unlikely to gain it inthefuture;and,secondly,toavoidacostlydelayintheadjustmentprocessof thedecliningsector relyingongovernmentprotection.

These theoretical results contain a clear normativeimplication: governments should undertake bindingtrade policy commitments concerning their futurebehaviour.Atradeagreement,inadditiontofacilitatingpolicy cooperation as emphasized above, may haveprecisely this commitment role, as it reduces oreliminates the signatory governments' discretionarypower in setting tariffs, and raises the costs ofresorting to unilateral trade protectionism. Thisprovidesawelfare-improvingwaytoenforcedomesticcommitmentstoapolicyoftradeopenness.8

An important question is whether a PTA may providemore credibility than a multilateral treaty – in otherwords,wouldaWTOmemberchoosetosignaPTAtoimprovefurtherthecredibilityofitspolicyvis-à-vistheprivatesector.Onepossibilityisthatacountrymaybetoosmall inworldmarketsforothercountries tocareabout its GATT/WTO violations, whereas a countrythat has preferential access to that country has aparticular stake in making sure that this preferentialaccess ismaintained.Thisprovidesapossiblereasonwhyasmallcountryseekingtotieitshandsthroughatradeagreement–andthereby increaseitscredibilitywith itsownprivatesector–mightnaturally looktoaPTAinadditiontoGATT/WTOcommitments.

(c) Othereconomicmotives

There are several other economic reasons whycountries opt to form PTAs, some that mirror themotivesdiscussedaboveandothersthataresometimesreferredtoas“non-traditional”motives(FernandezandPortes, 1998). These are briefly reviewed below. Theyinclude, but are not limited to, increasing market size,increasing policy predictability, signalling openness toinvestorsandachievingdeepercommitments.

IncreasingmarketsizecanbeareasonforestablishingPTAs since it enables firms from signatory states toexploit economies of scale and to gain a relativeadvantageoverexcludedcompetingfirms. Inaddition,preferentialaccesstoa largermarketmay increaseacountry's attractiveness as a destination for foreigndirect investment (FDI). Both reasons are particularlyvalid for small economies, which may help to explainwhy these countries agree to make concessions onother more controversial issues, such as intellectualproperty rights or environmental standards, whennegotiatingPTAswithlargeeconomies.

Related to the time-inconsistency issues addressedabove, a trade agreement may also be signed toreduceuncertaintyonfuturetradepolicy,thussendingan important signal to investors. Since futureadministrations might have policy preferences thatdiffer from those of the current administration, agovernmentmaysignaPTAinanattempttolock-initspolicies (forexample, apro-open tradepolicy) and todiminish the likelihoodthat theymightbereversed. Inthis way, the government addresses not so much theissue of policy credibility as the issue of policypredictability(FernandezandPortes,1998).

A country with a reputation for protectionism mightfind it particularly valuable to signal itswillingness toshift towards a more liberal and business-friendlypolicy.Inthiscase,thepreciseprovisionsofaPTAarelessrelevant thandemonstratingto investors that thecurrentgovernment isopentobusiness.Alternatively,acountrymightwanttoenterintoaPTAtosignalthatitseconomy,oraparticularsector,iscompetitive.

Economicanalysisoftenoverlooksthesimplefactthattradepolicy isdecided inapoliticalenvironment,andgovernments may face incentives that differ fromsimple welfare considerations. However, some recenteconomicliteraturehasemphasizedtheroleplayedbyspecial interestgroups in tradepolicydetermination.9Simply put, interest groups lobby to influencegovernmentdecisionsand, inturn,governmentstradeoff the welfare effects of their trade policy choices(e.g. signing or not signing a PTA) with the politicalsupport of special interests. In this political context,the choice to sign a preferential agreement may bedriven by the interests of an organized lobby ratherthan by social welfare considerations (Grossman andHelpman,1995).10

AfinalargumentforsigningaPTArelatestotheneedto achieve a deeper form of integration which goesbeyondtraditionaltrade(i.e.border)measuressuchastariffs (Lawrence,1996).Thisdeeper integrationmayrequire institutions and levels of policy coordinationthatcanbemoreeasilyachievedat theregional thanat the multilateral level.11 This issue will be moreextensivelydiscussedinSectionC.3.

(d) Politicalmotives

The creation of PTAs cannot be fully understoodwithout considering the political context within whichthey are formed. Political science has providedadditionalexplanationsforwhystatesmightengageinPTAs, focusing in particular on the role of politicalintegration, domestic politics, forms of governments,institutions, diplomacy or the influence of power andideas. Some of the most important “political”argumentsforPTAsarediscussedbrieflybelow.

Preferentialtradeagreementshavelongbeenseenasplaying a key role in regional political integration.


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Perhaps thebestmodernexamplewas the formationoftheEuropeanCommunity(EC) inthe1950swhich,at the time,was themost importantPTA in theworldand attracted considerable attention from politicalscientists. Initially, “functionalist” scholars, inspiredbythelogicofintegration,emphasizedtheimportanceofbureaucratic actors as key drivers of integration, aswellastheprocessbywhichnationalelitestransferredloyaltiestoasupranationallevel(Mitrany,1943;Haas,1958;SandholtzandZysman,1989).

Itwaspostulated that apolicy spill-over effectwouldincrementally drive integration from “low politics”(trade integration) to “high politics” (politicalintegration).This“functionalist”schoolofthoughtwaslaterchallengedbypoliticalscientistswhomarshalledempirical evidence that cast doubt on the extent ofspill-overs and helped explain the stagnation in theEuropeanintegrationprocess.Proponentsofan“inter-governmentalist” theory argued that nationalpreferences were more relevant in shaping the paceandcontentofpoliticalandeconomicintegration,andquestioned whether there had been a significanttransferofcontrol frommemberstatestoCommunityinstitutions(Hoffmann,1966;Moravcsik,1998).

To help explain the increasing number of tradeagreementselsewhere in theworld,political theoristsfirst attempted to apply the European integrationmodels. However, the limits soon became obvious.TradeintegrationoutsideEuropeproceededaccordingto different patterns and concomitant politicalintegration was lacking. Additional strategicexplanations emerged. These included a desire toincrease influence in international negotiations bypoolingresources(e.g.theCaribbeanCommunity),seeAndriamananjara and Schiff (2001), or the goal ofresistingthethreatofcommunisminSouth-EastAsia,by strengthening cooperation among like-mindedgovernments(e.g.theAssociationofSoutheastAsianNations)foranoverview,seeRavenhill(2008).Anotherstrategicmotiveforformingregionaltradeagreementswas to counteract the growth of other regionalarrangements. For example, Asia-Pacific EconomicCooperationwaswidelyseenasanattemptbytheUSto send a pre-emptive trade policy signal to theEuropean Community about the cost of building a“FortressEurope”.

Existing research has shown that democracies aremorelikelytoformPTAsamongthemselves(Mansfieldet al., 2002). One explanation is that democraticgovernments use trade agreements as a signallingdevice vis-à-vis domestic constituents that they areimplementingsensiblepolicies.Relatedresearchlooksat how governments calculate the political costs andbenefits of PTAs, and how voters hold their politicalleaders accountable. The work by Mansfield et al.(2007)suggeststhatacountry'sdecisiontoenterintoPTAsisrelatedtothenumberof internalvetoplayers(i.e. lawmakers or parliamentarians). In addition,

MansfieldandMilner (2010)showthat thenumberofvetoplayersinacountryaffectsthetransactioncostsof an agreement. As the number of veto playersincreases,ratificationbecomeslesslikely.

While veto players diminish the likelihood of enteringPTAs,theregimetype(democracy)affectstheratificationrate positively. Mansfield and Milner (2010) argue thatPTAs can serve as a strategic tool vis-à-vis voters. Inother words, PTAs can act as a credible signal thatgovernments can use to pursue trade objectivespreferred by a majority of voters rather than by specialinterests.Accordingtothisview,thespreadofdemocracysincethe1980s,especiallyacrossthecountriesofLatinAmerica,Asia,andCentralandEasternEurope,mayhelpexplaintheproliferationofPTAs.

ThedecisiontonegotiateandsignPTAsmayalsobeaffected by the extent to which countries use tradepolicy to reinforce wealth and empower relations. Ifgovernments distrust one another, they may formbilateral treaties in order to limit or to control thegrowth of other powers (e.g. to serve as counter-balances). Gowa and Mansfield (1993) and Gowa(1994) argue that trade integration stimulates tradeflowsbetweentwocountries,leadstoamoreefficientallocationofresourcesandthusfreesupresourcesformilitary use. The increasing wealth and power ofmember countries should be of concern to excludedcountries. An agreement between two countries maythus forceotherpairsofcountries to followsuit,withthe aim of retaining their current relative position(GowaandMansfield,1993).

Inasimilarvein, thedesignofPTAs isalso indicativeof power relations. Stronger states can more easilydictate the terms of agreements in a bilateral orregional context. Other diplomatic and foreign policyconsiderations may influence the decision to formPTAs. For instance, some states use PTAs to rewardalliesandtoreinforcekeyalliances.Inthisview,PTAsare an active part of foreign policy making (White,2005;Rosen,2004;Higgott,2004;Capling,2008).

PTAs might also serve as “diffusion mechanisms” –either directly, in the form of coercion, or moreindirectly, in the form of learning. For example, agrowing body of work treats the EU as a “conflictedpower”(MeunierandNicolaidis,2006),whichusesitsmarketpower(i.e.accesstotheEU'ssinglemarket)tocoerceweakerpowers, includingformercolonies, intoaccepting new types of trade arrangements (Farrell,2005)(forexample,EuropeanPartnershipAgreementswith the African, Caribbean and Pacific group ofstates).OthersconsiderthattheEuropeanCommunityprovidedanexample foreconomic integrationamongcountries in Latin America and Africa in the 1960s(Pomfret, 2001), demonstrating how the perceivedsuccessoftradearrangements“teach”otherstoadoptsimilarpolicies(Krueger,1997).


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Finally, there may be a direct or indirect relationshipbetween the formation of PTAs and the multilateralsystem, either reflecting a lack of progress at themultilateral level or a strategy to improve states’leverage in the WTO. Gridlock or stagnation inmultilateral negotiations, for example, may createincentives for states to pursue preferential tradeliberalization, and encourage exporters to lobby theirgovernmentsforPTAs(forexample,seecasestudiesinCaplingandLow(2010),wherepolicycommunitiesnote both the “remoteness” and “slowness” of theWTO).Alternatively,statesmaysignPTAsinordertoincrease their bargaining power during multilateraltrade talks (Mansfield and Reinhardt, 2003). Thedrawn-out negotiations in the Uruguay Round, and inthecurrentDohaDevelopmentRound,mayexplainthecurrentproliferationofPTAs.

(e) WhatexplainsthegrowthofPTAs?

Changes in the underlying dynamic of traderelationshipsacrosstheglobemaypromptcountriestosign PTAs. Baldwin (1995) provided a model of theenlargement of Europe's economic integration whichrestedona“dominotheory”ofregionalism–i.e.wherethe potential loss of market share induces non-members to joinexistingPTAs, creatingaprocessofaction and reaction or contagion. Exporters in non-member countries push their governments to joinexisting PTAs or create new ones to counteract thepotential damage caused by preferential tradeliberalization(BaldwinandJaimovich,2010).Thereisaset of studies which find broad empirical support forBaldwin'sdominotheory–formationofPTAscreatesan incentive for outsiders to become members of anexistingPTAor to formnewPTAs (Egger andLarch,2008;BaldwinandJaimovich,2010;ChenandJoshi,2010). According to Egger and Larch (2008), theseresultsareparticularlyuseful to “predict” theprocessofregionalintegrationinEurope.

The political science literature also focuses on thecausal mechanisms behind the domino effect, inparticular how decision-makers and interest groupsreact todiscrimination.Pahre(2008)appliesthe ideaof a competitive spread of trade agreements to thenineteenthcentury.Mattli(1999)makesthisargumentwith respect to the enlargement of the EuropeanUnion,whileGruber (2000)doesso in thecontextofthe North American Free Trade Agreement (NAFTA).Inasimilarvein,Dür(2010)explainsthePTAssignedby the EU and the US in the 1990s and 2000s interms of competition for market access in emergingeconomies.Thisempiricalliteraturedoesnotdenytheimportance of factors other than potential tradediversion in explaining the growth of PTAs. Forexample, Manger (2009) argues that investmentdiscrimination as a result of the creation of NAFTAcontributed to Japan’s decision to conclude a tradeagreementwithMexico.

The concluding part of this section emphasizes theimportanceof “deep” integration–arrangements thatgobeyondextendingpreferentialtariffconcessionstoincludeareassuchas investment– inPTAformation.Furthermore, Section D assesses the relativeimportance of tariff liberalization and “deep”integrationinexplainingtherecentspreadofPTAs.

In the literature, the influence of existing PTAs onsubsequent PTA formations is often referred to as“endogenous regionalism”. Such “endogenousregionalism”,however,mayalsobe influencedby tradeliberalization at the multilateral level. For instance,Freund (2000) argues that as multilateral tariff levelsfall, the formation of PTAs, and hence the dominoeffect, is strengthened. This may be explained by theeffect of tariff reduction on competition, profits, andtariffrevenue.

Lowering tariffs enhancescompetition,which leads togreateroutput.Athighworldtarifflevels,thisefficiencyeffect is large and multilateral tariff reduction, whichhas a greater effect on competition than preferentialreduction, is better. However, lowering tariffs alsomeans smaller profits and less tariff revenue. At lowoverall tariff levels, theefficiencyeffect issmaller,butpreferential reduction is lesscostly–profitsand tariffrevenuefallbyless.Preferentialagreementseffectivelyallow members to divert part of the profit loss thatresults from lower tariffs to the third country whereoutputcontracts.Hence,thewelfaregainfromjoiningaPTAisgreaterthanthegainfromamovetoopentradewhentariffsarelow;thereverseistruewhentariffsarehigh.12 Empirical evidence confirms the aboveprediction. For example, Fugazza and Robert-Nicoud(2010)showthatreductionsintheUSmultilateraltariffofagivenproductintheTokyoandUruguayRoundsaresystematicallyassociatedwithlowerpreferentialtariffsforthatproduct,andwiththatproductbeingincludedinmorePTAsformedaftertheconclusionoftheUruguayRound.

Finally, there isanemerging literaturewhichprovidesa systematic explanation of the timing of PTAformations and enlargements since the late 1950susingeconometricdurationanalysis.ThishelpsexplainthepatternofPTA formationdescribed inSectionB.For instance,Bergstrandetal. (2010)13 identify threesystematic relationships between the “timing” of PTAevents and different economic characteristics.Specifically, natural tradingpartners (countriescloserto each other in terms of physical distance), pairs ofcountrieswithlargergrossdomesticproducts(GDPs),andpairsofcountrieswhoseeconomicsize issimilar,have a higher probability of forming a PTA – orenlarginganexistingPTA–soonerthancountriesthatdonotshare these threecharacteristics.14Liu (2010)drawssimilarconclusions.

Bergstrandetal. (2010)alsooutlineconditionsunderwhich PTAs create the greatest incentives for non-


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BoxC.1:PtA case studies

The WTO periodically examines the national trade policies of its members through Trade Policy Reviews(TPRs). Themember being reviewed submits aGovernmentReport that is publishedalongside the reportprepared by the Secretariat. These official statements present the government’s perspective on majordevelopmentsinthecountry’stradepolicy,includingthenegotiationandconclusionofPTAs.AlthoughthereisnodefinedstructuretotheGovernmentReports,theyoccasionallyprovideinsightintothemotivesbehindpreferentialagreements.

Therearecertainlimitationstothisanalyticalapproach.GiventhateachmemberdecideswhattoincludeintheGovernmentReports,someexplicitlyaddress themotivationbehindpursuingPTAs,whileothersavoidmentioningitaltogether.Furthermore,severalgovernmentstendtorepeatparagraphsfrompreviousTPRstoexplaintheirtradepolicywithoutdescribingmotivesthatarespecifictonewPTAinitiatives.Therefore,thissurveyofGovernmentReportsismostlyanecdotalandfarfromexhaustive.

A survey of Government Reports shows that PTAs are predominantly about securing preferential marketaccess and attracting investment, as these are the most commonly quoted motives. However, an array ofadditional motives is also mentioned, in particular the goal of addressing policy issues that go deeper orbeyondWTOrules(seeSectionDforcontentsofPTAs).ItalsoappearsthatPTAsaresometimesusedasameansofpromotingdeepercommitmentsinnewareas,withtheaimofeventuallyincorporatingthematthemultilaterallevel.

Forexample,theUnitedStatesstatedinitsGovernmentReportthatPTAs“challengethemultilateralsystemtokeeppacewith the interestsandneedsofmembers,andcontribute to theWTOsystemby introducinginnovation and strengthened disciplines”, and that “these agreements can become models for futuremultilateral liberalization in new areas, such as agriculture, services, investment, and environmental andlabourstandards”(WorldTradeOrganization(WTO),2008).

members to join existing agreements or to form newones. First, the closer a potential entrant is to a PTAthatanothercountryisalreadyamemberof,themorelikely that the two countries will form a PTA sooner,consequently enlarging the PTA. Second, the higherthe“intensityofregionalism”acountrypairfaces,themorelikelyitisthatthetwocountriesformorenlargean existing PTA sooner. Third, there is a “hump-shaped”relationshipbetweenthenumberofmembersof the nearest PTA and the likelihood of it enlargingsooner. At first, the probability that two countriesenlarge an existing PTA sooner increases with thenumber of members of the nearest PTA – reflectingdemandformembershipbypotentialentrants.Beyondacertainthresholdlevelofmembershipsize,however,this probability declines as the utility loss from anexpansion for the potentially “worst-off” existingmember15 prevents infinite enlargement.16 This isimportantsincethespeedofregionalismhasappearedto be “much slower” than the apparent growth indemand for membership by non-members suggests,giventhedominotheoryofregionalism.17

Overall, Bergstrand et al. (2010) show that therelationships suggested by the six economiccharacteristics described above are sufficient toexplain 62 per cent of the variation across 10,585pairsofcountriesand57yearsofthetimingof1,560PTAevents.Furthermore,themodel isabletopredictthe actual year of the PTA formation or enlargementbyacountry-paircorrectlyinnearly50percentofthe1,560 PTA events. Liu (2010) also emphasizes theimportance of certain political variables in explaining

the timing of PTA formation. For example, the authorshows that countries with similar polity scores,18 lackof political hostility and a shared colonial history aremorelikelytoformPTAs.

Based on answers provided by WTO members in theTradePolicyReviewsundertakenbytheWTOSecretariat,Box C.1 contains a short discussion of the motivesmentionedbyWTOmembersforwhytheysignPTAs.

The above sections have covered in depth thedeterminants of the formation of preferential tradeagreements. However, little mention has been made ofthose agreements that have been negotiated amongcountriesbuthaveneverbeenimplemented.Forexample,intheearly1990sdiscussionswerebeguntoestablishaFreeTradeAreaoftheAmericas(FTAA).Thisenvisioneda hemispheric-wide free trade area in the continent.However, the initiativehas largelyfallenbythewayside.One way to look at the motives of preferential tradeliberalization is that they provide a demand-sideexplanationofthecreationandenlargementofPTAbutassumesthatthereisanunlimitedsupplyofmembership.It is important though toalsoconsiderwhatconstraintsare operating on the supply-side of preferentialliberalization.InthecaseofenlarginganalreadyexistingPTA,forexample,thesupplyofnewmemberswouldbedetermined at the margin by the potentially worst-offmember(Bergstrandetal,2010).Hence,theremightbesituationsinwhichthedeterminantsofthedemandandthe supply of preferential liberalization membership areso dissimilar that an agreement will very unlikely bereached.Thisissuemeritsfurtherresearch.


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Similarly, the Government Report of Mexico acknowledged that PTAs “establish important precedents insomeareas thatcouldbe included in futuremultilateralnegotiations”, and thatMexicowould “continue tonegotiate regional trade agreements insofar as they go beyond multilateral liberalization” (World TradeOrganization(WTO),1997).

Political motivations that go beyond trade policy are also expressed in the official statements. SeveralGovernmentReportsexplicitlydeclarethatPTAsaimtopromotedemocracyandpoliticalstability.PeaceandsecurityisalsosaidtobeadvancedthroughtradecooperationinPTAs.

IntheTPRontheEuropeanCommunities(EC),theECplacesparticularemphasisonthepoliticalcooperationdimensionof its respectiveagreements.Forexample, in its region-to-regionnegotiationswith theAndeanCommunityandCentralAmericancountries,theEC“aim[ed]toreinforcethepoliticalandeconomicstabilityofeachregion”(WorldTradeOrganization(WTO),2009b).

CommentingonitsPTAwiththeEC,Chilealsoassertsthattheagreement“coversnotonlytradeissues,butpoliticalandcooperationareasaswell. In thepoliticalarea, theagreementseeks topromote,disseminateanddefenddemocraticvalues”(WorldTradeOrganization(WTO),2003).

ThelinkagebetweenpoliticalstabilityandpeaceismoreevidentintheEC’sagreementswithneighbouringpartners:“TheEuro-MedagreementsconcludedwitheightMediterraneancountriescontinuetobethebasisfor intensifying bilateral and regional co-operation in support of an area of peace, stability and sharedprosperity”(WorldTradeOrganization(WTO),2004).

Similarly, the US Government Report argues that the Dominican Republic-Central American Free TradeAgreement(DR-CAFTA)“supportsregionalstability,democracyandeconomicdevelopment”contributingtothe“transformationofaregionthatwasconsumedbyinternalstrifeandborderdisputesjustadecadeago”(WorldTradeOrganization(WTO),2006).

In severalGovernmentReports, theslowpaceatwhichmultinationalnegotiationsarecurrentlyadvancinghasbeenusedasajustificationforseekingPTAs.

The Government Report of Chile admits that “the pace of multilateral discussions is not rapid enough ... arelativelysmalleconomy likeChilehasvery limitedcapacity toexertany influence in theresolutionof theseproblems.Bilateral initiativesarethereforeusefulasasupplementarywayofachievingsubstantialoutcomesmoreexpeditiouslythanwouldbepossibleatthemultilaterallevel”(WorldTradeOrganization(WTO),2009a).

Thecontagionordomino-theory,wherebytheconclusionofaPTAactsasacatalysttotriggerotherPTAs,alsoappearstobeacentralmotive.ThereisevidencethatcountriesareconsciousoftheeffectsPTAshaveonthirdcountriesandthemultilateralsystem.Somecountries,suchasMexico,havepursuedPTAswiththeexplicitgoalofencouragingothertradingpartnerstonegotiatesimilaragreements.Othercountries,suchasPakistanandJapan,havereactedtotheproliferationofPTAsbyconcludingthattheyhavenochoicebuttocreatetheirownnetworkofPTAs(despitebeinginitiallyopposedtopreferentialliberalization).

AfterconcludingitsfirstmajorPTA,MexicostatedinitsGovernmentReportthatNAFTA“isveryimportantforMexico,notonlyowingtotheparticipationofitsbiggesttradingpartner...butalsobecauseitgeneratedan incentive and interest among other trading partners for negotiating similar agreements” (World TradeOrganization (WTO), 1997). This has been a successful strategy, considering that Mexico went on toconcludePTAswiththeEC,theEuropeanFreeTradeAssociationandJapanwithinadecade.

Fearing being left out of the preferential liberalization taking place outside the multilateral negotiations,countries such as Pakistan are “cognizant of the proliferation of regional and bilateral Preferential TradingArrangements”andhavereasonedthat“manysucharrangementsplacePakistaniexportersatadisadvantagevis-à-vis theircompetitors. Inorder tocounter thesenegativeeffects,Pakistanhasbeenactively involved inseekingsucharrangementsonbilateralorregionallevel”(WorldTradeOrganization(WTO),2007).

Inits2000report,Japanremained“seriouslyconcernedthatsomeRTAshaveraisedtradebarrierstotradewithnon-membercountries,andthattheyhaveeffectivelyweakenedthefree,non-discriminatory,andopenmultilateral system formed under the WTO”. It clarified it did not “belong to any preferential regionalagreements”butthatasaresultoftheproliferationofPTAs“thepossibilityandthedesirabilityoffreetradeagreements[were]beingexaminedbyvarioussectors”(WorldTradeOrganization(WTO),2000).Twoyearslater,initsnextTPR,JapannotedthatithadbeguntopursuePTAs(WorldTradeOrganization(WTO),2002).


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2. ThestandardeconomicsofPTAs

(a) AnoverviewoftheeconomiceffectsofPTAs

Thebasiceconomiceffectsofpreferentialagreementscan be illustrated in a simple model (Baldwin, 2009).Consideraworldcomposedofthreeidenticalcountriescalled Home, Partner and Rest of the World (RoW).Each country imports two goods from the other twonations, and exports one good to both destinations.Thetradepatternsofthismodeleconomyaredepictedin Figure C.1 below. Further assume that in an initialsituation,allcountriesimposeoneachotherthesame(non-discriminatory) tariff, referred to as the Most-Favoured Nation (MFN) tariff. In this scenario, thedomesticpriceishigherthantheborderpricefacedbythe twosuppliersand importsare lowercompared toopen trade. Importantly, however, the two suppliersshare equally the reduction in exports due to theimpositionofanMFNtariff.

Whataretheeffectsofapreferentialtradeagreement?Tohelpanswerthisquestion,consider thecasewhereHomeandPartnerformafreetradearea(oracustomsunion),so thatPartnerproducersgetduty-freeaccessintheHomemarket,andHomeproducersgetdutyfreeaccess in the Partner market (a complete graphicalanalysisiscontainedinTechnicalAppendixC.1).

Focusingfirstonthemarketforgood1,thegoodthatisimportedbytheHomeeconomy,thefollowingpriceand volume effects take place. The domestic pricefalls relative to the situation where there is a singleMFN tariff as the supply of the good in the Homeeconomy is increased, but now thereare twodistinctborder prices. The border price faced by Partner ishigher,asexportersnolongerfaceatariffintheHomemarket, while the border price faced by exporters inRoWislower,astheystillfaceatariffbutthedomesticprice in the Home economy is lower. As a result,exportsfromPartnerexpand,whileexportsfromRoWcontract.

AsthePTAisreciprocal, theeffectsdiscussedaboveonthemarketforgood1materializesymmetricallyforgood 2. The only difference, intuitively, is that in thismarket the Home economy is an exporter, whilePartner is the importer. Therefore, in this market,Home gains from a higher border price and greaterexports toPartner,whileRoW loses from thedrop inborder price and the reduction in its exports insector 2. Finally, the formation of a preferentialarrangementhasnoeffecton themarket forgood3,whereRoWistheimporter,asthatcountryisassumedtomaintainthesameMFNtariff.19

APTAhastwotypesofeffectsontheexportside.First,exporters in member countries gain from improvedmarketaccessasthetariffisremoved.Secondly,theseexporters also benefit from the fact that tariffdiscrimination reduces imports from RoW. The lattereffectissometimesreferredtoasthe“preferencerent”,as itwouldnotexist if tariff liberalizationwerecarriedoutinanon-discriminatoryfashion.20

On the import side, the preferential agreement hasambiguouseffectsonmembercountries.Considerthemarket for good 1, where the Home economy is theimporter (the effects on Partner for good 2 areanalogous). The formation of the PTA has offsettingvolume and price effects.21 The increased importsallow the Home economy to benefit from thereplacement of high-cost domestic production withmore efficient imports. The terms of trade (i.e. thepriceofexports relative to imports)ofHome improverelative to RoW and falls relative to Partner. Overall,whether themembersofaPTAgainor losedependson the level of the initial MFN tariff and on theelasticities of demand and supply (i.e. to what extentthe demand and supply of a product is sensitive tochangesinitsprice).

AfinalconsiderationrelatestothewelfareeffectofaPTA on non-members. As discussed above, RoWsuffersa reductionof itsexports to thePTAmembercountries. In addition, the non-member is hurt by anegative terms-of-trade effect, as the price of itsexports declines while the prices of its imports areunaltered. In other words, a preferential agreementcanbe interpretedasanegativeexternality thatPTAmembersimposeonnon-members.

(b) Tradecreationandtradediversion

The formal analysis of the economic impact of PTAsbegan with the work of Jacob Viner in the 1950s(Viner, 1950). He asked whether a PTA would makemember countries better off, and concluded that thiswasnotnecessarilyso.Whilehisapproachdisregardedsome of the effects discussed above, it had animportant and enduring effect on the academic andpolicy debate surrounding preferential agreements.22AreviewoftheVineriantheoryis,therefore,usefultounderstandmuchofthedebateonPTAs.

FigureC.1:the PtA diagram’s trade pattern

Home

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Good 2

Good 1 Good 2

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In this theory, preferential liberalization has two maineffects– tradecreationand tradediversion–and thenet balance between the two determines whether aPTA increases welfare for its members. As tariffs ontradebetweenpartnersfall,somedomesticproductionis replaced by imports from more efficient producersfrom partners – thus resulting in trade creation andwelfare gains. But since the PTA also discriminatesagainst non-members, imports from partners replaceimports frommoreefficientoutsideproducersand themember countries end up paying more for the samegood. This second effect which harms members'welfare is known as trade diversion. The interactionbetween trade creation and trade diversion hasdominatedmuchof thesubsequent literatureonPTAsand regionalism. Box C.2 provides a simple graphicalanalysis to illustrate tradecreationand tradediversioneffects.

BuildingonViner'sinsightintotheuncertainimplicationsof PTAs' effect on welfare, Kemp and Wan (1976)

foundtheconditionsthatwouldmakeacustomsunion–aPTAwithacommonexternalpolicy–necessarilywelfare-improving. They concluded that a customsunionwillbewelfare-enhancing ifexternal tariffsareadjusted so as to leave world prices unchanged. Inother words, if tariffs are such that external trade isnot affected, any additional trade between membersmust be trade-creating and outsiders are not hurt. Inthiscase,thePTAisParetoimproving.23Thisgeneralprinciple has been extended to other forms of PTAs:free tradeareas (PanagariyaandKrishna,2002)andpartialliberalization(Neary,2011).Furthermore,Kempand Wan also found that it is possible to guaranteethat all members of a PTA are better off if countriescan compensate losing members through lump-sumtransfers.Even if inreality theexternal tariffsarenotfully adjusted and lump-sum transfers are not alwayspresent,theKemp-Wanlogicisimportantfromapolicyperspective because it proves that PTAs are notnecessarilybadforworldwelfare.24

BoxC.2:trade creation and trade diversion effects

Consider a world composed of three countries: Home, Partner 1 and Partner 2, trading a homogeneousgood.AssumeHomeisasmallcountrythattakesinternationalpricesasgiven,whilePartner1andPartner2arelargeeconomies,meaningthatHomecouldsatisfyitsentirenationaldemandforthegoodbyimportingfromeitherof them. IfHomehasnoPTA inplaceandapplies thesameMFNtariff tobothPartner1andPartner2,itwillgetallitsimportsfromthemostefficientcountry.

FigureC.2belowshows thesupplyanddemandcurves forHome.The free-tradepricesof thegood fromPartner1andPartner2arerepresentedbyPBandPC,respectively.NotethatPartner1isthemoreefficientproducer,asitiscapableofsupplyingtheproductatalowerpricethanPartner2.WhenHomeappliesthesametarifftobothcountries,thedomesticpricesincreaseequallyforbothandaredenotedbyPB

TandPCT.

Undertheseconditions,HomewouldimportsolelyfromPartner1,atthepriceofPBT,aquantityofthegood

givenbythesegmentD1–S1.

ConsiderfirstthecaseinwhichHomesignsaPTAwithPartner1.Insuchasituation,importsfromPartner1arenolongersubjecttotariffsandthedomesticpriceofthegoodfallstoPB.Atthisprice,HomewillimportfromPartner1 thequantityD2–S2.Tomeasure theneteffectof thePTAonnationalwelfare,onemustanalysehowconsumers,producersandthegovernmentareaffected.

FigureC.2:Home PtA with Partner 1: trade creation

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Since, inthiscase,HomeconcludedaPTAwiththemostefficientproducer,theagreementresultsinpuretradecreation.Thegainsoftradecreationaremeasuredbytheshadedtriangles“b”,whichrepresentsgainsin production efficiency, and “d”, which represents gains in consumption efficiency. Consumers in HomebenefitfromthePTAbecausethedomesticpriceofthegoodfallsandconsumptionrises.Thereby,consumersurplus increasesbyareasa+b+c+d.Producersurplus isreducedbythearea“a”.AsthepriceoftheproductonthedomesticmarketdecreasesthroughcompetitionfromPartner1,somedomesticproducerswillbeforcedtoreduceoutputorclosedownaltogether.Governmentalsolosesallofthetariffrevenuethathadbeencollectedonimportsoftheproductdepictedasarea“c”inFigureC.2.Thus,theoverallneteffectofthePTAfornationalwelfareispositivewithagainofb+d.

Now,consider thecase inwhich thatHomesignsaPTAwithPartner2 instead. In thiscase, thepriceofimportsfromPartner2fallstoPC,whichisbelowtheimportpricefromPartner1.Atthislowerprice,HomeimportsfromPartner2ratherthanPartner1.FigureC.3belowshowsthat,bygivingpreferentialaccesstotheleastefficientproducer,thePTAresultsintradediversion.

BeforesigningaPTAwithPartner2,HomewouldapplythesameMFNtarifftoallforeignproducersanditwouldimportfromthemostefficientcountry,Partner1,thequantityD1–S1atthepricePB

T.WhenHomeconcludes the PTA, the price of goods imported from Partner 2 falls to PC while imports from Partner 1remainatPB

T.Asaresult,HomewillimportonlyfromPartner2thequantityD2–S2atthepricePC.Onceagain,tomeasuretheneteffectofthisPTAonnationalwelfare,onemustanalysehowconsumers,producersandthegovernmentareaffected.

After signingaPTAwithPartner2, as in thefirst case, consumers inHomearebetteroff andconsumersurplusgainscompound to theareaa+b+c+d.Note thatwhile there isstill some tradecreation, theefficiency gains in production and consumption – triangles b and d – are smaller than in the previousscenario.Also,domesticproducerssufferareductioninproducersurplusequaltoarea“a”andgovernmentlosestariffrevenueequalto“c”.Themaindifferencebetweenthetwocasesisintheshadedarea“e”whichrepresents trade diversion. This shaded area is the amount of trade the PTA diverts away from the moreefficientproducer,Partner1,bygivingpreferentialaccess toPartner2. Inotherwords,Homesuffers thisefficiencylossandpaysahigherpriceforimportsbynotadoptingopentradetowardsallcountries.

Tocalculatenationalwelfare,onemustbalancetheefficiencygainsagainsttheefficiencyloss.InFigureC.3,it isclear that thearea “e” is larger thanb+d; thus thePTAwithPartner2hasanegativeneteffectonnationalwelfareinHome.However,thisisnotalwaysthecase.ItispossiblethataPTAistrade-diverting,butnotwelfare-reducing, if thegainsfromtradecreationare largerthanthe lossfromtradediversion–e.g. ife<(b+d).

FigureC.3:Home PtA with Partner 2: trade diversion

P S

D

S2 S1 D1 D2

PCT

PBT

PC

a b c

e

d

PB

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(i) The effects of PTAs in services

Up to this point, the analysis has focused on thewelfare effects of preferential liberalization in goodstrade. However, given the increasing importance ofservices in PTAs, it is useful to analyse the welfareimplicationsofservicesliberalization.Doestheformeranalysis also help us to understand the effects ofPTAsinservices?

The crucial difference between trade in goodsliberalizationandtradeinservicesliberalizationisthatPTAs in services do not involve tariff reductions butchanges to domestic regulations, and the removal ofrestrictions on the movement of foreign investment.Although protection in services sectors may assume

several forms, they can be grouped into threecategories: (i) variable cost increasing measures(“frictional barriers”); (ii) fixed cost increasingmeasures; and (iii) quantitative restrictions on thenumberof foreign serviceproviders.While regulatorymeasuresareoftennon-discriminatoryinnature,thereareexampleswherethisisnotthecaseandcountriesemploymeasuresthatde factoliberalizepreferentially.

The effects of PTAs in services are illustrated inBoxC.3.Thisanalysis isbasedontheworkofMatooand Fink (2002). Focusing on the first category ofservices protection, the authors study the trade andwelfare effects of discriminatory services tradeliberalization.

BoxC.3: the effects of PtAs in services

Considerathree-countrymodelsimilartotheoneinBoxC.2,butassumenowthattheHomeeconomycanimpose(discriminatory)frictionalbarriers.Thissituationcanberepresentedbyassumingthequalityoftheservice composed by a universal standard (U) which is equal across countries and a country-specificstandard(Vi).Ifaforeign-servicesupplierwantstoprovideaserviceintheHomecountry,ithastofacethecostofmeetingthespecificstandardinthedomesticcountry(Ci)sothevariablecost increasesbyCiVi. ItmayalsobethecasethattheHomecountrydoesnotaccepttheuniversalstandardcomponentprovidedbytheforeignsupplier.Underthesecircumstances,iftheforeignsupplierwantstosellinthedomesticcountry,ithastofaceanadditionalcostofCi(Vi+U),becauseitneedstoadapttoboththeuniversalandthecountry-specificstandard.

Given this framework, theanalysisofdiscriminatory regulation inservices trade follows thesame logicastradeingoods.AssumethattheHomeeconomyissmallandthattherearetwoforeigncountries(Partner1andPartner2,respectivelyindicatedbysubscriptsBandC)potentiallyexportingservices.Asintheprevioussection,assumethatPartner1isthemoreefficientproducer.SupposethattheautarchypricefortheserviceisP*and that,before recognition, foreignfirmshave tomeet theuniversal standard in theHomecountry.InitiallythevariablecostbyforeignfirmsinthedomesticmarketisCi(Vi+U)+Chome(Vhome+U).Whenthiscost is higher than P* (for both Partner 1 and 2), no trade occurs. But if Home recognizes the universalcomponent of quality by Partner 2 as equivalent to the domestic one, Partner 2 faces a reduction in itsvariablecost,nowCc(Vc)+Chome(Vhome+U).IfthiscostislowerthanP*,weobservetradeinservicesfromPartner 2 to the Home country (see Figure C.4). In this case, discriminatory recognition (liberalization) isnecessarilytradecreating.

Assumenowthatinitially,whentraderestrictionsapplytobothforeigncountries,CB(VB+U)+Chome(Vhome+U)<P*<Cc(Vc+U)+Chome (Vhome+U)onlyPartner1 sells its services in theHomeeconomy (seeFigureC.4).IftheHomecountryrecognizestheuniversalstandarduprovidedbyPartner2asequaltothedomesticone, itmaybethecasethat theonlyexportingcountry isPartner2and importsarehigher thanbefore.ThisistruewhenCc(Vc)+Chome(Vhome+U)<CB(VB+U)+Chome(Vhome+U)<P*.

ThewelfareeffectofthediscriminatoryliberalizationontheHomeeconomycanbeseeninFigureC.4:thereisagain inconsumersurplus(a+b+c+d)partiallyoffsetby loss inproducersurplus(a).An importantpointhereistounderstandtheroleoftheareac+e.Inthetraditionaltradeingoodscase,theareac+eisawelfarelossforHomesinceitrepresentsthefallingovernmenttariffrevenue.However,inthiscontext,theareac+e represents theadditionalcost thatPartner1had to facewhen itsupplied theHomeeconomy(CBUtimesthepre-recognitionvalueofimports).IfthiscostdidnothaveanyeffectontheHomecountry(forinstance,intheformofaregulatoryrent),theareac+edoesnotenterintothecalculationofthetotalHomecountry’swelfare.Ontheotherhand,ifashare(s)ofthecostsustainedbyPartner1constitutedaformofregulatoryrent,thenetwelfareeffectofservicesliberalizationintheHomeeconomyisb+c+d-s(c+e).


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FigureC.4:effects of PtAs in services

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(c) Naturalpartners,accumulationandlocationeffectsofPTAs

TheeffectsofPTAsstudiedintheeconomicliteraturego well beyond the ones discussed in this section.Below, we briefly summarize three areas of researchthat provide additional insights into the welfareimplicationsofpreferentialagreements.

It is possible that the trade effects of a preferentialagreementdependontheeconomiccharacteristicsofPTA members themselves. In particular, if tradeagreements are more likely to be signed betweencountries that trade intensivelywitheachother,PTAsshould generally be expected to be trade creating.This idea is often referred to as the “natural tradingpartners”hypothesis.

Krugman (1991) shows that the costs of preferentialtrade agreements formed between “natural” tradingpartnersare likely tobe lower than forarrangementsbetween countries that do not trade heavily with oneanother. He models a world where countries arespread over many continents and where variations ininter-continental transport costs determine whetherthe formation of regional trading blocs are globallywelfare-improving. If inter-continental transport costsarehighenoughtoensurethatthebulkoftradetakesplaceregionallyintheabsenceofPTAs,theformationof “natural” trading blocs within a region is welfare-improvingasthegainsfromtradecreationarelikelytooutweightradediversion.25Thevalidityofthe“naturaltrading partners” hypothesis is discussed in theempiricalevidencesubsectionbelow.

The effects of PTAs are not necessarily limited totraditionaltradeeffects(i.e.theallocationofresourcesin participating economies). Specifically, preferentialagreementsmayinfluencewelfareofmembercountriesthrough accumulation (i.e. economies of scale) andlocationeffects(BaldwinandVenables,1995).

Thetradecreation, tradediversiondebatefocusesonthestaticeffectsofPTAs.However,itisreasonabletoexpectthatpreferentialagreementswillhavedynamicimplications (i.e. that change over time). Theaccumulation effect considers how a PTA affectsgrowth. Itdoes this throughchanges in the returnoninvestment in member countries determined bychanges in physical capital and human capital(management and technical expertise)or by changesin technology available to firms. In a sense, theredistributionofcapitalflowsaftertheconclusionofaPTAcanbeseenasinvestmentcreationanddiversion.If capital is internationally mobile, it is possible thatthere will be an increase in capital inflows within thePTAattheexpenseofnon-members.Inaddition,thereisawidebodyof literaturethatstudiestheeffectsoftrade on long-run growth (World Trade OrganizationWTO,2008).Thisareaofresearchgenerallydoesnotconsider theeffectsofpreferential tradeagreementsas opposed to non-discriminatory trade opening.However, some of the mechanisms through whichtrade affects growth (international knowledgespillovers, enhanced competition, etc.) apply to PTAsaswellastomultilateraltradeliberalization.26

The location effect looks at how the integration of acountry into a PTA may alter the distribution ofeconomic activity within thePTAand thereby lead toinequality among member countries. When tradebarriers are reduced, firms can alter their locationdecisions. This decision depends on the balancebetween production costs and the trade costs thatmust be incurred to supply different markets. On theone hand, locations where economic activity is moreconcentrated can be efficient in the presence ofexternal economies of scale that increase firms'productivity.Ontheotherhand,proximitytoconsumersreduces trade costs, particularly when trade policyrestrictionsareinplace.BaldwinandVenables(1995)findthatastradecostsdecline,havingcloseaccessto


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consumers becomes less important. Thus, during aprocessoftradeliberalization,firmswouldbedrawnto“central” areas within the PTA. This agglomerationeffect may exacerbate regional inequalities betweenmembersofanagreement.

(d) EffectsofPTAs:theevidence

Severalstudiesexamine the impactofPTAsand testthe traditional theories on trade creation and tradediversion. While this literature is not conclusive, itsuggeststhattradediversionmayplayarole insomeagreements and in some sectors, but it does notemerge as a key effect of preferential agreements(FreundandOrnelas,2010).27

A first branch of the empirical literature analysesspecific agreements and, using differentmethodologies,reachesmixedconclusionsintermsofthe net welfare effects of PTAs. For example, a firstsetofstudiesfocusontheCanada-UnitedStatesfreetrade agreement (CUSFTA). Clausing (2001) findsevidence that the agreement increased US importsfromCanada,butdidnotdivertUSimportsawayfromotherUStradingpartners.Similarly,theCUSFTAstudyby Trefler (2004) confirms the finding that tradecreation outweighs the trade diversion effect. Incontrast, a study of NAFTA concludes that theagreementisoveralltradediverting(Romalis,2007).28Romalisuseschanges inEU tradeover theperiod tocapture the counterfactual (i.e. what would havehappenedintheabsenceoftheagreement),butfindsthatthewelfarecostsofNAFTAaresmall.

ChangandWinters(2002)evaluatethewelfareimpactoftheSouthernCommonMarket(MERCOSUR)fromadifferentperspective,lookingattheeffectthecustomsunion (between Argentina, Brazil, Paraguay andUruguay)hashadonexportpricestoBrazil.TheyfindthatArgentina'sexportpricesincreasedwhilethoseofexcluded countries have declined, suggesting theagreement istrade-divertingandthat ithashurtnon-members. Finally, Egger (2004) finds that joining aregional trading bloc does not exert any significantshort-termimpactontradevolumes,butthatthereisaconsiderable trade creation effect in the long-run.Hypothetically,removingtheEuropeanEconomicArea(EEA) would account for a 4 per cent reduction oftrade within the EEA. A similar estimate for NAFTAyieldsareductionin15percentofvolumetrade.

Anotherbranchoftheempiricalliteratureusesgravitymodelstoinferthetradeeffectsofanagreement.Thekey question is to what extent PTA partners trademore than would be predicted by standard bilateraltrade determinants (e.g. income, geographicalproximity,etc.).Magee(2008),forexample,usespaneldata for 133 countries in the 1980-1998 period andincludes several fixed effects to capture thecounterfactual: what would happen to trade if therewere no PTAs. He finds that the average impact of

PTAson tradeflows issmall–only3percent–andthat, on average, trade creation exceeds tradediversion. In contrast, an earlier gravity-model studycovering130countriesfrom1962to1996foundthatPTAs have generated a significant increase in tradebetweenmembers,oftenattheexpenseoftherestofthe world, suggesting evidence of trade diversion(Carrere,2006).

Finally, focusing on East Asia, Lee and Shin (2006)find thatPTAs in the regionare likely tocreatemoretrade among members without diverting trade fromnon-members.BaierandBergstrand (2007)estimatethe impactofPTAson tradeflows, takingaccountofthe “endogeneity"29problem– i.e. thepossibility thatcountriesjoinPTAsforunobservablereasonsthatmaybe correlated with the level of trade. They concludethat when taking into account the endogeneity of aPTA,thepositiveimpactoftheagreementonbilateralflowsbecomesstatisticallymorerobustandfivetimeslargerthaninestimatesthatdisregardtheendogenityproblem.30 Thus, it appears that countries generallyopt forwelfare improvingPTAswhen therearegainsfromliberalizingbilateraltrade.

Acharya et al. (2011) analyse trade creation effectsbothwithinthePTAandoutsideofthePTAforanumberof preferential trade agreements. They find strongevidenceofintra-PTAtradecreation,showingthatPTAsincreasethevalueoftradebetweenmembercountries(for 17 out of the 22 PTAs considered). On the otherhand, they do not find evidence of trade diversioneffects. Differently from other studies in this area,Acharya et al. (2011) also consider the possible tradecreationeffectoutsideofthePTA.MostoftheanalysedPTAsincreaseexportsfrommembercountriestonon-member countries. In particular, they find very strongand positive effects regarding MERCOSUR and theASEAN Free Trade Area, with an increase of exportsoutsideof thePTAby109percentand136percentrespectively.TradediversioneffectsoutsideofthePTAhave been found in a number of cases, including theCaribbean Community (CARICOM), the CentralEuropeanFreeTradeAgreement(CEFTA),theCommonMarketforEasternandSouthernAfrica(COMESA)andtheCloserEconomicRelationsFTAbetweenAustraliaandNewZealand.

Athirdapproachintheempiricalliteraturehasbeentotestthe“naturaltradingpartner”hypothesis(Krugman,1991). Also using a gravity model and concentratingontheAmericas,Frankeletal.(1995)seektoidentifytrade diversion by testing whether regional trade isgreater than could be explained by naturaldeterminants of trade, such as proximity and marketsize. They find that multiple PTAs with partialliberalization among neighbours within a continentwouldraisewelfare,andthatthissituationispreferableto a single continental free trade area. Thus, in theirview, the formation of trading blocs, such as NAFTAand MERCOSUR, among “natural trading partners” is


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preferabletothefailedFTAA(FreeTradeAreaoftheAmericas).AnopposingviewisheldbyBhagwatiandPanagariya(1996),whoarguethatthevolumeoftradeandtransportcostcriteria,testedbyFrankeletal.,arenotsufficienttoensurethataPTAwillraisewelfare.

Addressing the points brought up by Bhagwati andPanagariya, Krishna (2003) uses detailed US tradedata to estimate the welfare effects of hypotheticalbilateral PTAs. He finds that neither geographicalproximitynortradevolumesaresignificantlycorrelatedwithwelfaregains,concludingthatthesearenotgoodindicators for the formationofPTAs,as the literaturesupporting the “natural trading partner” hypothesissuggests. Baier and Bergstrand (2004) study whichpairofcountrieswouldgainmostfromformingaPTAand whether these country-pairs are more likely tosignapreferentialagreement.Theydevelopageneralequilibriummodelwithasampleof53countries,usingdata from 1996. Testing for several variables thatpredict 85 per cent of the bilateral PTAs in theirsample,31 their results support the natural tradingpartnerhypothesis.32

(e) ThepoliticaleconomyofPTAsandexternaltariffs

SectionC.1makesthepoint that theviewsofspecialinterestgroupsmayweighheavilyongovernmentsandthat apolicymakermay signaPTA toaccommodatetheinterestsofpowerfullobbygroups.Inthispoliticalcontext, can inefficient PTAs be signed (or efficientones be rejected)? More precisely, under whatconditionswillatrade-distortingPTAbeendorsedbyagovernment?Twoinfluentialstudiesaddressingthesequestions reached a similar conclusion in that trade-divertingPTAsaremorelikelytobepoliticallyviable.33

TheworkbyGrossmanandHelpman(1995)providesthe basic structure for the so-called “new politicaleconomy” literature in trade. The key idea, which isembodied in all models discussed in this section, isthattheinteractionofgovernmentsintheinternationalarenaisatwo-levelgame(Putnam,1988). Inthefirststage, the policy preferences of a government areshapedbynationalwelfareconsiderationsandby thepolitically organized groups that represent differentindustrial sectors. In the second stage, governmentsnegotiateaPTAundertheconstraintsimposedbythedomestic political environment. The outcome of thisgameisthepoliticallyviablepreferentialagreement.

A PTA naturally requires the assent of bothgovernments involved. The question is, therefore,under what domestic conditions is such commonalityof purposes more likely? As lobby groups tend torepresent producers' interests, one needs tounderstand how a preferential agreement affectsproducers. Consider first a trade-diverting PTA(e.g. theonebetweenHomeandPartner2describedin Figure C.3). In this case, the price in the Home

marketfallsbyasmallmargin,andexportersinPartner2 gain from the high domestic price in the partner'smarket.Hence,domesticimport-competingproducersare hurt slightly and would weakly oppose anagreement, while exporters in the partner countrybenefit largely and strongly support the agreement.Consider next the case of a trade-creating PTA (e.g.theonebetweenHomeandPartner1, inFigureC.2).Thedomesticpricefallssubstantiallyasaresultoftheagreement, the domestic import-competing sectorsuffers larger losses while foreign exporters receivelittle benefit. In this scenario, domestic politicaloppositiontothePTAisstrong,whileforeignsupportismarginal.34

TheworkbyGrossmanandHelpman(1995) isbasedon the assumption that markets are perfectlycompetitive (i.e. no supplier has sufficient marketshare to affect prices). A question, therefore, ariseswhether results would be different under imperfectlycompetitivemarkets. Inanoligopolisticsetting,wherea small number of producers dominate the market,Krishna (1998) shows that it is still true that trade-diverting PTAs are politically viable, while trade-creating ones are not. Intuitively, trade diversionincreases the oligopolistic incomes (rents) ofproducers in the partners' economies and, therefore,creates political support for the agreement.Specifically, Krishna (1998) posits that a politicalrequirement for a PTA is that aggregate profitsincreaseinthepartners'economies.Iftradeisdivertedaway from third countries, it is more likely that firmsfrom within the agreement gain market share in thepartner's economy (to the disadvantage of third-marketcompetitors)andincreasetheirprofits.35

In brief, these earlier works conclude that theconditions needed for the political viability of a PTAmaycontradictthosethatensureitssocialdesirability.Thesestudies,however,donotconsider thatexternaltariffs(i.e.thetariffthatPTAmembersimposeonnon-members) may respond to the formation of apreferential agreement. For instance, Richardson(1993) first made the point that countries may havereason to lower their external tariffs after entering aPTA. Importantly, removing this assumption mayradically change the implications of these models.Intuitively,consideringthegraphinFigureC.2,ifHomelowers theexternal tariff toPartner1after signingaPTA with the less efficient Partner 2, it is entirelypossiblethatthePTAwillstillbetrade-creating.36

Ornelas (2005a: 2005b) revisits the Grossman-Helpman and Krishna theory, which deals with thesituationwheretheexternaltariffisallowedtochangeafteraPTAhasentered intoforce.Specifically, thesepapers allow tariffs on third countries to be set“endogenously”, that is, in a way that allows specialinterest groups to influence policy both before andafter an agreement is signed. Ornelas shows thatindependentlyofthestructureofmarkets(i.e.perfectly


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competitive or not), welfare-decreasing preferentialagreements are unlikely to be politically viable.However,Ornelasshowsitisstillpossiblethatspecialinterest pressures may persuade governments not tosignsomepreferentialagreementsthatwouldimprovesocialwelfare.

Thestartingpoint for anaccurate characterizationofthesefindingsistoconsiderthepoliticaldeterminantsof external tariffs. The political demand for externalprotection is lower under a preferential agreement.AfteraPTAisformed,thedomesticimport-competingsector losesmarketshare to thepartners'producers.Inthisnewenvironment,anyincreaseinthedomesticprice thatmayresult froman increase in theexternaltariffbenefitsdomesticproducerslessthanitwouldifaPTAwasnotinplace.Thereasonisthattheexternalprotectiongrantedbythetariff“leaks”toPTApartnersand only partly benefits domestic producers.37 Putdifferently, the incentive of import-competing sectorstodemandprotection is stronger in theabsenceofaPTA, as their share of the domestic market is larger.Thisistruebothforperfectlycompetitiveproducersaswell as for oligopolistic firms. Moreover, the cost oflobbying is not changed under a PTA, as this stillreflects the cost of the external tariff to society atlarge.

The above reasoning has the following implications.First,aPTAweakens the impactofpoliticaleconomyforcesonexternaltariffsinequilibrium.AsthedemandforexternalprotectionfallsunderaPTAwhileitscostis unaltered, the external tariff is predicted to fall.Secondly, if preferential agreements destroyprotectionist rents, political support of organizedsectors cannot be a strong rationale for a PTA.Politicallyviableagreementsmust,therefore,bethosethatimproveaggregatesocialwelfare.

To some extent, these recent works on the newpolitical economy of preferential agreements shouldbe seen as complementary. Grossman and Helpman(1995) and Krishna (1998) focus on the decision tosignornotaPTA,buttheydonotexaminetheeffectthataPTAhasonexternaltariffs,whichisinsteadthefocusofOrnelas (2005a:2005b). If special interestscouldbothlobbytoinfluencethetraderegimedecisionaswellasthetariffformation,Ornelas'findingswouldbe qualified. In this scenario, trade-divertingpreferential agreements can be politically viable.However,thisnegativeoutcomeisnotaslikelyasonemightthink,asthepoliticalrentdestructioncausedbya PTA reduces governments' incentives to endorsewelfare-reducing agreements (Freund and Ornelas,2010).

Thenewpoliticaleconomyliteraturehasalsoraisedarelated but distinct question. A number of PTAs gowell beyond tariff arrangements and include “non-trade” issues, such as labour or environmentalstandards, provisions on intellectual property rights

and several other areas. As the next subsectiondiscusses more extensively, there are a number ofreasonsthatjustifythesedevelopments.Thequestionaddressed here is not on the economic rationale forsuch arrangements, but rather whether one shouldexpect external tariffs to fall when preferentialagreements encompass more than the lowering oftariffs.

Limão(2007)providesaneconomicmodelthatallowsan analysis of the importance of non-trade issues inPTAs,andtheireffecton incentives to lowerexternaltariffs. Specifically, he argues that, if preferentialagreements include non-trade issues rather than justtariff reductions,governmentsmaybemore reluctantto reduce external tariffs. The reason is that a PTAmaybevaluable toacountrypreciselybecause tariffreductionsencouragecooperationonothernon-tradeissues.However, inthiscase,agovernmentmayhavelittle appetite to reduce tariffs on third-countryimports, because a reduction in the external tariffswould lower the preference margin to partners andthusweakentheagreement.38

Ultimately,theeffectofPTAsonexternaltariffs isanempiricalquestion.However, the literatureappears tobediscordant.Inafirstsetofstudies,Estevadeordaletal. (2008) and Calvo-Pardo et al. (2009) find thatpreferentialagreementsinLatinAmericaandASEANcountries had the effect of reducing external tariffs.Specifically, they find that external tariffs declinefaster in those sectorswherepreferenceshavebeengrantedand that,contrary toprevailingopinion, thereis little evidence that preferences lead to higherexternal tariffs. In a second set of studies, Limão(2007)andKaracaovali(2008)showthattheoppositepattern emerges from an analysis of PTAs signed bytheUnitedStatesandtheEuropeanUnion.

While these contrasting empirical findings suggestthatmoreanalysisisneededinthisarea,theymaybeless controversial at a closer look. Specifically, thedifference in the sample of countries analysed mayexplainpartof thedifferences.PTAssignedbetweendeveloped and developing countries, such as thosesignedby theEuropeanUnionand theUnitedStateswith developing countries, may be more likely toinclude provisions that go beyond the lowering oftariffs than agreements between two developingcountries.Asthisisgenerallythecase(seeSectionB),itisnotsurprising,inlightofthetheory,tofindthatthePTAs between developed and developing countriestend to increase external tariffs, while agreementsbetweentwodevelopingcountriesarelikelytoreducethem.


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(f) Rulesoforiginandtradediversion

(i) Rules of origin: a source of trade diversion

In PTAs which are not customs unions, membersmaintaintheirownexternaltariffs.Consequently,intheabsence of any rules, imports of particular productswould enter the country in the PTA with the lowestimportdutyontheiteminquestionandbere-exportedto other countries in the PTA. Hence, rules whichconfirm the true “origin” of the goods are required topreventsuchre-routingofgoods–or“tradedeflection”.For example, suppose the preferential tariff on theexportsofcountryAtocountryBiszero.Hence,whencountry A exports the good to country B, the latterneeds toensure that thegood reallydoesoriginate incountry A, and is not simply being re-routed viacountry A by some third country which does not havethesamedegreeofpreferencesincountryB.Empiricalevidencesupportsthishypothesisrelatingtotheroleofrules of origin (RoOs)39 in preventing trade deflection.Forinstance,Estevadeordal(2000)findsthatthehighertheabsolutespreadbetweenMexicanandUStariffstothirdparties,thehighertherestrictivenessbuiltintotheRoOsofNAFTA.Inreality,however,RoOsmaybeusedto protect certain favoured industries, thereby leadingto trade diversion or trade suppression (Krishna andKrueger,1995).

Considerthefollowingscenario.AssumeaproductionsharingnetworkbetweencountriesBandC,wherebycountry B exports a final good to country A usingintermediate goods from country C. Furthermore,assume that country A is a high-cost (relative tocountryC)producerofintermediategoodsusedintheproduction of this final good which is exported bycountryBtocountryA.Initially,countryAsignsaPTAwithcountryBandanotherPTAwithcountryC.Hence,agoodproduced inBwouldhavepreferentialaccessto A, as would a good originating in C. Under thenegotiated PTA, country A could impose stringentRoOsoncountryBwiththeresultthatthefinalproductthatcountryBexportstocountryAmaynotqualifyasoriginatingthere–perhapsbecausetheproportionofintermediategoodsfromCistoohigh.Hence,thefirmin country B can either continue to import theintermediate good from country C and not gainpreferential access to countryAor shift its purchaseof the intermediate good from C to A, in order tosatisfy the RoOs and obtain preferential access ontheirexportstocountryA.

Inotherwords,restrictiveRoOsmaymakeitprofitableforfirms incountryB toengage in “supplyswitching”by using a more expensive intermediate good eitherfromcountryAoradomesticfirm,i.e.restrictiveRoOsin final goods divert or supress trade in intermediategoods. Supply-switching strengthens the trade linkbetween countries A and B (hub-spoke), at theexpenseof tradebetweencountriesBandC (spoke-

spoke),i.e.countryAbenefitsbyusingRoOstoprotectexports of certain industries (Gasiorek et al., 2009).Furthermore, by influencing the sourcing ofintermediategoods trade,RoOsare likely to increasefirms'costsandhencehaveanadverseeffectonfinalgoods trade. This increase in cost strengthens the“spaghettibowl”effectofPTAsanalysedinSectionB.Hence, supply-switching – or the non-utilization ofpreferences,asa resultofRoOs– reduces the tradeliberalizingimpactofPTAs.Analysingimportdataforasampleofmore than150countriesduring theperiodfrom 1981 to 2001, Estevadeordal and Suominen(2008) find that restrictive product-specific RoOsencourage the trading of intermediate goods withinthe PTA (thereby leading to trade diversion) andundermineaggregatetradeflowsamongPTApartners.

Inasurveyof345firmsinfourLatinAmericancountriescarried out by the Inter-American Development Bank(IADB) in 2007-08, fewer than 10 per cent reportedhavingchanged theirsupplychain inorder toadapt torules of origin (Harris and Suominen, 2009). Thissuggests that most firms continue to import from thesame source as before, even if this means foregoingpreferentialaccesstotheirPTApartnercountrymarket.Among the multi-national corporations (MNCs) in thesample, however, about 75 per cent (ranging from 50percentinPanamatonearly90percentinColombia)described RoOs as an important factor in determiningwhere to invest inproduction facilities.However,whenasked whether investment in a subsidiary was madeexplicitly tomeetRoO requirements inoneormoreofthecountry'sPTAs,thefigurefallsto lessthan30percent40 (Harris and Suominen, 2009). This firm-levelevidencesuggeststhatforMNCs,whichrelyheavilyonflows of intermediate goods trade via productionnetworks, RoOs significantly affect investmentdecisions.Inparticular,firmsmayswitchtheirsourceofintermediategoods fromamoreefficient supplier inanon-member country to a less efficient supplier in amember country (where they establish productionfacilities),therebyresultingintradediversion.

(ii) Reducing such trade diversion: the way forward

The hypothetical scenario described above showedthat the final good originating in B has preferentialaccesstoA,asdoestheintermediategoodoriginatinginC.However, thefinalgood fromB,producedusingintermediate goods from C, which does meet rulesgranting originating status for B’s exporters to C,would not be eligible for preferential access. Such asystem of bilateral hub-spoke agreements withconstraining rules of origin is thus likely to enhancehub-spoketradeattheexpenseofspoke-spoketrade.

Gasiorek et al. (2009) have argued that thisdiscrimination, which protects the exports of certainindustries in country A and hence leads to tradediversion, can be resolved if country B signs a PTA


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withcountryCandisthereafterallowedtoadditsownintermediateinputs(valueadded)withtheintermediateinputsfromcountryCindeterminingoriginatingstatuson theexportsof thefinalproductsold tocountryA.Thisistheprincipleof“diagonalcumulation”ofrulesoforigin. Under this arrangement, all participatingcountries agree bilaterally that in all PTAs concludedamongthemselvesmaterialsoriginatinginonecountrycanbeconsideredtobematerialsoriginatinginalltheother countries. This makes it easier to importintermediategoodsandstillsatisfytheRoOs.

Diagonalcumulationappliestotradebetweenthreeormore trading partners normally linked by PTAs withidentical RoOs. It builds on the concept of “bilateralcumulation” – materials originating in one country canbe considered as materials originating in the otherpartner country – which is a feature of all PTAs. Inaddition, there is the concept of “total cumulation”,which again applies to trade between three or morecountries,but involvesgreaterflexibility than “diagonalcumulation”. This is because it allows intermediateprocessingtobesplit inanywayamongallthepartiesto the PTA, provided that when added together, thecumulative processing is sufficient to meet the originrule.Inthecontextofourhypotheticalscenario,supposeforinstancethattheintermediategoodfromcountryCdoesnotqualifyasoriginatinginthatcountry.Withtotalcumulation,theproducerincountryBcancumulatethe

proportionofcountryC’svalueaddedtogetherwithitsownvalueaddedindeterminingoriginatingstatus.

Althoughtotalcumulationisrare,diagonalcumulationhas been used by some PTAs. The EU is a goodexample in this regard.BoxC.4providesanoverviewoftheEUexperienceinrelaxingRoOsinPTAs.

3. Goingbeyondthestandardanalysis

As shown in Section B and Section D, over the pastthree decades trade agreements have gone beyondbordermeasures,suchastariffs,andhave integrateda number of domestic policies and regulations,including intellectual property rights, productstandards,competitionandinvestmentpolicies.Thesedevelopmentsarenotinconsequential;oncetariffsareremoved, differing regulatory policies among nationsbecomemoresalient, creatingcomplexchallengesofaccommodation and coordination. Moreover, tradeopenness – along with the new forms of trade thattechnological development makes possible – createsnew pressures to reconcile divergent nationalpractices, and generates new forms of cross-borderpolicy effects (spillovers). These developmentsproducedemands forgovernanceand the ruleof lawthattranscendnationalborders.

BoxC.4: Lessons from the eu experience in relaxing rules of origin (Roos)

For theEU, the issueofmultipleRoOsbecame increasinglysignificant in the1990s,asagreementswereconcludedwithanumberofcountriesfromCentralandEasternEuropeandfromtheSouthMediterranean.ItbecameapparentthattheEU’s“spaghettibowl”ofcriss-crossingagreementswasrestrictingfirms’abilitytosourceintermediategoodsfromthecheapestsource,i.e.therewastradediversion(Gasioreketal.,2009).

Toaddressthisproblem,thePan-European(PANEURO)CumulationSystem(PECS)waslaunchedin1997.It established identicalprotocols forproduct-specificand regime-wideRoOsacross theEU’sexistingandfuturePTAs.ThisincludedarrangementswiththeEuropeanFreeTradeAssociation(EFTA)countries,datingfrom 1972 and 1973, as well as those forged in the 1990s and later – i.e. PTAs with several EasternEuropean countries, the Euro-Mediterranean Agreements, the Stabilization and Association Agreementswith Croatia and FYR Macedonia, as well as extra-regional PTAs with South Africa, Mexico and Chile(EstevadeordalandSuominen,2004).Hence, “diagonalcumulation”wasakeyprinciple introduced inpan-European rules. It enabled producers to use components originating in any of the participating countrieswithoutlosingthepreferentialstatusoffinalproduct.

Empirical evidence reveals that the harmonization of RoOs, via diagonal cumulation in the PECS, hasimpactedtradeflowssince1997.For instance,analysingthetextile industry,Augieretal. (2004)findthattradebetweennon-cumulatingcountriescouldbelowerbyupto50to70percent.Similarly,usingdataontradeflowsbetween38countries for threebaskets– trade inallgoods, trade in intermediategoods,andtradeinmanufacturedgoods–Augieretal.(2005)showthattradebetweencountriesthatbecamepartofthepan-Europeansystemofdiagonalcumulationwashigherrelativetotradewithothercountriesbyabout43 per cent between 1995 and 1999. In addition, they show that the introduction of the PECS in 1997increasedtradebetweenthespokesby7and22percent.However, theirmethodology isbasedonusingdummyvariablesinagravitymodeltocapturetheroleofcumulation.Hence,itispossiblethatthesevariablesarecapturingotherfactors.

Atthesametime,analysingdataontradeflowsbetween38countries,Gasioreketal.(2009)findthatthetradebetweennewlycumulatingcountries (following the introductionof thePECS in1997) risesbymorethantradebetweenthesecountriesandthirdcountriesforsomeselectedindustries.41


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The following subsection looks at the new forms oftradeagreementsthatareemerging,usingtheconceptof “deep” integration (Lawrence,1996),andasks twomain questions. First, what are the motives behindthese agreements? Secondly, what determines thestructureofdeeperarrangements?Answers to thesequestionsareessentialtounderstandingtheeconomiccostsandbenefitsofdeeperintegration.

(a) Theconceptofdeepintegration

Trade agreements that deal mostly with bordermeasuresareoftendefinedas “shallow”agreements.On thedomesticside, theseagreementsaccordnon-discriminatorynationaltreatmenttoforeigngoodsandfirms (i.e. the same treatment that is accorded todomestic firms), but stop short of intervening indomestic economic policies beyond this requirement.In contrast, trade agreements that include rules ondomestic policies that fall “inside the border” arereferred to as “deep” agreements (Lawrence, 1996).There is no agreed definition of the scope of suchdeep agreements, and indeed the concept is widelyused to refer to any arrangement that goes beyondsimply extending preferential tariff concessions.However, thereareat least twodistinctdimensions–the“extensive”and“intensive”margins–toanydeeperintegrationagreement.

Thefirstdimensionreferstoincreasingthecoverageofan agreement beyond the lowering of tariffs (e.g. theharmonization of national regulations in financialservices).Mostdiscussionsofdeepintegrationfocusonthis dimension. The second dimension, the intensivemargin of deep integration, refers to the institutionaldepth of the agreement, such as the extent to which

certain policy prerogatives are delegated to asupranationallevelofgovernment(e.g.theformationofa customs or monetary union). These two dimensionsareoftenrelated.Thatistosay,extendingthecoverageof an agreement may also require creating commoninstitutionsandnew,moresophisticatedwaysofsharingsovereignty in order to administer it. The table belowprovidesaschematic(butnotexhaustive)pictureofthediverseformsofintegration.42

Like shallow integration arrangements, deeperagreements can be among advanced economies(North-North), advanced and developing economies(North-South), or just developing economies (South-South). Similarly, membership in deep integrationarrangements can be wide or narrow, ranging fromregional agreements involving several neighbouringcountriestobilateralagreementsbetweentwodistantpartners.43

(b) Whyisdeepintegrationgainingmomentum?

Deep economic integration and trade are intimatelyrelated (see Table C.1). Deep arrangements may benecessarytopromotetradeincertainsectorsoracrosseconomiesmorebroadly.Forinstance,harmonizationofcertain regulations may be a prerequisite for trade inservices or common competition policy rules may berequired toallowcomparativeadvantage tomaterialize(see Section D.2(b)). Conversely, trade liberalization –and the evolving structure of trade (for example, thegrowth of production networks) – can make the needfor deeper policy integration more pressing. In short,shallow and deep integration can be complementaryprocesses, as the first generates a demand for

TableC.1:shallow versus deep integration

Integration level type of PtA Features example

SHALLOWINTEGRATION

DEEPINTEGRATION

Freetradeagreement(FTA)Membersliberalizeinternaltradebutretaintheirindependentexternaltariffs

US-IsraelFTA

FTA+

AnFTAthatinadditionharmonizessomebeyondtheborderstandards(e.g.environmentalstandards)

NAFTA

CustomsUnion(CU)

Membersliberalizetradewithintheunionandadoptcommonexternaltariffsagainsttherestoftheworld

SACU

CommonMarket

EstablishmentofthefreemovementofallfactorsofproductionwithinthePTA,includinglabourandcapital

EU

MonetaryUnion

Establishmentofacommoncurrencyandcompletelyintegratedmonetaryandexchangeratepolicy

EuroArea

FiscalUnionEstablishmentofacommonfiscalpolicy

US

Note:ThedepthofintegrationofPTAsmightoverlapacrosstypesofagreementsincertaincircumstances.


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governancethatthelattercanprovide.Thisrelationshipisunderscoredintheeconomicliterature.

A number of authors argue that markets need non-marketinstitutions(political,legalandsocial)iftheyareto function properly (Casella, 1996; Casella andFeinstein,2002;Padoa-Schioppa,2001;Rodrik,2000).These non-market institutions are essentially publicgoods that the market itself fails to provide. Othersmake the point that trade openness increases policyexternalities, rendering unilateral decision-makinginefficientcomparedwithcooperativedecision-making(BronerandVentura,2006;EpifaniandGanica,2006;BrouandRuta,2010;AntràsandStaiger,2008).

Insum,therelationshipbetweendeepintegrationandtradeworksbothways–inthesensethatonemaybethe cause and/or consequence of the other. Therelationship is also dynamic – in the sense that it islikely to develop over time. The remainder of thissection focuses on international production networkswhich exemplify the complementarity between tradeand governance that lies at the root of the currentproliferationofdeepagreements.

(i) International production networks and deep integration

Twenty-first century trade, as defined by Baldwin(2010), is a much more complex phenomenon thantradepriortotheearly1980s.44Thiscomplexityistheresultoftheincreasedroleofinternationalproductionnetworks in the global economy, which arecharacterized by the unbundling of stages ofproduction across borders. Increasingly, multinationalfirmsarenotonlydistributingmanufacturingstagestodecrease costs and exploit comparative advantages;they are also unbundling and outsourcing serviceswork,primarilyoffice tasks,makingglobalproductionnetworksevenmoresophisticatedandcomplex.

These new forms of international trade requirereconsiderationandreconceptualizationofpreferentialtrade. Most of the PTA models above assume thatcountries trade final goods and that producers areprotection seekers for these goods. However, theremight be some economic sectors, increasinglydependentonimportedintermediateinputs,thatseeklower levels of protection to reduce their productioncosts (Yi, 2003). Some empirical evidence suggeststhatwhencountrieshaveasignificantnumberoffirmsinvolvedinproductionnetworksthereismorepressureforunilateraltradeliberalization.45

Forsimilarreasons,countriesthatformpartofsupplychains involving multiple nations might be moreinclined tosignPTAswith their tradingpartners thanto unilaterally liberalize. As various stages ofproduction may take place in a number of differentcountries,theeffectsoftradebarriers,suchastariffsorothernon-tariffbarriers,onthecostofaparticular

stage of production is proportional to the number oftimes the product crosses other national boundaries.Inaddition,countriesmaysignPTAsinordertosecureor“lockin”tradingrelationships,thusreinforcingtheirpositionasthemainproviderofintermediateinputs.

Theoreticalconclusions regarding thewelfareeffectsofpreferentialtradeliberalizationalsochangewiththepresenceofproductionnetworks.Infact,internationalproduction sharing can mitigate the trade-diversioneffects of PTAs.46 The possibility of dividing up theproduction of final goods into various stages orcomponents alters the calculation of trade creationand tradediversionand,although theoutcome isstilluncertain, it leaves room for welfare-reducing PTAs,that trade only in final goods, to become welfare-improving PTAs, once members engage in trade ofpartsandcomponents.47

International production networks are not a newphenomenon, but their relevance is increasing inparticularregionsoftheworld(seeBoxC.5),andtheirpattern and composition has changed over time.Initially,countriesengaginginproductionsharingweremainlyrichcountries.48Fromthemid-1980s,however,production networks between developed anddeveloping countries started to increase (seeSectionB.3).

Is there any link between the recent growth ofproduction networks and the demand for deeperagreements? The theoretical and empirical literatureon FDI and offshoring highlights that despite thebenefitsofexploitingfactorpricedifferencesandnewtechnologicaldevelopments,thereareadditionalcostsofinternationalfragmentationofproduction–fromthemanagerial and logistic costs associated withmonitoring and coordinating international productionto learning about the laws and regulations that arerequired to do business in another country. Thesecostsmightbeparticularlyhighfordevelopingnationswhich are part of North-South production networks,and that may lack the kind of sophisticated businesslawsandtheproductandlabourregulationswhichrichcountriesusetoconsolidatetheirtradeinintermediategoods(Baldwin,2010).

Inthiscontext,theexpansionofproductionnetworks–and in particular of North-South production-sharing– should be related to the proliferation of deepagreementsaimedatfillingagovernancegapbetweencountries. Agreements that include provisions relatedto the institutional framework, competition policy, theproduct and labour-market regulations, infrastructuredevelopment,andotherareascouldmakeproduction-sharing activities more secure and less vulnerable todisruptionsorrestrictions(Yeats,2001).

This pattern can be observed in agreements such asNAFTAwhichnotonlyincreasemarketaccess,throughtariffreductions,butalsoincludedisciplinesthatreduce


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therisks–andincreasetheprofitability–ofinvestmentin Mexico. Also the recent accession of easternEuropeaneconomiestotheEuropeanUnion,aswellassomeoftheeuro-Mediterraneanagreements,couldbepartlyexplainedasaresponsetothedemandfordeepintegration agreements associated with expandinginternationalproduction-sharing.

TheevolvingnatureoftradeagreementsinEastAsia,whereasignificantandgrowingshareofinternationalproductionsharingtakesplace,alsohighlightsthelinkbetween production networks and deep integration(seeSectionD.3 foramoredetailedanalysis). In thisregion, the growth of production sharing first tookplace through de facto economic integration.53However,more recentNorth-Southagreements, suchas Japan's economic partnerships with Malaysia,Indonesia, Thailand and Viet Nam, or ASEAN's pushfordeeperdisciplines,clearlyshowthat this region ismovingtowardsdeeperintegration.

Lawrence(1996)wasthefirsttohighlightthesystemicimplications of international production networks anddeep integration. With increased internationalcompetitionflowingfromreducedbarrierstotrade,theability to operate abroad – and to locate complex

production in the most cost-efficient regions –becomes increasingly important to firms'competitiveness. In order for cross-border productionnetworkstooperatesmoothly,certainnationalpoliciesneed to be harmonized across jurisdictions. Thisgeneratesademandfordeepformsofintegration.

The trade literature has largely failed to model theinteraction between international production networksand deep integration. One significant exception is therecent work by Antràs and Staiger (2008). They showthat the rise of offshoring creates new forms of cross-borderpolicyeffectsthatgobeyondthestandardtradepolicyexternalities,whengoodsareproducedinasinglelocation(i.e.theterms-of-tradeeffect).54Inthiscontext,theobjectiveoftradeagreementsismorecomplexthanthe standard theory would suggest, as negotiatingmarketaccessisnotsufficienttoaddressdistortionsofunilateral policy-making. An implication of this model isthat the changing nature of trade (from trade in finalgoods to trade in intermediate goods) is directlyresponsibleforthegrowingdemandfordeepagreementsthat can address these new cross-border effects.Specifically, externalities associated with productionoffshoring are different from those associated withtraditional market access, and cannot be easily

BoxC.5: Determinants of the regionalization of production networks

Standard elements of comparative advantage, such as variations in labour supply conditions, wages, orrelativefactorendowments,helpexplainnotonlytheproliferationofNorth-Southproductionnetworksbutalsotheregionalizationofsuchnetworks.StudiesbyAthukoralaandMenon(2010)ofEastAsia,forexample,showthateventhoughwagesinChina;HongKong,China;theRepublicofKorea;andChineseTaipeihavebeenrapidlyapproachingdeveloped-countrylevelsinrecentyears,wagesincountriessuchasMalaysia,thePhilippines,ThailandandVietNamremainlowerthan–orcomparableto–wagesinMexicoandcountriesonEurope’speriphery.

The role of distance is also important in explaining the regionalization of production networks. Severaleconomists have pointed out that despite technological advancements, distance still matters and certaincountries still suffer from geographic remoteness (Venables, 2001).49 In addition, there is evidence thatgeographicaldistanceremainsakeyfactorindetermininginternationaltransportcosts,especiallyshippingcosts,anddeliverytime(EvansandHarrigan,2005).Arguably,thesetypesofcostsareparticularlyrelevantforproductionnetworks,whereagoodcancrossbordersseveraltimesinthevariousstagesofproduction.

New geography models of economic agglomeration at the international level are also useful in explaining theregionalizationofproductionsharing.Accesstointermediategoodscreatesagglomerationofproduction,asfirmsgainfrombeingclosetocustomerandsupplierfirms.50Asmoreandmorefirmsmovetoacertainregion,theycreateademandforsuppliersofintermediategoodsandservices,reinforcingtheoffshoringattractivenessofthatregion for other firms in the industry and related fields. In addition, because production networks are formedaroundcentresofeconomicactivity,thedistancebetweentheseproductioncentresandtheperipherymatters.51

SchatzandVenables (2000)showthatmajoroutward investorscarryoutmuchof their investment,whichreliesheavilyonintermediategoodstrade,closetohome(theUnitedStatesinvestinginMexico;theEUinCentralandEasternEurope;Japan inAsia)and this trendcapturesan importantshareofFDIflows fromdevelopedtodevelopingcountries.52

InthecaseofEastAsia,AthukoralaandMenon(2010)findthattheregionhasbenefitedfroma“first-mover”advantage in hosting assembly operations of multinational corporations. Established companies haveattractedotherkeymarketplayersand, in turn,manyhaveupgraded the technologyemployedby regionalproduction networks and assigned greater global production responsibilities to local affiliates, reinforcingtheagglomerationeffects.


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addressedwithgeneralrules,suchasnon-discriminationand reciprocity (Bagwell and Staiger, 2003). If thisargument is correct and the GATT/WTO system is notwelladaptedtohandlethesenon-marketaccessissues,countriesmightturntootheravailableinstruments,suchasPTAs,tosolvetheircoordinationproblems.

This presents the multilateral trading system with adifficult challenge. The recent wave of preferentialagreements may (at least in part) be an institutionalresponse to the new problems associated with thegrowth inoffshoring.On theonehand, this suggeststhat PTAs are efficiency-enhancing rather thanbeggar-thy-neighbour agreements.55 On the otherhand,PTAsmaymakeitmoredifficultfortheWTOtoperform its traditional role of providing reciprocalmarket access opening. In essence, the institutionalchallengefortheWTOistofindanapproachthatcanfacilitate the deeper integration that countries areseeking while at the same time upholding the coreprincipleofnon-discrimination.

(c) Thetrade-offsinvolvedindeepintegration

Unlike shallow integration, deep integration –regardless of the form it takes – requires commonpolicies and regulations among member countriesacross anumberof areas.56This raisesa completelydifferent set of questions. What are the costs andbenefitsofcommonpolicies?Whichcountriesshouldformadeepagreement?Whichpoliciesshouldremainin the national domain, and which should beharmonizedat–orassignedto–asupranationallevelof government? These questions are traditionallyaddressedinpubliceconomics,andhavegeneratedanextensive literature, mainly focused on fiscalfederalism,whichisbrieflyreviewedbelow.57

Economists have developed a simple principle tounderstandthecostsandbenefitsofcommonpolicies,knownastheOates'DecentralizationTheorem(Oates,1972). This theorem suggests that there is a basictrade-off between the benefits of common policies,which depend on the extent of cross-border policyspillovers,andtheircost,whichdependsontheextentof policy preference differences across membercountries.Forindividualcountries,thecostofcommondecision-making is that it moves the common policyaway from its preferred national policy (i.e. a loss innational sovereignty); the benefit is that policyspilloversareinternalized.

This basic principle sheds an important light on theremaining two questions – i.e. which countries andwhich policies should undergo deep integration.Regarding the first question, countries that havesimilarpolicypreferenceswouldbenefitthemostfromdeepintegration,asthiswouldlimitthepoliticalcostofintegration.Similarly,foracertainspectrumofnationalpolicy preferences, countries that are more

interconnected would also benefit more from deepintegration.Regardingthesecondquestion,countriesshould take common policy decisions in areascharacterized by large cross-border effects andmaintainnationalpolicyprerogativesinareaswithlowcross-border impacts (and where policy preferencesaredissimilar).

An interesting empirical issue is whether the fiscalfederalism theory can explain observed patterns indeep integration arrangements. First, the theorypredicts that countries sharing similar policypreferencesandgreater levelsof interconnectionarethe ones that should choose deeper over shallowintegration. While a direct test of this proposition ishard to verify, several deep PTAs are formed bygeographicallyclosemembers(theEUbeingaprimaryexample). To the extent that policy preferences arecorrelated with geographic location, this providesindirectevidenceinsupportofthetheory.

Secondly, the fiscal federalism theory states thatpolicies characterized by high cross-border spilloversand low heterogeneity of preferences for differentcountriesshouldbecentralized,whiletheprovisionofall other services should be decentralized. Alesina etal. (2005) contrast this benchmark with a set ofindicatorsthatmeasuretheroleoftheEUindifferentpolicy areas. They find that there is a partialinconsistency between the resulting allocation ofcompetencies to the EU and the Oates Theorem. Inparticular, their data suggest that the EU is active incertainareaswherecross-bordereffectsare lowandthat its intervention is too limited in some policydomainscharacterizedby largespill-oversandsimilarpreferencesacrosscountries.58

Three further issues are relevant to the debate ondeep integration: the welfare effects of deepagreements on member countries; the trade-offs ofbilateral North-South deep agreements; and thesystemiceffectsofdeepregionalarrangements.

Asdiscussed in thepreceding section, there is not asingle definition of deep integration agreements, asthis concept generally refers to any agreement thatgoesbeyondshallowarrangements.Asaresult,thereis not the same comprehensive analysis of theeconomic costs and benefits of deep integration asthere is forpreferential tariff liberalization.This isnotsurprising for two reasons: first, the effects of FTA-plusorcustomsunion-plusagreementsarelikelytobedifferentfromtheeffectsofstandardFTAsorcustomsunions. Like shallow agreements, deep agreementsreducethecostsoftrade,andthuscanbeexpectedtoincrease trade among members (Section D providesan empirical analysis of the trade effects of deepintegration). However, unlike shallow agreements,deep integration agreements may also providesupranational public goods (common rules, a stablemonetary system, etc.) that the markets or national


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governments cannot offer. The welfare effects ofthese public goods can go well beyond the tradeeffects,andaremorecomplicatedtomeasure.

From the perspective of developing countries, deepintegrationwithadvancedeconomiesmaycreatecertainadvantagesanddisadvantages (BirdsallandLawrence,1999).Asregardsadvantages,for instance,developingcountries can import international regulatory systemsthat are “pre-tested” and represent “best practices”,withouthavingtopaythecostsofdevelopingthemfromscratch.Asregardsdisadvantages,developingcountriesmay be pressurized to adopt common rules which areinappropriate for their level of development, such ascertainenvironmentalandlabourstandards.Thisriskishigher the weaker the bargaining power of developingcountries vis-à-vis their advanced trading partners (orwhen policies and regulations are imposed rather thandevelopedcooperatively).Suchstandardscouldalsobeusedbyadvancedeconomiestoprotectvestedinterestsandtoclosemarketstopoorcountries.

In a model of regional integration where specialinterest groups can manipulate the decision-makingprocess, Brou and Ruta (2006) show that moreadvanced economies tend to be more politicallyorganized and exert a stronger influence on commonpolicies.Whiledeepintegrationcanstillbeaboonfordeveloping economies, the theory supports concernsthat the common policy will shift away from theinterestsofthelessdevelopedmember.

Whatarethesystemiceffectsofdeepintegration?Thereis a long-standing debate in the trade literature onwhether preferential agreements are friends or foes ofthe multilateral trading system. Although this debate isextensively reviewed in Section E, some preliminaryobservations are worth noting. First, deep integrationmay,insomecases,havetrade-divertingeffects.Facchiniand Testa (2009), in their work on common markets,showthatmobilefactorsofproductionaremorelikelytoexperience an increase in returns, while immobile onesaremorelikelytobemadeworse-offcomparedwiththestatusquo(i.e.nocommonmarket).Ifnoformofwealthtransferacrosscountriesispossible,acommonmarketispolitically viable – i.e. it would be supported by themedian voter in each member country – only if somefactorsremainedprotectedvis-à-vistherestoftheworldoncetheintegrationprocessiscompleted.

In an empirical study, Chen and Mattoo (2008) findthat regional harmonization of standards significantlyincreases intra-regional trade in affected industries,but that the exports of excluded countries decline.Thissuggeststhatfirmsintheexcludedcountriesarehurtmorebyanincreaseinthestringencyofstandardsthan by the scale benefit provided by integratedmarkets. In other words, standards harmonization inPTAscanbede factorestrictive.

Asecondimportantobservationisthattheprocessofdeep regional integration may be a complement torather than a substitute for the process of globalintegration. Deep agreements address behind-the-bordermeasuresthataremoredifficulttonegotiateatthegloballevel,becauseofthewidelydifferentpolicypreferences and needs among countries. Regionalgroupings may offer supranational public goods thatgovernments–aswellasmultilateralarrangements–sofarfailtosupply(e.g.redistribution,infrastructures),giving them an appropriate intermediate level role inintegration between the national and global levels(Padoa-Schioppa,2001).

4. Conclusions

This section has reviewed the main reasons forestablishingPTAsandwhattheconsequencesareforboth members and non-members. Much analyticalwork in the past has focused on shallow tradearrangements,suchasfreetradeareas,andthetrade-creation/trade-diversion effects of PTAs. Aspreferential agreements have evolved over time,however, the loweringof tariffs isno longer themainfocusofPTAs.Agreementsnowcoverawidernumberof issues – beyond tariffs – and involve morestructured institutional arrangements. Traditionaltheories about PTAs fail to explain these newdevelopments, both in terms of the causes andconsequences of “deep” agreements. In particular,traditional theories are silent on the relationshipbetween the growth of international productionnetworks and the formation of deeper policyarrangements among countries. While the abovediscussionhasshedsomelightonthecausesandthestructure of deep integration agreements – adiscussion that falls mostly outside the domain oftrade economics – there is clearly a need for furtherresearchinthisarea.


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1 Theempiricalrelevanceofterms-of-tradeeffectsintradepolicyhasbeenthesubjectofarecentdebateintheempiricalliterature.Brodaetal.(2008)andBagwellandStaiger(2011)findevidenceconsistentwiththeviewthatgovernmentssetpolicytoexploitterms-of-tradegains.

2 Ingametheory,thePrisoners’Dilemmarepresentsasituationwherebeneficialcooperationdoesnotemerge.Inthegameitisassumedthatplayers(theprisoners)caneithercooperateornotandthatcooperationinvolveshigherjointwelfarethannon-cooperation.However,wheneverotherschoosetocooperate,eachplayeractingindividuallywillbebetteroffbydeviatingandchoosingnon-cooperation.Giventhatallplayersaretryingtomaximizetheirindividualwelfare,theonlyrationalequilibriumimpliestheinferiorsituationofnon-cooperation.

3 Asitiswellunderstoodinthetheoreticalliteratureandinthepracticeoftradepolicy,cooperationamongcountriescannotbeachievedintheabsenceofatradeagreement.Thereasonisthat,ifacountryunilaterallyreducesitstariff,thetradingpartnerswouldstillhaveanincentivetomaintainitslevelofprotection.A“tradewar”,ontheotherhand,isastable(Nash)equilibrium,asoncehighprotectionsareinplace,nocountryhasanincentivetoreduceitstariffunilaterally.

4 AsdiscussedinBagwellandStaiger(1998),PTAsmayevenposeathreattothefunctioningofthemultilateraltradingsystem.SeeSectionEforadiscussionoftherelationshipbetweenpreferentialandmultilateralagreements.

5 SectionC.3will,however,analysecaseswherepreferentialagreementsmayaddresscoordinationproblemsbeyondterms-of-tradeorproductionrelocationexternalities.

6 Timeinconsistencyarises,forexample,whenapolicydecisionisseparatedthroughtimefromitsimplementation,withtheresultthatforsomereason(e.g.organizedpoliticalopposition)theinitialpolicyintentionisnolongerfeasible.

7 Putsimply,atime-inconsistencyproblemreferstoasituationwherebyadecision-maker’spreferenceschangeovertimesothatwhatispreferredatonepointmightbeinconsistentwithwhatispreferredatanotherpointintime.

8 Whetheranagreementcanincreasetradepolicycredibilityandwhethercountriesarelikelytosignagreementstocommittheirtradepolicyareultimatelyempiricalquestions.StaigerandTabellini(1999)andTangandWei(2008)provideevidencethattheGATT/WTOincreasedcredibilityofpolicycommitments.Arcandetal.(2010)findthattheprobabilitythattwocountriessignaPTAislargerwhensuchagreementleadstocredibilitygains.

9 ThekeyreferenceinthelobbyingliteratureintradeisGrossmanandHelpman(1994).Severalstudieshavedocumentedtheroleoflobbyinggroupsininfluencingtradepolicyoutcomes.Forareviewofthisempiricalliterature,seeGawandeandKrishna(2003).

10 ThispoliticaleconomyliteratureismoreextensivelydiscussedinSectionC.2.

11 LevyandSrinivasan(1996)provideanexampleofthislogic.AparticularfeaturesomePTAshavethattheWTOsystemislackingisprivateagents’accesstodisputesettlementmechanisms.Inthemultilateralsystem,privatedisputantshavetorelyontheirgovernmentstoactontheirbehalfeventhoughtheultimateincidenceofthecostsandbenefitsofthesettlementfalllargelyonthem.Meanwhile,aPTAlike

theEuropeanUnionallowsprivatepartiesindirectaccesstodisputesettlementthroughtheEuropeanCourtofJustice.LevyandSrinivasan(1996)arguethatthisdifferenceinthedesignofdisputesettlementmechanismsmightbeamotiveforpreferringPTAs.

12 Naturally,thisargumentwouldonlyholdtruewhenMFNratesarepositiveandnon-negligible.WithzeroMFNrates,therewouldbenoscopeforusingPTApreferences(asexplainedinSectionB).

13 AnempiricalstudymotivatedbyaformalgeneralequilibriummodelofthedemandforandsupplyofPTAmembership.

14 Theserelationshipsbecomestatisticallyinsignificantwhensuchfixedeffectsarecontrolledfor.Dyadicvariablessuchasbilateraldistancearetime-invariantandhencenotde-meanedfollowingthedifferencingtransformation.

15 Mostagreementsrequireallexistingmemberstoadmitanewentrant.

16 Thisempiricalfindingisfacilitatedbythefactthatunlikeothermodels,Bergstrandetal.(2010)donotassumeaninfinitelyelasticsupplyofPTAmembership.

17 Thesethreerelationshipsarerobusttotheinclusionofcountrypairfixedeffectsintroducedviaatimede-meaneddifferencingtransformation.

18 Thisreferstoawidely-usedmeasureofthe“politicalregimecharacteristics”ofstates.Thepolityscoremeasuresthegoverningauthorityofstatesrangingfromfullyinstitutionalizedautocraciestofullyinstitutionalizeddemocracies.Statesarerankedona21-pointscalerangingfrom-10(hereditarymonarchy)to+10(consolidateddemocracy).Seehttp://www.systemicpeace.org/polity/polity4.htm.

19 Dependingontheassumptionsonpreferences,itwouldbepossibletohaveeffectsalsoonthemarketforgood3evenincaseRoWmaintainsthesamenon-discriminatorytariff.However,inthisdiscussionweabstractfromtheseadditionaleffects.

20 Inamodelwithmorethanthreecountries,theextentofthisrentcanbeshowntodependonthenumberofcountriesthathavepreferentialaccesstothemarketofthetradingpartner.Specifically,asthisnumberincreases,thepreferencerentdecreases,asituationreferredtointheliteratureas“preferenceerosion”.

21 Thenextsubsectionprovidesasimplegraphicalanalysisinthespecialcasewheretheimportingeconomyissmallanddoesnotaltertheworldprice.

22 SeeBaldwin(2009)foracriticalsurveyofVinerianregionalismandforadiscussionofthelimitsofthetraditionalgraphicalapproachpresentedinBoxC.2.

23 Inneoclassicaleconomics,aParetoimprovementischaracterizedbyanactionthatmakesatleastoneindividualbetteroffwithoutmakinganyotherindividualworseoff.Paretooptimalitydescribesasituationwherenofurtherimprovementstowelfarecanbemade.TheParetooptimumisindifferenttothedistributionalconsequencesoftheoutcome.

24 DixitandNorman(1980)haveshownthatintra-PTAcommoditytaxesandsubsidiesaresufficienttoobtainthesameresultwithoutlump-sumtransfers.

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25 Schiff(1999)statesthatthevolumeoftradedoesnotnecessarilyprovideanobjectivemeasureoftheextenttowhichtradingpartnersare“natural”becausethevolumeoftradeisitselfaffectedbypolicy.Instead,Schiffproposestodefinecountriesas“naturaltradingpartners”iftheytendtoimportwhattheprospectivepartnerexports.

26 Forinstance,Bustos(2011)studiestheimpactofMERCOSURontechnologyupgradingbyArgentineanfirms.Sheshowsthattheincreaseinrevenuesproducedbytradeintegrationcaninduceexporterstoupgradetechnology.AnempiricaltestofthemodelrevealsthatfirmsinindustriesfacinghigherreductionsinBrazil’stariffsincreaseinvestmentintechnologyfaster.Similarly,thereisevidencethatNAFTAhadpositiveeffectsonproductivityandtechnologyadoptionfornewexportingfirms.Inparticular,LileevaandTrefler(2010)findthatlower-productivityCanadianplantsthatwereinducedbythetariffcutstostartexporting,increasedtheirlabourproductivity,engagedinmoreproductinnovation,andhadhighadoptionratesofadvancedmanufacturingtechnologies.

27 AsummaryofthemainfindingsisprovidedinAppendixTableC.1.

28 OtherstudiesanalysingthewelfareeffectsofNAFTAthroughageneralequilibriumapproachareBrown(1994);Brownetal.(1992);Brownetal.(1995);Cox(1994);Cox(1995);CoxandHarris(1992);Sobarzo(1992);Sobarzo(1994);Sobarzo(1995).

29 Inaneconometricmodel,avariableissaidtobeendogenouswhenthereisacorrelationbetweenthevariableandtheerrorterm,whichistheunexplaineddeviationofsampledatafromtheirunobservable“true”value.

30 Inarecentpaper,BaierandBergstrand(2009)provideevidenceofthetradeeffectofPTAsbyusingnon-parametricestimates.WhentheselectionintoaPTAisnotrandom,asshownbyBaierandBergstrand(2004),andsomenon-linearitiesexistbetweenco-variatesingravityequationandPTAdummies(seeFrankel,1997,andBradaandMendez,1985),parametricestimatorscanbebiased.Inthiscase,non-parametricestimatorsareneeded.Usingthiseconometrictechnique,theauthorsprovidemoreeconomicallyplausibleeffectsofPTAsontradecomparedtopreviousestimates.

31 ThelikelihoodofaPTAisshowntodependon:(i)geography(thecloserthetwocountriesaretoeachotherandthefurthertheyaretotherestoftheworld);(ii)income(thelargertheirGDPsandthesmallerthedifferencebetweentheirGDPs);and(iii)endowments(thelargertheirrelativefactorendowmentdifferenceandthewiderabsolutedifferencebetweentheirandtherestoftheworld’scapital-labourratios).

32 Bergstrandetal.(2010)findsimilarresultsconsideringthetimingofallPTAsbyusingadurationanalysis.

33 OtherstudiesincludeRichardson(1994)andPanagariyaandFindlay(1996).

34 Theprospectsforanagreementimproveifpoliticallysensitivesectorscanbeexcludedfromtheagreement(GrossmanandHelpman,1995).ThisisbecausesectorsthatanticipatelargelossesfromaPTA,andlobbyforrejection,maybeindifferentiftheagreementwouldnotaltertheprotectiontheyaregrantedfromthegovernment.Inotherwords,excludingsomesectorsmaybeawaytodiffusepoliticaloppositiontoanagreementandimprovethechancesofachievinganaccordthatisbothpoliticallyviableandwelfareimproving.

35 TheworkbyKrishna(1998)hasalsoimportantimplicationsfortheregionalismversusmultilateralismdebate,asitimpliesthatpoliticallyfeasiblePTAsarelikelytohindermultilateraltradeopening.ThisissuewillbefurthertakenupinSectionE.

36 ThiswouldbethecaseifpBT,theborderpricefacedby

producerslocatedin1thatsellintheHomemarket,islowerthanpC,thepriceatwhichproducerslocatedin2cansellinHome.

37 Thoseanalysesarerestrictedtonon-cooperativemultilateralsettings(i.e.whereamultilateraltradeagreementsuchastheGATT/WTOisnotinplace).Ornelas(2008)studieshowtheformationofPTAsaffectsexternaltariffsandglobalwelfareinacooperativemultilateralenvironment.ThismodelshowsthatthecomplementaritybetweenexternalandpreferentialtariffsfoundintheliteraturediscussedinSectionC.2(e)generalizestothecasewherecooperationatthemultilaterallevelissignificant.

38 OtherworksthathavemadeasimilarpointontheroleoftradepreferencesininducingcooperationinotherpolicydomainsareJackson(1997);PerroniandWhalley(2000);andWorldBank(2000).

39 HereafterreferredtoasRoOs.

40 ThisisaffectedbytheMNCsoperatinginChile,ofwhich53percentrespondedthattheRoOshadbeenthedecidingfactor.Intheotherthreecountries,lessthan20percentofMNCsreportedRoOsasthedeterminingfactor.

41 Theauthorscontrolforothervariablesthatchangedbetweenthepre-1997andpost-1997periods,aswellasforunobservablepair-specificfactors.

42 NotethatTableC.1doesnotnecessarilyimplyalinearprogressionbetweendifferentstagesofintegration.Forinstance,acustomsunioncanbeformedevenintheabsenceofFTA+harmonizationsoramonetaryuniondoesnotnecessarilyimplythatacommonmarkethasbeenpreliminarilyestablished.

43 SeeSectionB.1fordataandafurtherdiscussion.

44 Systematicempiricalanalysisoftheinternationalfragmentationofproductionismissingduetolackofdata.However,recenteconomicliteraturehighlightsthreemajortrends.First,bothmerchandiseandservicesoffshoringhasrapidlyincreasedinthelasttwodecades.Second,althoughinternationaloutsourcingofintermediategoodsisquantitativelymoreimportant,servicesoffshoringhasbeenincreasingatafasterpaceinrecentyears.Third,thesetrendshavebeenwidespreadacrosssectorsandtypesofinputs(Helpman,2006).

45 SeeLipson(1982);Cantwell(1994);Chengetal.(2000);ArndtandKierzkowski(2001);ChengandKierzkowski(2001);Ando(2005);andBlanchard(2005).

46 SeeArndt(2004a,2004b).

47 Potentialcostsavingsfromintra-productspecializationmaybeloweredbyrestrictiverulesoforigininthecaseofafreetradearea.

48 SeeGrunwaldandFlamm(1985).

49 Inaddition,studiessuchasAndersonandvanWincoop(2004)havealsoshownthat,followingrecentwavesofliberalization,non-tariffbarrierstotradelikeshippingcostshavebecomemorerelevant.


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50 SeeFujitaetal.(2001)foratheoreticalanalysisofclusteringattheinternationallevel.

51 Severalempiricalpapersusinggravitymodelsshowthatthereisapositiverelationshipbetweenproximitytointernationalcentresofeconomicactivityandpercapitaincomelevels(Hummels,1995;Leamer,1997).

52 HorizontalFDI,ontheotherhand,isstilldeterminedmostlybymarketsizeandtheseinvestmentflowsarecharacterizedbybeingbetweendevelopedeconomies.

53 ThelackofadeepAsianregionaltradeagreementhasbeencompensatedwithotherwaysofliberalizationsuchasbilateralinvestmenttreaties(BITs),which,accordingtoUNCTAD,increaseddramaticallyduringthe1990s,andunilateralliberalizationandpro-businessreformspromotedbyemergingmarketstoattractFDI.Inaddition,thereisalsoevidencethatseveralcountriesinEastAsiahaveconcentratedtheirpublicresourcesonthedevelopmentofeconomicinfrastructuresthatfacilitateproduction-sharing(AndoandKimura,2005;Ando,2005).

54 IntheAntràsandStaiger(2008)model,finalgoodsproducersandinputsuppliersarelocatedindifferentcountries.Contractsareincompleteandinvestmentsarerelation-specific.Inthiscontext,governmentshaveanincentivetousetradepolicybeyondterms-of-tradeeffects,asitaffectstheconditionsofex postbargainingbetweenforeignsuppliersanddomesticproducers.Thisisattherootofthenewcross-borderspillovereffectcreatedbytheriseinoffshoring.

55 Beggar-thy-neighbourisanexpressionineconomicsdescribingpoliciesthatseekbenefitsforonecountryattheexpenseofothers.

56 Commonpoliciesandregulationsareseenhereastheresultofinternationalcooperation.Analternativeisthatonecountrythathasahigherbargainingpowerimposesitspolicyandregulatoryframeworkontheother(possiblyinexchangeformarketaccessorasaformofhegemonicimposition).Thelattercaseisbrieflydiscussedbelow.

57 Forasurveyofthisliterature,seeOates(1999).Ruta(2005)andAlesinaandSpolaore(2005)provideextensivediscussionsoftherelatedpoliticaleconomyliteratureondeepintegration(i.e.theformationofinternationalunions).

58 TheOatesTheoremisbasedontheassumptionthatgovernmentshavenopoliticalmotivationsandmaximizesocialwelfare.Alargebodyofliteraturehasrevisitedthisprincipleinmodelsthataccountforpoliticalmotivationsofgovernments(AlesinaandSpolaore,1997;BoltonandRoland,1997;BesleyandCoate,2003;AlesinaandSpolaore,2005;Alesinaetal.,2005;Lockwood,2008;BrouandRuta,2006).ThesepoliticaleconomymotivationscanexplainthedeparturefromOates’normativetheoryandtheobservedallocationofcompetenciesintheEU(Ruta,2010).


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ThisappendixfocusesonthesystemiceffectsofPTAs− that is, on the consequences of preferentialarrangements for members and non-members. Theapproach used is based on a graphical analysis anddrawsontheworkofBaldwinandWyplosz(2004).

Suppose that initially there is open trade across allcountries. Under these conditions, Home imports thequantityMatapriceofPFTdefinedbytheequilibriumof the import supply (MS) and import demand (MD)curves inHome (seeAppendixFigureC.1).Note thatM is the sumof theexport quantities fromRoW (XR)andPartner(XP)givenbytheintersectionoftheopentrade price line PFT , with each country export supplycurve shown as points 1 and 2 in the diagram,respectively.

IfHomemoves from free trade toapplyingauniformMFN tariff to all countries, the imposition of such atariffshiftstheimportsupplycurveuptoMSMFN.AsaconsequenceofthetariffT,thedomesticpriceforthegoodatHomerisestoP'andthequantityofimportsisreduced to M'. Meanwhile, the new border price forcountriesexportingtoHomeisgivenbyP'–T.Atthislower price, producers from RoW and Partner arewilling to supply less and exports are reduced to X'RandX'P,respectively.

After Home and Partner conclude a PTA, one ofHome's import suppliers gets duty-free access whilethe rest still pay T. Therefore, the new import supplycurve in Home, given by MSPTA, will lie between theoriginalopentradeandMFNsupplycurves(Appendix

AppendixFigureC.1: open trade and mFn tariffs

TPFT

P’

MD

2

XSp

X’p Xp Partner exports

Border price

Partner

MSMFN

M = XP + XR Home importsM’

MS

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Home

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P’-T

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Border price

RoW

AppendixFigureC.2: PtA price and quantity effects

T

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M’’ Home importsM’

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MS

Domestic price

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X’’R X’R RoW exports

P’-TP’’-T

P*

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Border price

RoW

Pa1

Technical appendix: Systemic effects of pTas


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FigureC.2).MSPTAisnotastraightlinebecausethereis a thresholdpricebelowwhichonlyproducers fromPartner will be willing to export. The tariff preventsRoW firms from exporting until the domestic price atHome rises above the price marked Pa. This is sobecausewhenHome'sdomesticpriceisbelowPa,theborderpricefacedbyRoWexportsisbelowtheirzero-supplypricemarkedasP*.Consequently,Partnerfirmshave an effective “monopoly” over the access toHome's market up to the quantity denoted by thepoint1.Afterthispoint,firmsfromRoWwillalsosupplyimportstoHomeandMSPTAresumesitsnormalslope.

In the post-PTA equilibrium where MSPTA meets MD,Home will import the quantity M'' and the newdomestic price is P'', which is lower than the MFNdomesticpriceP'.ThePTA'simpactonborderpricesismore complex. For Partner-based producers,liberalizationmeans that their borderprice rises fromP' – T to P'', Home's new domestic price. For RoW-basedproducers,however, theborderprice falls fromP'–TtoP''–T.AwaytounderstandthiseffectistothinkthatRoWfirmsmustcuttheirborderpricesothatthey can enter Home's market and be competitive(be able to sell at a domestic price of P'') after thetariff T is added to their exports. As a result of thischange in border prices, Partner exports increase toX''PwhilethosefromRoWfalltoX''R.

The change in Home's import composition wheregoodsfromPartnerarefavouredoverthoseofRoWisknownastradediversion.Inotherwords,discriminatoryliberalization induces Home to switch some of itspurchases to import suppliers who benefit from thePTA and away from suppliers from nations that wereexcluded.ThePTAhasdistortedpricesignalssothatHome consumers are not aware that Partner goodsmay actually cost more than those from RoW. Homeconsumers ignore theborderpriceofgoodsandonlyobserve thedomesticpriceP'',which is thesame forimportsfromanysource.

To measure the welfare effects of the PTA, we mustevaluate the impact it has on the foreign exportingcountries (Partner and RoW) and on the importingcountry(Home).TheseeffectsareshowninAppendixFigure C.3. It is straightforward that the tradeagreement has favoured Partner as it experiences apositive border price effect (from price P' – T to P'')andapositivetradevolumeeffect(fromquantityX'PtoX''P).Thus,Partner'sgainsarecapturedbytheshadedareaD.TheoppositeistrueofRoWasitexperiencesequal but negative effects. RoW loses from the PTAbecause it facesa lowerborderpricefor itsgoodsatP'' –Tand its trade volumealso falls to thequantityX''R.TheselossesarecapturedbytheshadedareaE.

The PTA has more ambiguous welfare effects onHomeasithascreatedapositivetrade-volumeeffectbut also some conflicting terms-of-trade effects thatstemfromthedifferentiated(discriminatory)post-PTAborder-pricesPartnerandRoWface.By lowering thedomesticprice,preferentialliberalizationhasincreasedimportsfromM'toM'',leadingtoagaininconsumptionmeasured by the shaded area A. The positive trade-volume effect that has led to an efficiency gain inconsumptioncanbeseenasthetradecreationeffectofthePTA.Inotherwords,thePTAhascreatedtradebyallowingHometoaddthe importquantityM''–M'thatwasnotpresentbeforetheagreement.

Turning to the price effects of the PTA, HomeexperiencesanimprovementintermsoftradeagainstRoW as imports from this country have becomecheaper. Thus, Home imports a quantity of X''R fromRoW at a lower cost and gains from this change inborder price (the shadedareaB). TheareaBcanbeseen as a production efficiency gain, as producersfromRoWhave tobecomemoreefficient tocompeteinHome'smarketwhilefacingalowerborderprice.Onthe other hand, Home experiences a deterioration interms-of-trade against Partner as imports from thiscountryhavebecomemoreexpensiveafterthePTA.

AppendixFigureC.3:Welfare effects of preferential liberalization

P’P’’P’’

MD

XSp

X’p X’’p Partner exports

Border price

Partner

M’’ Home importsM’X’’R

Domestic price

Home

X’’R X’R RoW exports

P’-TP’’-T

P’-TP’’-T

P*

XSR

Border price

RoW

E

D

B

C

A


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ThehikeintheborderpriceaffectsthequantityM'–X'Rand yields a loss to Home equal to the shaded areamarked C in the diagram. Since we have assumedPartnerandRoWtobeidentical,andthereforethereisnotamoreefficientproducer,weconcludedthatunderopentradeHomeimportedanequalamountfrombothcountries (50-50 share). After the PTA, however,

imports from Partner are favoured and represent alarger share of Home's imports. Thus, a portion ofareaCcaptures the trade-diversioneffectof thePTA,namely theamountof imports thathavebeendivertedawayfromRoW'soriginalshareinHome'smarket.Thenet welfare effects of the PTA on Home are given by(A+B)–C,whichmightbepositiveornegative.

AppendixTableC.1: empirical findings on trade creation and trade diversion

Authors Data and methodology trade creation trade diversion

Romalis(2007) CGEapproachontradeflowsbetweentheUnitedStates,Canada,Mexicoandtherestoftheworldintheperiod1989-1999.ThepaperfocusesonCanada-USFreeTradeAgreement(CUSFTA)andNorthAmericaFreeTradeAgreement(NAFTA)

EvidenceoftradecreationonlyfortradeflowsinvolvingMexico

EvidenceoftradediversionbyCUSFTAandNAFTA

Trefler(2004) CGEapproachonCanadianimportsfromUSandtherestoftheworldintheperiod1989-1996.ThepaperfocusesonNAFTA

NAFTAraisedCanadianimportsfromtheUnitedStates

NAFTAloweredCanadianimportsfromtherestoftheworld

Clausing(2001) CGEapproachonUSimportsfromCanadaandtherestoftheworldbetween1989and1994.ThepaperfocusesonCUSFTA

ThetariffliberalizationbyCUSFTAwasresponsibleforUSD21increaseinUSimportsfromCanadabetween1989and1994

Thereisnoevidenceoftradediversion

SoloagaandWinters(2001)

Gravitymodelonbilateralimportsfor58countriesfrom1980to1996.ThepaperfocusesontheEuropeanUnion(EU),EuropeanFreeTradeArea(EFTA),AssociationofSoutheastAsianNations(ASEAN),GulfCo-operationCouncil(GULFCOOP),NAFTA,CentralAmericanCommonMarket(CACM),LatinAmericanIntegrationAssociation(LAIA),AndeanCommunity(ANDEAN),SouthernCommonMarket(MERCOSUR)

AllthePTAsinvolvingLatinAmericancountrieshaveapositiveeffectonintra-bloctrade

TradediversioneffectforEUandEFTA

BaierandBergstrand(2007)

Gravitymodelonbilateraltradeflowsfor96countriesfrom1960to2000

PTAincreasestradebetweentwomembercountriesbyabout100percentonaverageafter10years

-

Frankeletal.(1995) Gravitymodelonbilateraltradeflowsfor63countriesovertheperiod1965-1990.ThepaperfocusesonEastAsiaEconomicCaucus(EAEC),Asia-PacificEconomicCo-operation(APEC),EuropeanCommunity(EC),EFTA,NAFTA,MERCOSURandANDEAN

PTAsboosttradebetweenmembercountries(exceptionsareEFTAandNAFTAwhichdonothavesignificanteffectontradeflows)

-

LeeandShin(2006) Gravitymodelonbilateraltradeflowsfor175countriesfrom1948to1999

JoiningaPTAraisesintra-bloctradeby51.6percent

PTAmembers'tradewithnon-membersrisesby6.5percent

Carrere(2006) Gravitymodelonbilateralimportsfor130countriesfrom1962-1996.ThepaperfocusesonEU,ANDEAN,CACM,LAIA,MERCOSUR,NAFTAandASEAN

Thereisevidenceoftradecreationeffectfor5outof7PTAsanalysed

Theincreaseinintra-regionaltradeiscoupledwithareductioninimportsfromtherestoftheworldin6outof7PTAsanalysed

Egger(2004) GravitymodelonbilateralexportsforOECDcountriesfrom1986to1997.ThepaperfocusesonEU,EFTAandNAFTA

Strongevidenceoftradecreationeffect

-

Magee(2008) Gravitymodelonbilateraltradeflowsfor133countriesfrom1980to1998

ThelongrunimpactofaPTAisestimatedtobean89percentincreaseintradeflows

Noevidenceoftradediversion

SilvaandTenreyro(2006)

Gravitymodelonbilateralexportflowsfor136countriesin1990

Strongevidenceoftradecreation

-


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AppendixTableC.1: empirical findings on trade creation and trade diversion (continued)

Authors Data and methodology trade creation trade diversion

GhoshandYamarik(2004)

Gravitymodelonbilateraltradeflowsfor186countriesovertheperiod1970-1995

PTAmembershipraisesintra-bloctradeby39percent

PTAmembershiplowerstradeoutsidetheblocby6percent

BaierandBergstrand(2009)

Non-parametricestimationsonbilateraltradeflowsfor96countriesovertheperiod1965-2000

AveragelongruneffectofPTAsontradeflowsis100percent

-

Aitken(1973) Gravitymodelonbilateraltradeflowsfor12countriesovertheperiod1951-1967.ThepaperfocusesonEFTAandEEC

PositiveeffectofPTAsonbilateraltrade

-

Bergstrand(1985) Gravitymodelonbilateraltradeflowsfor15countriesforyears1965,1966,1975and1976.ThepaperfocusesonEFTAandEEC

PTAshadapositiveeffectonbilateraltrade

-

Acharyaetal.(2011) Gravitymodelonbilateraltradeflowsfor179countriesovertheperiod1970-2008

TheimpactofPTAsonintra-PTAtradeispositivefor17outof22PTAsanalysed.PTAsalsoincreaseimportsandexportsfrommembercountriestonon-membercountriesby20percentand21.5percentonaverage

Intra-PTAtradediversionhasbeenfoundin3outof22PTAsanalysed;5PTAslowertheextra-PTAexportsfrommembertonon-membercountries


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This section considers to what extent conclusions about deep preferential trade agreements (PTAs) and production networks, reached in Section C, are supported by evidence. The evidence presented includes an examination of the magnitude of preferential tariff rates, the coverage and contents of the agreements, econometric evidence on the relationship between production networks and deeper PTAs and the integration experience of specific PTAs.

d. anatomy of preferential trade agreements


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Contents 1. ArelowertariffsstillimportantforPTAs? 124

2. PatternsinthecontentofPTAs 128

3. ProductionnetworksanddeepPTAs 145

4. Africanregionalcooperation:lessonsfromdeepintegration? 151

5. Conclusions 153

Appendixtables 157


• MFN tariffs are low and equal to 4 per cent on average in 2009.

• Most “sensitive” sectors remain “sensitive” in PTAs. Approximately

66 per cent of tariff lines with MFN rates above 15 percentage points

have not been reduced in PTAs.

• If the preferential access enjoyed by other exporters is taken into

account, less than 13 per cent of preferential trade benefits from a

competitive advantage exceeding 2 percentage points.

• Signing deep integration PTAs increases trade in production

networks by almost 8 per cent on average. In addition, high levels

of trade in production networks raise the likelihood of signing

deep agreements.


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1. ArelowertariffsstillimportantforPTAs?

TariffshaveprogressivelyfallensincetheestablishmentoftheGeneralAgreementonTariffsandTrade(GATT)in 1948. The pre-GATT average tariff among majortrading countries was between 20 and 30 per cent.1Since then, unilateral liberalization, eight rounds ofmultilateraltradenegotiationsandnumerousPTAshavesignificantly reduced the tariffs applied by WTOmembers.In2009,theaverageappliedtariffacrossallproductsandcountrieswasamere4percent.

The process of most-favoured nation (MFN)liberalization (i.e. the reduction of tariffs on an MFNbasis for all WTO members) accelerated in the late1980sand1990s,whenappliedtariffswerereducedinmany developing countries. The rates applied bydevelopedcountrieswerealready low,ataround6percent on average by the end of the 1980s. Theycontinued to decline subsequently, to an average ofapproximately 3 per cent in 2009. Average appliedtariffshavebeenfallinginallregions(seeFigureD.1).InSouth-CentralAmerica,theaveragetariffratefellfromover30percentatthebeginningofthe1990stolessthan10percenttenyearslater.Overthesameperiod,tariffsinEastAsiadroppedfromaround15-20percenttosome6percentin2009.Similarly,inAfrica,appliedMFNtariffsfellfromanaveragerateofroughly30percent to some 12 per cent in 2009. The reduction of

tariffs was more pronounced in West Asia, where theaverageMFNappliedtariffratefellfromanaverageofabout45percenttobelow15percent.

Tariff reductionshavenotoccurredat thesamepacein all sectors. Significant tariff barriers still exist inagriculture and some manufacturing sectors. MostMFN tariff reductions took place in manufacturedgoods,however,withparticularemphasisonpartsandcomponents (see Figure D.2). The latter trendaccompaniedthedevelopmentofproductionnetworks.

Despitevarianceintariffratesaroundtheaverage,lowaverage MFN rates suggest that the scope forexchangingpreferentialmarketaccessisunlikelytobeextensive. A similar conclusion is suggested by thedataontradeflows.AsseeninSectionB,theshareofMFN duty-free trade in total trade is estimated at52 per cent in 2008 (excluding trade within the EU),andover70percentoftotal tradeoccursatanMFNtariffrateofbelow5percent.

Moreover,PTAscannotbesatisfactorilyexplainedbyadesire to remove tariff peaks (i.e. relatively highertariffs).Most“sensitive”sectorswithhighertariffsalsotend to retain higher tariffs in PTAs. As shown inFigureD.3,forexample,tarifflinessubjecttoanMFNrate above 15 per cent continue to be subject torelatively high rates in PTAs. According to the 2007datareportedinthefigure,approximately66percent

FigureD.1: mFn tariff trends in developing countries by region (Percentage)

Note: Inorder toavoidsampleselectionbias,figureshavebeencalculated forabalancedsub-sampleofcountries ineach regionandmissingdatahavebeeninterpolated.Inthissubsample,EastAsiacomprises13economies(Australia;KingdomofBahrain;China;HongKong,China; Indonesia;Japan;RepublicofKorea;Malaysia;NewZealand;Philippines;Singapore;Thailand;andChineseTaipei);WestAsiacoversfourcountries(Bangladesh;India;SriLanka;andNepal);SouthandCentralAmericaismadeupof12countries(Argentina;thePlurinationalStateofBolivia;Brazil;Chile;Colombia;Cuba;Ecuador;Paraguay;Peru;TrinidadandTobago;Uruguay;andtheBolivarianRepublicofVenezuela);andAfricaincludes11countries(BurkinaFaso;Côted’Ivoire;Algeria;Ghana;Morocco;Nigeria;Rwanda;Tunisia;Tanzania;SouthAfrica;andZimbabwe).Thedatausedinthefigurearesimpleaveragesofad valoremlinesinallsectors.

Source:CalculationsbasedonTrainsdatabase,WITS.

Sim

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aver

age

(at t

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1990 1995 2000 2005 2010

50

40

30

20

10

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Africa South and Central America

East Asia West Asia


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ofthetariffsabovethisratehavenotbeenreducedatall throughPTAs.Thismeans that “preferential” ratesarenolowerthanMFNrates.

Recent work has emphasized that the value of aparticular preferential tariff must be gauged in thecontextofanimportingcountry'soveralltariffpolicy.2

Thus, in a world of numerous PTAs, the advantageconferred by a preferential tariff to a given exporterdoesnotdependonlyon that rate,butalsoon tariffsfaced by competing suppliers from other countries inthesamemarket.

Inordertoaccountfortheactualadvantageprovidedbypreferences, Low et al. (2009) use the concept of a“competition-adjusted”preferencemargin,calculatedasthepercentage-pointdifferencebetweentheweighted

averagetariff rateapplied to therestof theworldandthepreferential rateappliedtothebeneficiarycountry,where weights are represented by trade shares in thepreference-grantingmarket(seeBoxD.1).

Unlike a traditional preference margin which was thebasis of the analysis in Section B, this competition-adjusted preference margin can assume positive aswell as negative values. A negative value indicatesthat, in a specific market, a certain country facesworse market conditions than its trade competitors.3Competition-adjusted preference margins emphasizethefactthatPTAscanresultfromthedesiretoavoidnegative discrimination rather than to benefit from apositive preference margin. This is the underlyingargument for theso-called “dominoeffect” toexplaintheproliferationofPTAs(seeSectionC).

FigureD.2: World mFn applied tariff trends (Percentage)

Note:Underlyingdataaretrade-weightedaveragesofad valoremrates.

Source:Trainsdatabase,WITS.

FigureD.3: Preferential reductions of tariff rates above 15 per cent, 2007

Note:“PreferentialequalMFN”denotestheshareoftarifflinesattheHS-6levelwithanMFNrateabove15percentthathavenotbeenreducedunderPTAs.“PreferentialbelowMFN”denotestheshareoftarifflinesthathavebeenatleastpartiallyreduced.

Source:CalculationsbasedontheFugazzaandNicita(2010)database,coveringthePTAsof85countries,accountingfor90percentofworldtrade.

MF

N a

pplie

d ta

riff

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

10

9

8

7

6

5

4

3

2

1

0

Parts and components All products

Preferential below MFN34 per cent

Preferential equal MFN 66 per cent


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BoxD.1:measurement of the value of preferences

Traditionally, the valueofapreferencemargin forabeneficiarycountryhasbeenmeasuredsimplyas thedifference in terms of percentage points between the MFN rate and the preferential tariff. Or, expressedformally:

Traditionalpreferencemargin= jik

MFNik TT ,,

where MFNikT , istheMFNrateappliedbycountrykonproduct iand j

ikT , isthepreferentialrateappliedto

countryj.Bydefinitionthismargincanonlybepositive.

Alimitationofthismeasureofthevalueofthepreferenceisthatitcannotaddressthequestionwhethertheputative advantage of a preference effectively helps the beneficiary to export to the preference-givingcountry.Sincenumerousandoverlappingpreferentialtradeagreementsexistaroundtheworld,theMFNratedoesnotprovideanappropriatebasisforcalculatingthepreferencemargin.Onthecontrary,thevalueofapreferenceforonecountrywillultimatelydependontheadvantage/disadvantage ithasvis-à-vis theothercountriescompetinginthesamemarket.

The “competition-adjusted” preference margin proposed by Low et al. (2009) addresses this concern bymeasuringthevalueofapreferenceasthepercentage-pointdifferencebetweentheweightedaveragetariffrateappliedtotherestoftheworldandthepreferentialrateappliedtothepreferentialagreementpartner,where weights are represented by trade shares in the preference granting market. The formula for thismeasureisexpressedasfollows:

Competition-adjustedpreferencemarginforproducti= jik

wik TT ,,

where

vivk

v

vikivk

wik X

TXT

,

,,

, is theexport-weighted(X intheformuladenotesexportsofv intok)average

tariff imposedbycountrykonallotherexportingcountriesv (excludingcountry j) in respectofproduct i.Equivalently,theformulacapturesweightedtariffimposedbykonimportsfromallothercountriesbutj.As

before, jikT ,

isthepreferentialrateappliedtocountryj.Thiscompetition-adjustedpreferencemargincanbepositiveornegative,dependingonwhetherexportersofgood i fromcountry jbenefit frommarketaccessconditionsmoreorlessfavourablethantheothertradingpartnersofcountrykinthesamemarket.

In order to measure the overall level of advantage or disadvantage that a beneficiary under a PTA faces inenteringanothermarket in thepreferentialarea,FugazzaandNicita (2010)estimated theoverall value toacountryofpreferencesintermsofthedegreeofresponsivenessofimportdemandtovariationsinprice(priceelasticity of import demand), taking into account the trade share of the country concerned. Under thisspecification of the value of the preference, which the authors call the “relative preference margin” (RPM),preferencemarginsarethusweightedbytherelevantimportdemandelasticityandbytheexportshareofthepreference-receivingcountry.Therationaleforincludingtheseelementsinthepreferencemargincalculationisthat a preference margin is more or less valuable to the exporting country depending on the elasticity ofdemandintheimportingcountryandontheexportcapabilityoftheexportingcountry.Whenimportdemandiselastic,agivenpreferencemargingivesrisetolargerincreasesinimportdemandthanwhentheimportdemandisinelastic.Inaddition,apreferenceismorevaluabletoanexporterthehigherthelevelofexports.

TheformulafortheRPMis:

kj

X

TTXRPM

iikijk

i

jik

wikkiijk

jk

,

,,

,,,

whereεisanestimateofthepriceelasticityofdemandforanimport,andtheothervariablesaredefinedasabove.


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TableD.1showsthedistributionofcompetition-adjustedpreference margins at the Harmonized System (HS)6-digit level for the years 2000 and 2007. Thedistribution is highly concentrated, falling within therange of –2 per cent and +2 per cent. In 2007, over87 per cent of trade fell inside this range. Exceptperhaps for highly demand-elastic goods that areparticularlyresponsivetopricechanges,thesenumberssuggestthattodaytariffpreferencesareunlikelytobeasole reason,or insomecasesnotevenamajorone,forcountriesenteringPTAs.

A limitation of using competition-adjusted preferencemargins as a measure of the value of preferences isthattheydonottakeintoaccountthefactthatimportsofsomegoodscanbemoreresponsivethanotherstochanges in price. A reduction of the tariff on a goodwhose demand is inelastic (i.e. not very sensitive topricechanges)willhaveasmallerimpactontheoverallvolume of trade than a reduction of the samemagnitude for demand-elastic goods. Even a lowpreference margin may trigger significant changes inthe volume of trade when the import demand for thegood is elastic. In these circumstances, even lowpreferencemarginsmightleadtotheestablishmentofPTAs. Applying product-specific price elasticities toproducts,FugazzaandNicita(2010)defineanindexofthe overall advantage/disadvantage that exporters incountryA face incountryB (seeBoxD.1).This indexaccords lower weights to competition-adjustedpreference margins that are less sensitive to pricechanges(inelasticgoods)thanthosethataresensitive(elasticgoods).

Data based on this relative preference margin (RPM)index was calculated for a sample of 85 countriescovering90percentoftradebetween2000and2008.As shown in Figure D.4, RPMs improved on averageacrossall regionsbetween2000and2007, except inNorthAmerica,wheretheinitialcompetitiveadvantageof the region has been eroded by the proliferation of

PTAs in other areas. In general, PTAs have helpedcountriestooffsetorreducethenegativediscriminationthey suffer vis-à-vis non-PTA trading partners. Forexample, countries in South and Central Americasignificantlyimprovedtheirconditionsofmarketaccessbetween 2000 and 2007, mainly because of thenumerousPTAstheysignedoverthatperiod.

Figure D.4 shows that on average RPMs were below1 per cent in 2007. Africa and South and CentralAmericahadRPMsinexcessofthisaverage.FugazzaandNicita(2010)calculatedthata1percentchangein the RPM would have a trade impact of 0.34 percent.4 This implies that a rise or fall of 2 per cent intrade would require a change in the RPM of at least5percentagepoints.ElSalvadoristheonlycountryinthe sample covered by the Fugazza and Nicitadatabase that satisfies these conditions. This findingreinforces our conclusion that limited scope remainsforthepursuitofpreferencesinPTAs.

In sum, the proliferation of PTAs between 2000 and2007 has improved the conditions of market accessfor signatory countries. To a large extent, theimprovement has been due to the reduction in thenumber of instances where relative preferencemargins were negative (i.e. cases where a countryfaces worse market conditions than its tradecompetitors). One may argue, therefore, that PTAshave in part restored a “level-playing field” for thosecountries that facedworseconditionsofaccess thanothers. Whether or not adjusted for tariffs faced byother suppliers, the overall level of tariffs faced byexporters is low, as is the volume of trade for whichpreference margins are significant.5 Low averagebenefits accruing from preferential tariffs on trademay nevertheless conceal larger effects for someproducts and countries, and this should be borne inmindinthecontextofthebroaderconclusionreachedin this report that preferential tariffs are no longer amajorconsiderationinPTAformation.Wenowturnto

Table D.1: share of tariff lines and trade by level of competition-adjusted preference margin, 2000 and 2007 (Percentage)

Competition-adjusted preference margin

2000 2007

tL covered trade covered tL covered trade covered

<–30 0.2 0.0 0.1 0.0

–30;–15 1.1 0.3 0.5 0.1

–15;–5 7.1 3.4 4.6 2.3

–5;–2 9.3 5.8 6.3 3.5

–2;2 72.4 77.8 79.0 87.3

of which MFN = 0 9.2 18.5 25.3 42.5

2;5 5.7 7.6 5.6 4.5

5;15 3.7 4.1 3.1 2.0

15;30 0.4 0.9 0.6 0.2

>30 0.1 0.1 0.1 0.0

Source:CalculationsbasedontheFugazzaandNicita(2010)database,coveringthePTAsof85countries,accountingfor90percentofworldtrade.


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ananalysisofother factorsatplay, linkedparticularlytotheinternationalfragmentationofproduction.

2. PatternsinthecontentofPTAs

IftariffsarenolongersoimportantwithinPTAs,whatis being negotiated in these agreements? To answerthis question, we examine in detail the contents of alarge sampleofPTAs. Thisexamination is conductedfirst by analysing the sectoral coverage and legalenforceabilityofvariousPTAs.Theidentificationofthepolicy areas and the definition of legal enforceabilityare based on Horn et al. (2010). The result of thisanalysis shows that commitments in services,investment, intellectual property protection, technicalbarriers to tradeandcompetitionpolicy loom large inmany PTAs. In the second phase of the analysis, thenatureof thecommitments inanumberofkeypolicyareasisconsidered.

(a) Sectoralcoverageandenforceability

(i) Methodology

TheoriginalanalysisbyHorn,MavroidisandSapir(HMS)examined EU and US PTAs with third countries. Theirapproach can be divided into three stages. First, HMSidentify the substantive policy areas covered in PTAs.They consider an area to be covered by an agreementwhenthelatterprovidesforsomeformofundertakingintherelevantfield. In this respect,HMSbasetheir listofpolicy areas on article headings in the case of EUagreementsandchapterheadingsintheUSagreements.This is one limitation of our use of the HMS approach,sincenon-USandnon-EUPTAsmaycontainpolicyareasof importance to countries involved in those PTAs thatarenotreflectedintheUSandEUagreements.

The authors identify 52 policy areas which they thenclassifyintotwogroups.Thefirstgroupofpolicyareas,called WTO+ provisions, fall under the currentmandateoftheWTOandarealreadysubjecttosomeform of commitment in WTO agreements. WTO+provisionsreconfirmexistingcommitmentsandprovideforadditionalobligations.Thesecondgroupofpolicyareas, which they denote as WTO-X provisions, refertoobligationsthatareoutsidethecurrentmandateoftheWTO.TableD.2liststhe52policyareasthatHMSidentified as either WTO+ (14 areas) or WTO-X(38areas).

Inasecondstage, the legalenforceabilityof thePTAobligationsisascertained.Apolicyareathatiscoveredmightstillnotbelegallyenforceableduetounclearorloosely formulated legal language. The authors' ideaappears to be that the clearer, more specific andimperative the legal language used to express acommitment or undertaking, the more successfully itcan be invoked by a complainant in a disputesettlementproceeding,andthusthegreaterlikelihoodofitbeingenforced.Theyhaveclassifiedcertaintermsas either implying enforceable or non-enforceableobligations. The strengths and limitations of thedefinitionof“legalenforceability”,asappliedbyHMS,areconsideredingreaterdetailinBoxD.2.

In a third stage, the “depth” of an obligation isestablishedforsomepolicyareas.Thepurposeofthisstep is toestablishwhetheraprovision that is legallybindingisactuallylikelytomatterinpractice.However,HMSdidnotdelveintoanysubstantiveexaminationofthe policy. To complete this third step, this reportundertakes an in-depth provision-by-provisionexaminationofanumberofpolicyareas.

FigureD.4: Relative preference margins by region, 2000 and 2007

Note:RelativepreferencemarginsbyregionareinpercentagepointsandarecalculatedasthesimpleaverageofallRPMsofcountriesintheregion.

Source:CalculationsbasedontheFugazzaandNicita(2010)database.

Africa CIS EastAsia

EU (27) Rest ofEurope

MiddleEast

NorthAmerica

Southand

Central America

WestAsia

World

2.5

2

1.5

1

0.5

0

-0.5

-1

-1.5

-2

2000 2007


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TableD.2: Wto+ and Wto-x policy areas in PtAsWto+ areas Wto-x areas

PTAindustrialgoods Anti-corruption Health

PTAagriculturalgoods Competitionpolicy Humanrights

Customsadministration Environmentallaws Illegalimmigration

Exporttaxes IPR Illicitdrugs

SPSmeasures Investmentmeasures Industrialcooperation

Statetradingenterprises Labourmarketregulation Informationsociety

Technicalbarrierstotrade Movementofcapital Mining

Countervailingmeasures Consumerprotection Moneylaundering

Anti-dumping Dataprotection Nuclearsafety

Stateaid Agriculture Politicaldialogue

Publicprocurement Approximationoflegislation Publicadministration

TRIMSmeasures Audiovisual Regionalcooperation

GATS Civilprotection Researchandtechnology

TRIPS Innovationpolicies SMEs

Culturalcooperation Socialmatters

Economicpolicydialogue Statistics

Educationandtraining Taxation

Energy Terrorism

Financialassistance Visaandasylum

Source:Hornetal.(2010).

BoxD.2:Legal enforceability

For thepurposeofclassifyingprovisions inPTAsas “legallyenforceable”or “non-enforceable”,Hornetal.(2010)focusontwovariablesrelatingtodisputesettlement:(a)theactualterminologyofaprovision,andinparticularwhetheraprovision“specifiesatleastsomeobligationthatisclearlydefinedandlikelyeffectivelytobindtheparties”,asdistinguishedfromvagueundertakingsthatare“notlikelytobesuccessfullyinvokedbyacomplainantinadisputesettlementproceeding”;and(b)whethertheagreement“explicitlystatesthatdisputesettlementisnotavailablefortheprovision”underthePTA.

Although these two variables constitute a solid starting point, there are a number of other variables –includingthoserelatedtodisputesettlement–thatcouldalsohaveabearingonthe“legalenforceability”ofobligationsarisingunderPTAs.TheHMSstudy,however,focusessolelyonthetextofPTAs,andnotontheireffectsorimplementation.

Whetherornottheactualterminologyofaprovisionestablishesalegallyenforceableobligationisaquestionoftreatyinterpretation.Animportantconsiderationisthereforetheapproachtotreatyinterpretationadoptedin the PTA. For example, in the context of WTO dispute settlement proceedings, the Appellate Body hasrepeatedlyemphasizedtheprincipleof“effectiveness”intreatyinterpretation,whichprovidesallofthetermsoftheWTOagreementswitha“legallyoperativemeaning”.TheAppellateBodyhasfoundonmorethanoneoccasionthattheterm“should”,inthesamewayas“shall”,cangiverisetoalegalobligation.

The tradition of treaty interpretation stems from the Vienna Convention on the Law of the Treaties 1969(VCLT).TheVCLTisa legal instrumentcodifiedbytheUNInternationalLawCommission. Itsetsoutrulesrecognizedascustomary international law.Forpresentpurposes, therelevantrulesoftreaty interpretationarelaiddowninArticles31-33oftheConvention.Article31oftheVCLTestablishesfourelementsthathavetobecombinedintheinterpretationofatreaty.Atreatyhastobeinterpreted:i)ingoodfaith;ii)withintheordinarymeaningofitsterms;iii)initsspecificcontext;andiv)inthelightofitsobjectandpurpose.6PTAsarerecognizedastreatiesunderinternationallawandhavetobeinterpretedinaccordancewiththerulesoftheVCLT.7

Thestrongfocusontheuseof legal languageinaPTAisreferredtoasatextualor literal interpretation.8The languageofaprovision reveals its intentionand theextent towhich itdeclares legalobligationsandrights.9The languagealsohelps todefinedemarcationsand thescopeofWTO law indisputesettlement


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The analysis conducted here extends HMS's originalanalysisof14EUand14USPTAstoatotalof96PTAs.Of these, 33 involve the EU and 11 involve the UnitedStates. The sample covers some recently concludedEPAs by the EU, with Cameroon and CARIFORUM, forexample,aswellasEuromedagreements.The42otherPTAswereconcludedbyregionaltradingblocsandmajortrading powers, such as the Association of SoutheastAsianNations(ASEAN),China,theEuropeanFreeTradeAgreement (EFTA), India and the Southern CommonMarket (MERCOSUR). PTAs from Africa (such asCOMESA and ECOWAS) and the Middle East (such asthe GCC and PAFTA) are also included in the analysis.ThesampleofPTAswaschosenprimarilyonaccountofthevolumeoftradewithinthePTA,butalsoincludedtheinitial set of PTAs examined in the HMS study (seeAppendixTableD.1foradetailedlistofthePTAscovered).

The HMS study only covers PTAs concluded by WTOmembers, signedby thepartiesandmostlynotified totheWTOasofOctober2008.Itconsidersagreementssignedbothbeforeandafter thecreationof theWTO,

butexcludesthosewherepartnersarenotmembersoftheWTO.Threeagreementsthathavebeensignedbutthatarenotyetratifiedwerealsoincludedinthestudy.HMSfurtherrestrictstheselectionofPTAsinitsstudytothoseconcludedunderArticleXXIVoftheGATTorArticleVoftheGeneralAgreementonTradeinServices(GATS).AgreementsnotifiedundertheEnablingClausearenot taken intoaccount.All thePTAsconsidered inthe HMS study are free trade agreements, except forEU-Turkey,whichisacustomsunion.

Thesampleusedinthisreportalsoincludesagreementsin which not all partners are members of the WTO.Somenon-notifiedagreementsarecovered,butallarein force. The sample covers the period from 1958 to2010. PTAs notified under the Enabling Clause areincludedalongwithothersnotifiedunderGATTArticleXXIVandGATSArticleV.Eighty-twooftheagreementscovered are free trade agreements, 12 are customsunions and two are partial scope agreements.14 Fouramong the EC agreements are enlargementagreements.

proceedings.Inthisrespect,treatylanguagealsorevealsthoseareasthathavenotbeennegotiatedwithintheframeworkoftheWTO.10Theprocessofenforcement,however,makesuseofotherapproachesinWTOdisputesettlement.Threeaspectsofthelegalenforceabilityofaprovisionarementionedbelow,inadditiontothetextualapproach.

First, obligations arising under the WTO agreements may have a bearing on the legal enforceability ofobligationsunderPTAs.HMSconsiderprovisionscarvedoutfromdisputesettlementproceedingsasbeingnon-enforceable.TotheextentthataprovisionofaPTAaddressesanareathatisalsodirectlyorindirectlycoveredbyoneormoreobligationsundertheWTOagreements, it remainstobeseenwhetheraPTAcandepriveapartyof its rightofaccess to theWTOdisputesettlement system. Inotherwords, the fact thatdispute settlement may not be available in respect of that provision under the PTA would not necessarilyprecludeapartyfromhavingrecoursetoWTOdisputesettlementproceduresinrespectofthecorrespondingobligation(s) under the WTO agreements. This complex and unsolved legal question leaves open whetherandtowhatextentrulesofconflictleadingtotheenforcementofaprovisionunderaPTAcanoverridetheWTOdisputesettlementsystem.11

Secondly,totheextentthattheconceptoflegalenforceabilityislinkedtothepossibilityofapplyingcounter-measurestogiveforcetoPTAobligations,rightsandobligationsunderWTOagreementslimitingtheuseoftrade counter-measures may also have a bearing on theenforceability of certain PTAprovisions.AnotherrelatedissuereferstotheenforceabilityofWTO-Xprovisions.Towhatextent is itpossibletomakeuseoftradecounter-measurestoenforcethosepolicyareasnotcoveredbytheWTO(Marceau,2009)?Thescopeandlimitationsoftherelevantlawstillneedtobeclarified.12

Thirdly,non-legalconsiderationsareanimportantfactorwhendeterminingtheenforceabilityofobligationsintradeagreements.Thisapproachencompassespoliticalfactorsasrelevantintheprocessoflegaldrafting,thusleadingtotheadoptionoflooselyformulatedlegallanguage.Itdoesnot,however,takeexternalpoliticalfactorsintoconsiderationthatmightbeimportantfortheactualenforcementofaprovisioninpractice.13AsHMS acknowledge, “provisions may be enforced not only through a formal judicial dispute settlementmechanism,butalsothroughmorepoliticalmeans”.Inotherwords,thefactthatparticularobligationsmaybecarved out from dispute settlement procedures does not necessarily mean that parties cannot seek toenforcesuchobligations throughpoliticalordiplomaticmeans.However, the reverse isalso true.The factthatparticularobligationsarenotcarvedoutfromdisputesettlementproceduresdoesnotnecessarilymeanthatlegalenforcementthroughdisputesettlementproceedingsisalwaysarealisticandviableoption.

Thevastmajorityofprovisionsinregionalandbilateraltradeagreementsareneverthesubjectofanydisputesettlementproceedings,evenwherea right to invokeproceedingsexists. Inanutshell,provisions thatarelegallyenforceableintheorymaybedifficulttoenforceinpractice,whetheronaccountofpoliticalfactors,resourceconstraints,orothernon-legalconsiderations.


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The majority of the EU's PTAs are concluded withneighbouring countries, whereas those of the UnitedStates tend to be more widely spread geographically.Included in the coverage are ten PTAs concluded byJapan, seven by China, five by Australia, five by theRepublic of Korea and four by India. The sample covers18majortradingblocs.TheanalysisheredepartsslightlyfromtheHMSapproachinthatcertainobligationscoveredmaynotbe thesubjectofadedicatedarticleorchapter.Provisionsintheareasof“visaandasylum”or“informationsociety”,forexample,areoftennotexplicitlymentionedasanarticleorchapterheading,but in thecontextofotherprovisions.Anothernotableexampleisexporttaxeswhere,unlike HMS, this report considers “customs duties onexports”assynonymouswithexporttaxes.Finally,itshouldbe noted that the analysis relates to the version of thetradeagreementasitwassignedornotifiedtotheWTO.Thismeansitwillnotcapturesubsequentchangestoanagreement, such as the addition of new areas ofcooperationorastrengtheningofexistingprovisions.

(ii) Empirical evidence on PTA content by income, policy area and over time

Figure D.5 shows that the average number of WTO+areas coveredbyPTAshasbeen increasingover time.From1958to2010,theproportionoflegallyenforceableprovisionswasveryclosetothetotalnumberofsectorscovered. As described above, WTO+ areas are thosecovered by existing WTO agreements. The patternobserved suggests that deepening commitments intheseareas,i.e.goingbeyondcommitmentsintheWTO,continuetobeamajordrivingforceforrecentPTAs.

Incontrast,thepatternovertimeofWTO-Xprovisionsisless clear (see Figure D.6). It is certainly the case thatPTAscomingintoforcesince2000covermoreWTO-Xareasthanagreementsestablishedearlier,andthatmoreof them are legally enforceable. However, the gap

betweenareascoveredthatarelegallyenforceableandthose that are not is still higher for WTO-X provisionsthanforWTO+provisions.Hornetal.(2010)characterizeWTO-Xprovisionsas largely regulatory innature.Usingthis interpretation, and even accounting for the smallerproportion of these areas that are enforceable, thegrowth in the average number of WTO-X provisions inrecentPTAsisatestimonytothegrowingimportanceofbehindthebordermeasuresinPTAs.

Which specific policy areas figure prominently inpreferentialtradeagreements?FigureD.7presentsthenumber of PTAs in the sample with specific WTO+provisions. As expected, all of the 96 agreementscontainprovisionsrelatingtoindustrialandagriculturaltariffs.However,an increasingly largenumberofPTAsnowgobeyondmerchandisetariffs,includingprovisionson technical barriers to trade, services, intellectualpropertyandtrade-relatedinvestmentmeasures.FigureD.7alsoshows thateven if oneexamineseachof theWTO+ areas individually, there is not much of a gapbetweencoverageandlegalenforceability.

The main policy areas covered by WTO-X provisionsare competition policy, intellectual property rights,investmentandmovementofcapital (seeFigureD.8).These are also the policy areas that are most oftenlegallyenforceableinPTAs.Thenextlargestgroupofpolicy areas with legally enforceable provisions(present in about one-third of the agreements) areenvironmental laws, labour market regulations andmeasures on visa and asylum. The remaining legallyenforceablepolicyareasappearinlessthantenoftheagreements. So while there appears to have been asignificant increase in new policy areas in PTAs, thepicturethatemergesfromFigureD.8ismorenuanced.Only a handful of truly important areas are affected,whereimportanceisjudgedbywhethertheprovisionscanbeenforcedbythepartiestotheagreement.

Figure D.5: Covered and enforceable Wto+ provisions over time


Figure D.6: Covered and enforceable Wto-x provisions over time


Num

ber o

f WTO

+ p

rovi

sion

s (a

vera

ge)

1958-79 1980-89 1990-99 2000-10

12

10

8

6

4

2

0

Covered Enforceable

Num

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-X p

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s (a

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1958-79 1980-89 1990-99 2000-10

12

10

8

6

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Covered Enforceable


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To investigate possible differences among PTAssigned between categories of countries – that is,developed-developed, developed-developing anddeveloping-developing – the average number ofprovisionsinthesePTAcategoriesarecompared(seeFigureD.9).PTAsbetweendevelopedanddevelopingcountries contain on average a higher number oflegally enforceable WTO+ provisions compared withPTAs between trading partners with similar levels ofincome (i.e. among developed or among developingcountries). How might this be explained? Barriersaffecting goods and services are generally higher in

developing than in developed countries. DevelopedcountriesmightusePTAswithdevelopingcountriestoobtaindeeperlevelsofcommitmentsthanthosemadein the WTO. In exchange, developing countries mightacquirefullerandgreatersecurityofmarketaccesstothelargeeconomiesoftheirPTApartners.

As shown in the second panel of Figure D.9, PTAsbetweendevelopedanddevelopingcountriesalsocovera higher average number of WTO-X provisions thanPTAsbetweentwodevelopedcountriesorbetweentwodevelopingcountries.However,mostoftheseprovisions

FigureD.7: number of agreements covering Wto+ provisions


FigureD.8: number of agreements covering Wto-x provisions


Num

ber o

f PTA

s

Indu

stria

l tar

iffs

Agr

icul

tura

l tar

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Cus

tom

s

AD

CV

M

Exp

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TBT

GAT

S

TRIP

S

Sta

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id

Pub

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rem

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SP

S

STE

s

TRIM

S

100

90

80

60

40

70

50

30

20

10

0

Sector covered Legally enforceable

Num

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s

IPR

Agr

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Ene

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Cul

tura

l coo

pera

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Info

rmat

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soci

ety

Hum

an ri

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Eco

nom

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y di

alog

ue

Mon

ey la

unde

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Dat

a pr

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Illeg

al im

mig

ratio

n

Taxa

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Pub

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dmin

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atio

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Nuc

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Civ

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Com

petit

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polic

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Mov

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apita

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Reg

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l coo

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Indu

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Fina

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l ass

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Env

ironm

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s

Edu

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n an

d tr

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Visa

and

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lum

Con

sum

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Sta

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s

Inve

stm

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Res

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d te

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Labo

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arke

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ulat

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Soc

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SM

EA

ppro

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legi

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Pol

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Illic

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Ant

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Aud

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Min

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Hea

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Terr

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Inno

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are not legally enforceable. Agreements betweendevelopedcountriesonaveragehaveahighernumberof enforceable provisions, with PTAs betweendeveloping countries having the smallest number ofenforceable WTO-X provisions. The pattern betweendeveloped and developing countries observed in theportionofFigureD.9dealingwithWTO-Xprovisionsisconsistent with the argument made by HMS thatdeveloped countries are seeking to “export” theirregulatory regimes to developing countries. The factthat most of these WTO-X provisions are not legallyenforceable may suggest limited success in theseefforts, or perhaps that the process of regulatoryconvergenceinalegallybindingsenseisagradualone.

It may at first appear surprising that agreementsbetween developing countries include WTO-X policyareas. However, this pattern becomes moreunderstandablegiventhatmanyofthesePTAstypicallyinvolve upper or middle-income developing countriessuch as Chile, the Republic of Korea and Singapore.They may have the same interest in exporting theirregulatoryregimesasdevelopedcountries.

Overall, this analysis leads to two main conclusions.First, where WTO+ provisions are encountered inPTAs, involving any combination of developed ordeveloping countries, agreements have generallyserved to strengthen rules and commitment levelscompared with the WTO agreements. The fact thatthese are policy areas already covered by the WTOhas made it easier to give legal force to the relevantprovisions.Secondly,inspiteoftheapparentexplosionof new WTO-X issues covered by PTAs, the areasembodying legally enforceable and thereforesubstantive commitments in PTAs are relatively few,and are to be found predominantly in the fields ofinvestment, competition policy, intellectual propertyrights,andthemovementofcapital.

(b) PTAcommitmentsinselectedpolicyareas

(i) Services

Services obligations are usually included incomprehensive PTAs that cover not only trade ingoods, but also, for example, investment, intellectualproperty, e-commerce and competition. Out of 85notifications under Article V of the GATS,15 a littlemore than one-third of the agreements follow astructure that is close to that of the GATS, with asimilarsetofobligations(nationaltreatment,domesticregulation, etc.) that apply to the four modes ofsupply,16 and rely on a GATS-type “positive-listmodality” for the scheduling of liberalizationcommitments.17 A positive-list approach means thattheobligationsstipulatedintheagreementapplyonlyto those services sectors listed in WTO members'schedulesofcommitments (andsubject to limitationsinscribed), while a negative-list approach means thatobligations intheagreementapplyfullytoallsectors,subject only to explicitly listed reservations. In otherwords, inapositive listapproachonlywhat is listediscovered,whereasinanegativelistapproacheverythingiscoveredapartfromwhatislisted.

Almost half of the services PTAs notified follow adifferentstructure,whichisclosertotheapproachusedintheNorthAmericanFreeTradeAgreement(NAFTA)than to that of the GATS.18 Such agreements use anegative-list modality for the scheduling ofcommitments,andservicestradeiscoveredbydifferentsets of obligations. These include a chapter on cross-borderservicestradefocusingonmode1(cross-bordersupply), mode 2 (consumption abroad) and mode 4(movementofnaturalpersons),achapteroninvestmentcovering all sectors, including services, and separatechaptersontelecommunications,financialservicesandthetemporaryentryofbusinesspersons.19

FigureD.9: number of Wto+ and Wto-x provisions


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Overtime,anumberofagreementshave innovated interms of their structure, combining elements of boththe original NAFTA and GATS-type models.20 Anumber of services PTAs, whether positive-list ornegative-list, also include some additional sector-specific provisions, contained in annexes to relevantchapters. Examples of these are recognition forprofessional services in various PTAs, provisionsspecifictoexpressdeliveryservicesinUSagreements,and maritime services in the agreement between theEUandtheCaribbeanForum(CARIFORUM).

Aside from innovations in architecture and market-openingmodalities,mostservicesPTAstendtoshareabroadcommonality,amongthemselvesandwiththeGATS,intermsofabasicsetofdisciplinesrelatingtotrade in services. These include national treatment(the principle of giving others the same treatment asone’s own nationals), market access, domesticregulation obligations, exceptions, definitions andscope.Intheareaof“rules”,forwhichnegotiationsareprovided for under the GATS, namely safeguards,subsidies andprocurement, PTAshave tendednot togo further. The same is true for most agreements inregardtodomesticregulationandtransparencyissues.Important exceptions exist here, however, as somecountries have gone beyond GATS provisions. TheseincludeanecessitytestondomesticregulationintheSwitzerland-JapanPTA,oradditionalservices-specificprovisionsontransparencyinUSagreements.21

How much more market access than under the GAts?

Inadditiontoarchitecturalandrules-relateddifferencesin the services provisions in PTAs, a key issue is theextent of market-opening commitments – that is, thelevel of access guaranteed for foreign services andservices suppliers (market access and nationaltreatmentobligations).Studieshavefoundthat,overall,services commitments in PTAs go beyond GATScommitments currently in force.22 Some studies alsoshow that PTA commitments go further than GATSoffers tabled so far in theDohaDevelopmentAgenda(DDA).23GATS+commitmentsinPTAstaketheformofbothnewbindingsorcommitments inservicessectorsuncommitted under the GATS and better bindings insectorsalreadycommittedundertheGATS.

Thevalueofservicescommitments inPTAs is largelybasedonthefactthattheyguaranteeaminimumleveloftreatment–oftenabetteronethanthatguaranteedundertheGATS.Thisisimportantformode3(foreigncommercialpresence),wherethesupplyinvolveslargeinvestments abroad, and for mode 1 (cross-bordersupply),wherethecurrentlackofrestrictionsinvarioussectorsmaynotlastastechnologicaladvancesleadtogreater trade, and competitive pressures, via thatmode.24 It isalso important formode4(movementofnaturalpersons),wheremeasuresaffectingtemporaryentrycanrapidlybereversed.

PTA commitments are not expected to lead to manyoccurrences of “real liberalization” – i.e. removal ofapplied restrictions. At the same time, although suchinformation is not readily discernible from PTAs,evidence suggests that some PTAs have, in certaininstances,directlyledtotheremovalofcertainappliedrestrictions, for example the phasing out of themonopolyintheinsurancesectorinCostaRicaandtheopeningoftheinsurancesectortoforeignbranchesinAustralia,theDominicanRepublicorChile.25

FigureD.1026highlightsdifferencesbetweenservicescommitmentsintheWTOandinPTAsbyfocusingontheproportionofservicessubsectorsthataresubjecttomarketaccess/nationaltreatmentcommitments.OnthebasisofdataforalargenumberofPTAs,thefigureshows that members involved in PTAs have, onaverage, undertaken commitments on a greaterproportion of services subsectors than they have intheGATS, or even than theyhave so far proposed intheir current GATS offers in the Doha DevelopmentAgenda(DDA).Thistrendisclearinbothmodes1and3,representingmorethan80percentofthevalueofworld trade in services. Levels of sectoral coverageachieved in PTAs are, on average, similar fordeveloping and developed countries included in thesample. The contrast with the GATS, however, isgreaterfordevelopingcountries,whosecommitmentstend to apply to a more limited set of servicessubsectorsatthemultilaterallevel.

Figure D.11 presents a more complete picture ofGATS+ commitments in PTAs by showing theproportion of subsectors where commitmentsundertaken by WTO members in PTAs go beyond

Figure D.10: sector coverage in PtAs in comparison with GAts commitments and DDA offers (Percentage)

Note:SeeAppendixTableD.3forthelistofPTAscovered.

Source: Updated from Roy et al. (2008) on the basis of anexpandeddataset.

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Figure D.11: Proportion of services subsectors subject to new or improved commitments in PtAs, compared to GAts (by member) (Percentage)

Note:GATSstandshereforGATScommitmentsandDDAoffers.Blue:subsectorscommittedunderGATS;red:subsectorscommittedunderGATSbutboundat abetter levelof treatmentunderPTAs;green: subsectorscommittedunderPTAs thatwereuncommittedunderGATS.Covers each member’s “best” PTA commitment across all the PTAs it is party to. Covers modes 1 and 3. See Box A.1. The legend of theacronymsforthemembersisprovidedinAppendixTableD.2.

Source:UpdatedfromRoyetal.(2007),onthebasisofexpandeddataset.

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those inGATSschedulesofcommitmentsandoffers.This captures not only those instances where PTAsinclude new bindings in subsectors that wereuncommitted in theGATS,butalsobindingsatbetterlevelsofaccessinPTAsforthosesubsectorsalreadysubject to commitments under the GATS and DDAoffers.TheunderlyingPTAinformationrepresentsthePTA inwhich thememberconcernedhasundertakenthe highest level of binding – it is not an average ofbindingsinallPTAswithservicescommitments.Thesedata underscore the magnitude of GATS+commitments in PTAs, both among developing anddevelopedmembers.

The overall trend of significant GATS+ commitmentsobservedinmanyPTAsalsoembodieslargevariationsamong parties. Some exhibit spectacularimprovementsoverwhatiscommittedorofferedunderthe WTO, particularly in the case of a number ofdevelopingcountriesinLatinAmerica.Others,suchasASEAN countries (other than Singapore), showrelatively more limited GATS+ commitments in PTAs.Moreover,alargenumberofthosemembersthathavemade more significant GATS+ commitments havesubmitted relatively limited offers in the servicesnegotiationsintheDDA.

Thelevelofservicescommitmentsofindividualpartiesto PTAs also varies significantly among agreements.Singapore's services commitments, for example, varynotably in its agreements with the United States,Japan, and other ASEAN countries. Importantvariations can also be observed in the PTAcommitments of Australia, Chile and the Republic ofKorea.CommitmentsbytheUnitedStates,incontrast,do not vary significantly among PTAs, except for itsagreementwithJordan,whichwasbasedontheGATS(seeAppendixFigureD.1).

No simple or single reason explains why PTAcommitmentsaredifferentamong thePTAssignedbyvarious countries, or why PTA commitments aregenerally more far-reaching than those offered in theGATS. It has been argued that factors such asreciprocity (within services, but also among otherissues) as well as the respective economic size andimportanceofthepartiesinvolvedhaveplayedarole.27For example, the United States always obtains bettercommitmentsoverallonmodes1and3fromitstradingpartners than the commitments these countriesundertake in PTAs with other countries. In AppendixFigureD.1,thisisapparentinthePTAcommitmentsofChile,theRepublicofKorea,AustraliaandSingapore.

The type of liberalization modalities used in the PTA isalso a factor, as agreements using negative list28modalitieshave tended,onaverage, to result ingreatercommitmentsthanpositivelistones.Thismay,ofcourse,beduetothefactthatgovernmentswhicharereadytoassume more commitments are more comfortable withthenegativelistapproach.29Althoughnotinvestigatedin

the context of services PTAs, the nature of politicalregimes may also play a role in influencing levels ofGATS+ commitments that governments are ready toundertakeinapreferentialcontext.30

Figure D.12 shows GATS and PTA commitments bysectorformodes1and3.Overall,servicescommitmentsat the sectoral level in PTAs are more numerous thanthose inGATSsectors.Sectors thathaveprovedmoredifficult at the multilateral level (e.g. audiovisual,education)havealsoattractedlessGATS+commitmentsthan sectors such as telecommunications or financialservices. However, PTA commitments for the formerhavestillgonesignificantlybeyondGATScommitments.QualitativeanalysisofPTAcommitmentsinanumberofsectors also highlights this point.31 Nevertheless, themore sensitive sectors for larger trading partners havebeen subject to little or no improvement in PTAs(e.g. maritime transport for the United States oraudiovisualservicesfortheEuropeanUnion).

As for differences according to the level ofdevelopmentamongparties,theGATS+commitmentsof developed economies tend to be more limitedoverall in PTAs in view of the higher levels of GATScommitments in these countries. For developedcountries,GATS+commitments largely take the formofbetterlevelsofbindingsforsectorsalreadycoveredunder the GATS. The GATS+ commitments ofdeveloping countries are spread across all sectors,withparticularlysignificantadvancesinsuchareasasbusiness, environmental services, distribution,education and postal-courier services. Overall, PTAshavenarrowedthegapincommitmentlevelsbetweendevelopedanddevelopingcountries.

GATS+ commitments are more significant in cross-border supply (mode 1) and commercial presence(mode 3) than they are in respect of the temporarymovement of natural persons (mode 4). Mode 4commitments are essentially defined in a cross-sectoral manner in both the GATS and PTAs. PTAshave on the whole made notable improvements overtheGATS,althoughtoalesserextentinsuchimportantcategories of natural persons as “independentprofessionals”and“contractualservicesuppliers”.32

ThescaleofGATS+commitmentsvariessignificantlyfromonemembertoanother.AccordingtoStephensonandDelourme(2010),Australia,Canada,theEuropeanUnion and Japan have undertaken some significantGATS+commitments in some recentPTAs.33On theother hand, most United States PTAs on services,includingallthosenotifiedtotheWTOafter2003,donotgobeyondGATSonmode4.ThesameistrueforanumberofPTAcommitmentsbydevelopingcountries.However,thebroadersectoralcoverageofmostPTAsmeans that, at a minimum, GATS-type mode 4commitments are extended to many previouslyuncommittedsectors.34


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Bilateral investment treaties (BITs) also cover issuesrelevant tomode3.AlthoughthemajorityofBITsarelimited to post-establishment investor rights, somealso includecommitmentson investments in servicessectors with respect to the establishment phase.35ThisisparticularlythecasewithBITsconcludedbytheUnitedStates.

Finally,PTAsaresometimesGATS-minus, inthattheycontaincommitmentsthatprovideforlessthanwhatisbound under the GATS, either by excluding sectors(e.g. financial services in certain PTAs) or by listinglimitationsnotforeseeninGATScommitments.36

(ii) Investment

Thetradeand investment literature–see, forexample,Helpman (1984); Markusen (1984); Brainard (1993);Brainard (1997) and Markusen (1998) – allows us toinfer what provisions in trade agreements, and ininvestment chapters in particular, will be needed tofacilitateinternationalproductionnetworks.Akeyinsightof this literature is that what gives the multinationalenterprise itscompetitiveedge in internationalmarketsisitsfirm-specificassets–humancapital(managementor technical experts) and intellectual property, such aspatentsorblueprints.HenceprovisionsinPTAsthatgive

ample protection to these assets will encourage moreFDI flows and production sharing. Examples of suchprovisions are protection against expropriation or acommitment to compensate investors in the case ofexpropriation.

Allowingfreermovementofcorporatepersonnelwouldbe another critical ingredient in PTAs motivated byproductionsharing.Anotherprovisionthatmayimproveinvestor confidence is having the right to invoke thePTA'sdisputesettlementmechanism.Finally,reducingbarriers to investmentwill allowmoreenterprises theopportunity to establish a production facility in aforeignlocation.

What are investment provisions in PtAs commonly about?

SeveralstudieshaveanalysedinvestmentprovisionsinPTAs–see,forexample,Deeetal.(2006);Dee(2008);Houdeetal. (2007);Kotschwar (2009)andBergeretal.(2010).Forthepurposeofthisreport,theKotschwarstudywillbeused.Itisbasedonanexaminationoftheinvestment chapters or provisions in 52 PTAs. Thesample of PTAs includes 22 free trade agreementsamongcountriesoftheAmericas.Twoagreementsarefrom the 1980s, 13 from the 1990s, and 33 from

FigureD.12: GAts+ commitments in PtAs by sector, modes 1 and 3 (Percentage)

Note:GATSstandshereforGATScommitmentsandDDAoffers.Doneonthebasisofeachmember’s“best”PTAcommitmentacrossallthePTAsitispartyto.

Source:UpdatedfromRoyetal.(2007),onthebasisofexpandeddataset.

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2000 onwards. Seventeen agreements in the samplepaircountriesof theAmericaswithothersoutside theregion, including eight with Asian countries, six withcountries in the Middle East and three with Europeanpartners. Eight agreements are between Asiancountries, twoagreements amongEuropeancountriesor groups (European transition agreements), and oneeach involving Europe-Africa, Europe-Asia, Europe-Middle East and Africa-Africa. More than 30 specificfeatures of the investment chapters in theseagreementswereexaminedinKotschwar's2009study.

OnepotentialshortcomingoftheapproachtakenheretoexamineinvestmentprovisionsinPTAsisthattheseagreements are not the sole avenue for makinginternational commitments in investments. Over thepast20years,therehasbeenanexplosionofbilateralinvestment treaties (BITs). The United NationsConference on Trade and Development (UNCTAD)estimates that the total number of BITs increasedmorethansix-foldduringthe1990s,withtheirnumberrisingfrom385in1989tosome2,750bytheendof2009.37 One reason why investment and trade havebeen regulated by distinct treaties is becauseinvestmentandtradedisciplinesfocusedon“differentbut complementary objectives” (DiMascio andPauwelyn,2008).Tradeagreementsseekto increasetradingopportunitiesandinvestmentagreementsseektoprotectandpromoteforeigninvestment.

Even though PTAs increasingly include investmentrules, theirnumbersarestilldwarfedby theBITs.Forinstance, UNCTAD's BITs database reports that 82BITsweresignedin2009,whichexceedsthenumberof PTAs containing investment provisions notified tothe WTO that year.38 BITs have clearly been animportantvehicleforguaranteeinginvestorprotection(Adlung and Molinuevo, 2008). Baldwin (2010)considers the explosion of BITs in the 1990s as animportant means by which emerging markets wereable to attract offshored manufacturing jobs andfactories. Thus, it could be argued that BITs andinvestmentchapters inPTAsplay largelysimilar rolesinthespreadofinternationalproductionnetworks.

Kotschwar'sstudyidentifiesanumberofkeyelementsin the investment provisions of PTAs, includingcoverage, non-discrimination, standards of treatment,investor protection, temporary movement andnationalityofseniorpersonnel,anddisputesettlement.Eachoftheseisconsideredbrieflybelow.

Coverage

Thecoverageoftheinvestmentchapterdependsonhowinvestmentisdefinedandwhatdisciplinesarecontainedin the chapter. Investment may be defined in either abroad,asset-basedway(includingbothFDIandportfolioinvestment)ormorenarrowlyusinganenterprise-basedapproach(comprisingtheestablishmentoracquisitionofa business enterprise). Investment disciplines may be

dividedbetweentheinvestmentandserviceschaptersofanagreement.Asaconsequence, interactionsbetweenthemaremoreprevalent,andaregovernedeitherintheinvestmentortheserviceschapter(Houdeetal.,2007).Alternatively, investmentdisciplinesarecontainedintheinvestment chapter and there is limited interaction withtheserviceschapter.39

Principle of non-discrimination

A key mechanism for opening up investmentopportunitiesinaPTAistheapplicationoftheprincipleofnon-discriminationtoforeigninvestors.Theextentofopening depends upon how broadly investment isdefined in the agreement (i.e. the range of assets towhichnon-discriminationapplies),whethertheprincipleis applied to the entire lifetime of the investment (pre-andpost-establishment),andthenumberofreservations.There are two broad approaches for determiningreservations:thenegativelistandpositivelistapproach,asexplainedearlier.Ingeneral,anegativelistapproachislikelytoyieldgreaterinvestmentopportunities.

Standard of treatment

Beyondnon-discrimination,investmentprovisionsalsospecify other standards of treatment of foreigninvestors. These include such standards as fair andequitable treatment under international law, andfreedomintransferringpaymentsabroad.

Investor protection

Most investment chapters contain provisionsstipulating that investors are protected or will becompensated in the event that the host countrynationalizesorexpropriatesaninvestment.

Senior management and personnel

MostPTAsprovideforthetemporaryentryofmanagersand key personnel of a foreign investor. Someagreements allow hiring of top managerial personnelregardless of nationality, while other agreements holdthattheforeigninvestormaynotstipulatethenationalityofamajorityoftheboardofdirectors.

Dispute settlement

Whilemanyinvestmentchapters inPTAsnowcontainprovisionsondisputesettlement,disputesarehandledin a variety of ways. Some PTAs provide for thesettlement of disputes through coordination andnegotiation;otherscontainprovisiononlyforstate-to-state settlement of disputes. However, some PTAs,such as NAFTA, now allow investor-state disputesettlement. An investor that is a national of a PTAmembermaysubmittointernationalarbitrationaclaimthat a PTA member (state) has breached obligationsundertheinvestmentprovisionsofthePTA.


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Kotschwar'ssampleofPTAsisusedtoprovideamoredetailedanalysisof thoseelementsof theagreementsthatmightbeseenasessentialforproductionnetworks.FigureD.13showsthatalargeproportionofthesampleofthePTAs(between60and70percent)haveadopteda negative list approach to investment commitments.MFN and national treatment have also been widelyguaranteedtoforeigninvestorswhowishtoestablishapresence, or acquire or resell holdings. Investorprotectionguaranteesarewrittenintomostagreements,andprivateinvestorsarefrequentlygrantedtherighttodisputesettlement.Ingeneral,theinvestmentprovisionsin these PTAs appear to be rather open, although noattemptwasmade in theKotschwarstudy to testhowmuch these provisions actually affected FDI flows.Some econometric evidence is available, however,showing that FDI flows respond to provisions in theinvestment chapters of PTAs. See Dee et al. (2006),Dee(2008)andBergeretal.(2010).

Patterns over time

TheagreementsinKotschwar'ssamplespanfromtheearly 1980s to around 2009. Using the total numberofprovisionsintheinvestmentchapterasanindicatorof investment openness, later agreements appear tobe more open than earlier ones (see Figure D.14).40This trend is the same even if a narrower set ofprovisionsintheinvestmentchapterareused,suchasonlythoselimitedtoMFNandnationaltreatment.

Are there families of investment provisions?

KotschwarfindsthatPTAsaregroupedroughlyaroundtwo hubs: a NAFTA-type hub, which includesagreements among countries in the Americas andincreasingly in the Asia-Pacific region, and theEuropean-stylehub.ShecharacterizesallthePTAsin

FigureD.14: total number of provisions in investment chapter over time

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the sample involving the three NAFTA members(Canada, Mexico and the United States) with theirrespectivepartnersintheAmericasas“encompassing”,since they apply the four modalities that determineinvestment conditions: establishment, acquisition,post-establishment operations and resale. They alsocover such disciplines as MFN treatment, nationaltreatment, anddispute settlement.Eightyper centormore also cover transparency, protection againstdenialofbenefitsandrestrictionoftransfers,minimumlimitations on the nationality of management and theboardof directors, noperformance requirements andguaranteesagainstexpropriation.

The United States leads the way in designingparticularly comprehensive PTAs. In Asia, Kotschwarfinds that Singapore and Australia’s agreements aremorecomprehensive,butotheragreementshavescantcoverage. In interregional agreements, she finds thatthe coverage is somewhat lower due to the limitedcoverageofdisciplinesintheEU-MexicoandEU-Chileagreements,aswellas in theChile-ChinaFreeTradeAgreement (FTA), the P-4 Agreement (Australia,BruneiDarussalam,ChileandSingapore),andtheUS-JordanFTA.

Kotschwarobservesthattheagreementssignedamongdeveloped economies tend to go beyond provisions atthe multilateral level. This is most obvious where theyinclude separate investment chapters that go beyondservices,coverallinvestmentphases,employanegativelist approach, and have little or no limitations on thenationality of board members and management. Ageographic divide exists with respect to limitations onperformance requirements. United States agreements(except for US-Israel) restrict performancerequirements. Singapore agreements (except for US-SingaporeandJapan-Singapore)donot.

A similar division is seen in terms of transparencyrequirements.AgreementsintheAmericastendtoaddprior comment and publication obligations to theGATS, and establish national enquiry points. Asianagreements, by and large, do not. Australianagreements (with the United States and withSingapore) incorporateGATS-styledenialofbenefits.Amongagreements that includeAsianmembers,onlya handful adopt tougher-than-GATS treatment. All ofthesearewithcountriesintheAmericas(Chile-Korea,Mexico-Japan, US-Korea and US-Singapore).Agreements with Australia or Israel do not containinvestor-state dispute settlement mechanisms exceptfortheSingapore-Australiaagreement–allSingaporeagreementsincorporatethiselement.

Asforagreementsbetweendevelopedanddevelopingcountries,thoseintheAmericasallcontainaseparateinvestment chapter or incorporate a BIT. EUagreements with developing countries generally donot. PTAs among developing countries varyconsiderably in content and approach. Agreements

signed by Chile and Mexico with other developingcountries look much more like the agreementsinvolving developed countries than those signedamong other developing countries, such asMERCOSUR. These latter agreements tend to openmarketsmoregradually.

(iii) Technical barriers to trade

In a world where tariff barriers have progressivelyfallen,non-tariffbarriers to tradehaveacquiredmoresignificance. As noted above, many PTAs includenorms on technical barriers to trade (TBT) and agrowingnumberincludeTBTprovisions.

Data reported here on TBT provisions in PTAs aretakenfromastudybyPiermartiniandBudetta(2009)of 70 PTAs that differ in terms of geographicalcharacteristics,levelofdevelopmentandtheextentofintra-regional trade. Fifty-eight of the 70 PTAssurveyedcontainedTBTprovisions.Thestudyemploysa template that maps TBT provisions in terms of theintegration approach chosen for standards, technicalregulations and conformity assessment procedures(i.e. harmonization or mutual recognition),improvements in transparency, institutions ormechanisms to administer the agreement and solvedisputes, and the possibility of cooperation amongregionalpartnersonstandards-related issuesbeyondtrade objectives and technical assistance. Since thisdatabase primarily41 relies on the legal texts of theagreements, it does not allow an assessment of theactualextentofimplementationoftheprovisions.

What are tBt provisions in PtAs commonly about?

The most common provisions in PTAs (occurring inover 50 per cent of the 58 PTAs included in thePiermartini and Budetta study that contain TBTprovisions) are mutual recognition of conformityassessment, harmonization of technical regulations,transparencyprovisions, andprovisions that establishinstitutionalmachinerysuchasacommittee,abodyora network for standard-related matters (seeFigure D.15). Harmonized standards, harmonizedconformity assessment procedures and disputesettlementprovisionswerefoundinmorethan40percentoftheagreementscontainedinthesampleof58PTAs. Provisions dealing with the mutual recognitionof regulations and standards, common policies,technical assistance and metrology occurred in lessthan30to40percentoftheagreements.

Mutual recognition means that countries agree torecognize each other's regulations, standards orconformity assessmentproceduresasequivalent, thusfacilitating the unimpeded flow of goods into partnermarkets. Like mutual recognition, harmonization ofregulationsandstandardsisasteptowardsmoreopentrade. Both mutual recognition and harmonization


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promote transparency and trade opening by reducingthecoststoexportersofmonitoringdestinationcountrypolicy changes. These arrangements also provideexporters with easier access to information about thepreferencesofconsumersinpartnercountries.42

The advantage of harmonization relative to mutualrecognition in termsof itseffectsontrade is thatwithharmonizationproductsproducedindifferentcountriesare more similar (more homogeneous) and thereforebetter substitutes from the point of view of producersand consumers. This, in turn, may facilitate trade byimproving consumer confidence about the quality ofimported goods. In enhancing compatibility betweenimported and domestically produced goods,harmonizationmakes iteasier forconsumers tomatchproducts.Itisalsolikelytoincreasecompetition,reduceprices and increase trade. However, harmonizationinvolves more arduous negotiations and carries higherregulatorycoststhanmutualrecognition.

Finally, strengthening cooperation on the institutionalset-up for the standards regime is a step towardsfurther trade opening because it is likely to promotetheeffective implementationofmeasures. Ingeneral,the gap between law and practice will depend oninstitutionsandadministrativeprocedures.

Who integrates tBt provisions the most?

Agreementssignedbetweencountriessimilarintermsof levels of development, technology, environmentalrequirementsandpreferencesare likely tobedeeperin termsofTBT integrationthanthosebetweenmoredissimilarcountries.Thisisbecausecountriesthatare

alike tend to share similar policy objectives andtherefore similar types of standards. In addition,countries at a higher level of development are morelikely to trust one another's conformity assessmentsand standards than countries at a lower level ofdevelopment.

In order to understand the overall level of TBTintegration, PTAs have been ranked on the basis ofprovisions that go beyond WTO commitments(i.e.WTO+integration).FigureD.16showstheaverage

FigureD.15: Percentage of PtAs by tBt provision

Note:Percentagesarerelativetothe58PTAsinthesamplecontainingTBTprovisions.MRdenotesmutualrecognitionandHarm.meansharmonization.

Source:Authors’calculationsonPiermartiniandBudetta(2009)database.

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Note:The“North”consistsoftheEU,EFTAcountries,Australia,New Zealand, the United States, Canada and Japan.AgreementswithnoTBTprovisionsareincluded.

Source:Authors’calculationsbasedonPiermartiniandBudetta(2009)database.

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levelofWTO+integrationachievedbyPTAsclassifiedaccordingtothelevelofdevelopmentandsimilarityoftheirmembercountries.InlinewiththepredictionthatadeeperlevelofintegrationislikelytobeachievedinPTAs among countries with a similar level ofdevelopment and higher incomes, agreementsbetween developed countries (the North) display thehighest degree of TBT integration on average. PTAsbetweendevelopingcountries(theSouth)scoremorehighly than agreements between a developed and adeveloping country, confirming the proposition thatintegrationismorelikelyamongsimilarcountries.

Are there families of PtAs in the context of tBt integration?

TableD.3showspatternsofTBTintegrationbyregion.The most common provisions (defined as those thatoccurredinover60percentofthecases)areshadedin green, the least common (those occurring in lessthan40percentofcases)areshadedinblue,andtherest(occurringbetween40and60percentofcases)are shaded in red. While mutual recognition ofconformity assessment is common across the board,significant differences are discernible in relation toothermeasuresadoptedinPTAs.

AmajordifferenceexistsbetweenEU-typeandNorthAmerican-type agreements in terms of the choicebetween harmonization and mutual recognition as avehicle for TBT integration. PTAs involving the EUtypically prefer harmonization, while North Americanagreements tend to prefer mutual recognition. Inaddition, TBT provisions in PTAs in North America,EastAsiaandSouth-CentralAmericamainlyfocusonintroducingtransparencyrequirementsanddevelopinginstitutionalbodies,whileEUandAfricanagreementsbarelyconsidertheseissues.

PTAs that harmonize standards are likely to featurehub-and-spoke characteristics, with a larger partnerrepresenting the hub to whose standards the spokeswill conform. This tendency can result in standardsbecoming a barrier to trade and integration amongmajorregionalgroupings.43

(iv) Competition policy

Thepresenceofmonopolies, cartelsandother formsofprivateanti-competitivepracticescan frustrate thebenefits of trade, investment and services reform.These market features prevent multinationalenterprises from taking full advantage of differencesin costs among countries through fragmentingproduction. The adoption of competition policy is inmany ways a natural complement to the reduction oftrade, investment and services barriers. While thelatter reduce or eliminate policy-created distortions,competition policy dilutes or prevents the abuse ofmarket power. As noted by many commentators, thestillborn 1948 Havana Charter of the InternationalTrade Organization included provisions on restrictivebusiness practices, testifying to the recognition bynegotiators of the link between trade opening andcompetitionlaw.

Thefollowinganalysisofcompetitionrules inPTAs isbasedonrecentresearchbySilva(2004);Brusiketal.(2005); Anderson and Evenett (2006); Solano andSennekamp (2006); Teh (2009) and Dawar andHolmes (2010). Many studies of competition rules inPTAs have focused only on the competition policychapters of agreements. However, as Anderson andEvenett (2006)haveemphasized,competition-relatedprovisionsalsoappearinotherprovisions.Intheirview,thesesector-specificcompetitionprovisionsmayhavestrongerpro-competitiveeffectsthanthecompetition

TableD.3: Patterns of tBt integration across regions (percentage of PtAs by provision and region)

Provisions eunorth

Americaeast Asia

south Central America

Africa

MRstandards 13 7 8 6 0

MRtechnicalregulations 13 40 31 41 0

MRconformityassessment 67 73 69 76 70

Harm.standards 80 20 31 47 60

Harm.technicalregulations 73 27 54 59 50

Harm.conformityassessment 80 20 31 47 60

Transparencyrequirements 20 67 62 65 20

Administrativebody 20 67 62 76 40

Disputesettlementbody 20 33 46 47 20

Commonpolicy 7 0 15 6 20

Technicalassistance 40 40 23 65 40

Metrology 47 13 8 47 60

Note:MRreferstomutualrecognitionandHarm.toharmonization.

Source:CalculationsonPiermartiniandBudetta(2009)database.


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policy chapter itself, assuming that the tradeagreement even has one. The authors also drawattentiontowhattheyrefertoas“horizontalprinciples”relating to thenon-discrimination,procedural fairnessandtransparencyprovisionsintheagreements.

Transparency requires the publication of lawspromoting fair competition and addressing anti-competitive practices. Procedural fairness requiresthat administrative proceedings are consistent,impartial and reasonable and that it is possible torevieworappealanydecisionstakeninadministrativeproceedings.AndersonandEvenett(2006)arguethatthese horizontal principles have a bearing oncompetitionlawandpolicy.

Confirming the hypothesis of Anderson and Evenett,the study by Teh (2009) documents how a largenumberofPTAsincludecompetitiondisciplinesinthechapters on investment, services (intelecommunications, maritime transport and financialservices), government procurement and intellectualproperty.Basedonhissampleof74PTAs,FigureD.17shows the proportion of PTAs which containcompetition-relatedelements in theotherchaptersoftheagreements.MorethanaquarterofthePTAs,forexample, have provisions that guard against majortelecommunications suppliers engaging in anti-competitive practices. About one-fifth of the PTAshave an intellectual property (IP) chapter preventingabuse or anti-competitive behaviour by IP rightsholders.

As has been argued in this report, infrastructuralservices, investments, and intellectual propertyprotectionare likely tobecentral ingredientsofwell-functioningproductionnetworkingarrangements.Theapplication of competition rules in these areascomplements the reduction of trade and otherregulatorybarriers.

The main obligations found in the competition policychapters of PTAs are the adoption or application ofcompetition law and closer cooperation amongcompetitionauthoritiesofPTApartners.Severaltypesof behaviour are considered anti-competitive or ashaving the potential to affect competition adversely,andareexplicitlymentionedintheagreements.Theseinclude concerted actions, abuse of a dominantposition and state aid. Monopolies, state enterprisesand undertakings with special or exclusive rights arealsogivenparticularattention.

Competition policy chapters typically mandate closercooperation among national competition authorities,althoughforthemostpartthescopeofcooperationislimitedtotheexchangeofinformation,notificationandconsultation.AsmallnumberofPTAs,however,giveasubstantial role to regional bodies in carrying outsurveillanceandinvestigations,andintakingmeasurestocurbanti-competitivebehaviour.

One complication in assessing the policy effects ofcompetitionpolicychapters,asdistinguishedfromthesector-specific competition provisions and horizontal

FigureD.17: sector-specific competition provisions in PtAs

Source:Teh(2009).

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principles, is that a sizeable number of PTAs excludethem wholly or in part from dispute settlementprovisions intheagreement.Outof the55PTAswithcompetitionpolicyprovisionsinthesampleof74PTAsinTeh(2009),14excludealloftheseprovisionsfromdisputesettlement,whileanothertwoexcludepartsofthecompetitionprovisions.Thesecarve-outssuggestthatcompetitionpolicychaptersareforthemostpartintendedtooperateona“bestendeavour”basisonly.44Theyalsounderscoretheimportanceofthehorizontalprinciples and sector-specific competition provisionsoutsidethecompetitionpolicychaptersoftherelevantPTAs.

Pattern over time

Figure D.18 shows that the commitment to promotecompetitionthoughPTAshasincreasedovertime.Thefocus of this analysis is limited to sector-specific andhorizontal competitionprovisions,given thata sizeablenumber of PTAs exclude, completely or in part, thecompetition policy provisions from dispute settlement.TheverticalaxisinFigureD.18measuresthefrequencyofthesector-specificandhorizontalprovisionsofeachPTA in thesamplewhile thehorizontalaxisshows thedateonwhichthePTAenteredintoforce.Theincreasedcommitment to promote competition is shown by theascending blue line for the entire sample of 74 PTAswhichcameintoforcefrom1958to2006.

Are there families of PtAs in the context of competition policy?

The question whether distinct kinds of competitionprovisionsarefoundinagreementsinvolvingparticularcountriesisrelevantinlightoftheclaimbyHornetal.(2010) that certain PTA hubs tend to export theirregulatory regimes to PTA partners. Solano andSennekamp(2006)arguethatdistinctpatternscanbedetected in the competition policy provisions in EU-and NAFTA-style agreements. Since that study

focusedonlyonthecompetitionpolicychaptersoftheagreements, the question arises whether the findingholds if a broader view is taken of competitionprovisionsinPTAs.

The analysis undertaken in this report suggests thatthe Solano and Sennekamp finding is robust, even ifwe include the sector-specific and horizontalprovisions. Four salient differences are identifiable inthe treatment of competition policy in PTAs involvingthe EU and the United States. First, horizontalprinciples are more pronounced in US-centred PTAs.Secondly, competition disciplines are fairly prominentin the sectoral chapters of US PTAs, particularly intelecommunications, government procurement andinvestment.Thirdly,comparedwiththeEUagreements,thereislesslikelihoodoffindingaspecificcompetitionpolicy chapter in North American PTAs. Nearly all ofthe PTAs concluded by the EU contain competitionpolicy chapters. Finally, US-centred PTAs excludecompetitionpolicychaptersfromdisputesettlement.

It is difficult to ascertain the practical relevance ofthesedifferences. IntheanalysisofTBTprovisionsinPTAs, one explanation for the observed existence offamilies of PTAs was that the hub in hub-and-spokePTAs was exporting its regulatory regime to thespokes.ThusoneinterpretationisthatthetwotradingpowersareinterestedinexportingdifferentaspectsoftheircompetitionregulationstotheirPTApartners.

Are competition rules preferential?

Unlike traditional market access provisions, manyelements of competition rules in PTAs arecharacterized by non-discrimination, see for example,Teh (2009) and Dawar and Holmes (2010).Competition disciplines usually operate through theuse of domestic regulations.45 While it is notimpossible for these regulations to be tailored tofavour enterprises originating from PTA partners, it

FigureD.18: Competition disciplines in PtAs over time

Source:Teh(2009).

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may be costly to do so and becomes even moredifficultasthenumberofPTAstowhichacountryisasignatory increases. Transparency, and in particularthe obligation to publish laws promoting competition,providesinformationthat isavailabletoPTAandnon-PTAmembersalike.

Competition policy chapters typically mandate theapplication of competition law and the establishmentof a competition authority. To the extent thatenforcement of competition law in a country reducesthemarketpowerofdomestic incumbents,all foreignenterprisesthatoperateinthemarketstandtobenefit,regardless of whether or not they are from a PTAmember. Competition policy obligations also provideopportunities for new foreign entrants (either fromPTA or non-PTA members) to challenge domesticincumbents.

Finally, positive benefits (spillovers) may arise fromcompetition provisions, particularly if they arecontainedinregionalratherthanbilateralagreements(DawarandHolmes,2010).Economiesofscalecanberealized from the creation of a regional competitionauthority. Even if no centralized authority isestablished, beneficial spillovers can result frominformation sharing and cooperation amongenforcement authorities. There can also bedemonstration effects in other jurisdictions, when acompetitionauthorityinonePTAmembertakesactionagainst another for anti-competitive behaviour.Eventually, more common competition norms andpracticeswithinaPTAwillpreventregulatoryarbitrage,where enterprises locate in a jurisdiction in the PTAwithrelativelylaxcompetitionpolicy.

3. ProductionnetworksanddeepPTAs

In this section of the report, we turn to the role ofinternational production networks in encouraging theestablishmentof“deep”PTAsthatgobeyondreducingtariffs. The econometric results show that greatertrade inpartsandcomponents isassociatedwith thegreaterdepthofnewlysignedagreementsamongPTAmembers. In addition, the analysis shows that thegreater the depth of an agreement, the bigger theincreaseintradeamongPTAmembers.Tocomplementthis analysis, we examine two case studies fromdifferentregionsoftheworld:ASEAN(AssociationofSoutheast Asian Nations) and Costa Rica. Theseprovideusefulinsightsintothelinkbetweenproductionnetworks and the process of creating a PTA.46 Theintention is to document the growth of trade in partsand components as well inflows of foreign directinvestment during the period leading up to theconclusionofthetradeagreement.

(a) Deepintegrationandproductionnetworks:anempiricalanalysis

The theoretical literature on PTAs reviewed inSection C.2 suggests that the relationship betweendeepintegrationandtradegoesinbothdirections.Onthe one hand, PTAs may stimulate the creation ofproduction networks by facilitating trade amongpotential members of a supply chain. On the otherhand, countries already involved in the internationalfragmentation of production are willing to signpreferential trade agreements with their partners inordertosecuretheirtradingrelationshipsasprovidersof intermediate goods and services. Moreover, whenproductionnetworkstakeplaceamongcountrieswithsignificantgaps (ordifferences) inbusiness lawsandregulations, deep PTAs are a vehicle for narrowingsuch gaps and further developing production sharingactivity. In this section we will empirically test bothdirectionsofcausality.

The impact of PTAs on trade has been widelystudied.47ThemainconclusionofthesestudiesisthatPTAs boost trade among members. The literature onthe effects of deep integration, however, is limited.One of the main reasons for this is that difficultiesarise in defining and measuring the depth ofagreements (see Section C.2). In this section, anattemptwillbemadetoinvestigatetheeffectsofdeepintegration on trade with a focus on productionnetworks for the sub-set of agreements analysed inSectionD.2.48

Thedepthofanagreementwillbedefinedintermsofcoverageandwillbecapturedby twosetsof indices.Thefirstgroupof indices isconstructedon thebasisof the number of legally enforceable WTO+ andWTO-X provisions included in each agreement. Thehigher the number of enforceable provisions coveredby an agreement, the deeper the agreement. Alimitation of these indices is that they give the sameweighttoeachoftheareascoveredinaPTA,therebyassuming that the potential impact of each provisiononproductionnetworksisofthesamemagnitude.

Todealwiththisproblem,anothermethod–knownasa principal factors component methodology49 – willalsobeusedtogenerateanindexcapturingthedepthofanagreement.Thismethodologyisnottheoreticallyfounded but it can be used as a starting point forfurtherresearchonhowtoquantifydeepintegration.

Two alternative indices capturing the depth of anagreementinareassuchascompetitionpolicyandTBTsarealsoconsidered.Theseindicesarealsocomputedintermsofthecoverageofprovisions,withahigherindexscore representing increased depth in the relevantarea.50 These particular provisions are chosen for tworeasons.First,anexistingliterature51hasattemptedin-depth analysis and a mapping of the provisions.Secondly, as discussed in Section D.2, areas such as


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competition policy and TBT are important in terms ofproduction sharing. The integration of TBT measuresmakes international fragmentationofproductioneasierbyloweringthecostoftestingandproductcertification.Competition policy allows multinational enterprises totakefulladvantageofcostdifferencesamongcountrieswhenproductionisfragmented.

Anaugmentedgravityequation52 isestimatedfor200countries, using data from 1980 to 2007, in order toinvestigatetheeffectofdeepintegrationonproductionnetworks.Thismethodologyhasbeenextensivelyusedby economists to test empirically the determinants oftrade flows, and in particular to estimate the effect ofpreferential trade opening on trade flows. Estimatingthe effects of PTAs on bilateral trade in parts andcomponents using a gravity equation is, however,susceptible to an endogeneity problem.53 In order totake account of this, the approach used by Baier andBergstrand(2007)isfollowed.54

Lackofdataposessomedifficulties inassessingtheinternational fragmentationofproduction.This iswhytheempiricalliteratureoftendrawsonproxymeasuresfor production networks. Different approaches havebeen used to quantify the magnitude and pattern ofmanufacturingtradedirectlyattributabletoproductionnetworks.55 We follow Yeats (1998) and Hummels etal. (2001) and use trade in parts and components toproxyforglobalproductionsharing.56

Preliminaryresultsshowthat,asexpected,signingaPTAincreases production sharing among countries. Morespecifically,preferentialtradeagreementsincreasetradeinpartsandcomponentsby35percentamongcountrymembers (see column (1) of Appendix Table D.4). Inaddition,countriesthatsigndeepagreementstrademorethan countries that sign shallow agreements. In otherwords,havinganadditionalprovisioninanagreementwillincreasetradebyalmost2percentagepointsonaverage(see columns (2) (3) and (4) of Appendix Table D.4).Interpretingthemagnitudeofdeepintegrationwhenitismeasured using principal component analysis is lessintuitive,sinceitisnoteasytounderstandthemeaningofa one-unit increase in such an index. However, resultsshow that on average, signing deep agreementsincreasestradeinproductionnetworksbetweenmembercountriesbyalmost8percentagepoints (seecolumn5ofAppendixTableD.4).

Preliminary evidence also shows that deeperagreements in areas such as TBT measures andcompetition policy have a positive and significantimpact on production networks (see the last twocolumnsofAppendixTableD.4).Includinganadditionalprovision in competition policy or TBTs will increasetradebyoneandthreepercentagepointsrespectively.Results confirm that TBT integration involving mutualrecognition, harmonization of standards andtransparencydecreasesthecostsoffragmentationofproduction. The adoption of competition law and

higher levelsofcooperationamongcountrymembersofaPTAalsomakeproductionsharingmoreprofitableforfirmsinthecountriesconcerned.

Since the TBT integration and competition policyindicesarebasedondifferentsamplesofcountries,itis not possible to compare the magnitude of thesecoefficientsinordertodeterminewhichpolicyareaisthemostimportantinrelationtoproductionnetworks.

So far, we have considered whether deep agreementsincrease trade in parts and components. The secondquestion noted at the start of this subsection waswhetherhigherlevelsoftradeinpartsandcomponentsincreasethelikelihoodofsigningdeeperagreements.Inorder to answer this, we follow the literature on thedeterminants of preferential trade agreements57 andestimateanequationinwhichthedepthofanagreementisnow thedependent variable tobeexplainedand theshareoftradeinpartsandcomponentsintotaltradeisincludedasanexplanatoryvariable.58

Results (see Appendix Table D.5) show that higherlevels of trade in parts and components relative tototal trade have a positive impact on the depth of anagreement. This effect is still significant after takingaccount of other PTA determinants, such as theeconomic similarity between countries and theirdifferencesinrelativefactorendowments.

(b) ASEAN:fromregionalizationtoregionalism

InSectionBof thisreport, referencewasmadetothelarge increase and regional concentration of trade inpartsandcomponentsinEastAsiainrecentyears.Thispattern is consistent with the findings of Ando andKimura (2005)andKimuraetal. (2007) forabroaderclass of products which they termed “machineryindustries”.59Theauthors link the largeshareof theseproductsinthetradeofEastAsiancountriestotheriseofinternationalproductionnetworksintheregion.

International production networks are not, of course,unique to East Asia. It is possible to identify suchnetworksinNorthAmerica(involvingAmericanfirmsandMexican maquiladoras) and in Europe (featuring, forexample, German car companies and Hungarian andCzechaffiliates).However,thereareatleastthreefactorsthatmaketheEastAsiannetworksdistinctive(AndoandKimura,2005).First, countries'manufacturingactivitiesand international trade are more intertwined. Secondly,the networks involve a large number of countries atdifferent levels of income. Thirdly, the networks includebothintra-firmandarm’slengthrelationships.

ASEAN was established in 1967 largely to deal withrisingterritorialtensionsamongsomeofitsmembers(theoriginalsignatorieswereIndonesia,Malaysia,Philippines,SingaporeandThailand),andwithpossiblespilloversfromthe conflict in Indochina. As a result, economic


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cooperation did not appear to be a priority until 1977,whenapartial-scopePTAwasestablished.However,thescheme only had a limited impact because of longexclusionlistsandlowpreferencemargins(CuyversandPupphavesa, 1996). It was not until 1992 that formaleconomic cooperation took a significant step forwardwhen themembersdecided tocreatea free tradearea.The initial goal was to reduce tariffs between membercountriestoarangeof0to5percentwithin15years,butthathorizonwassubsequentlyshortenedtotenyears.

Inthequarterofacenturythatspannedthecreationoftheassociationandthedecisionformallytoestablishafree trade area, a shift occurred in economic policyfromtraditionalimportsubstitutiontoexportpromotionandopennesstoFDI.Totalmerchandiseexportsofthefive original members expanded from US$ 8.9 billionin1967toUS$357billionin1992(seeTableD.4).Inparticular, exports of parts and components becameincreasinglyimportant,risingfromabout2percentoftotalexportsintheyearoftheAssociation'sfoundingto 17 per cent by the time the free trade agreementwassigned.

Equallytellingwastheincreasedprominenceofpartsandcomponentsinintra-regionaltrade.In1967,partsandcomponentsmadeuplessthan2percentofintra-regional trade and by 1992 accounted fornearly18percentofsuchtrade(seeFigureD.19).

In their description of East Asian production networks,AndoandKimuraarguedthatJapanesefirmshadalargerole in the development of these networks. They notethatby2000asmanyas80percentof theJapanesefirmsgoingabroadhadatleastoneaffiliateinEastAsia,and 54 per cent of the foreign affiliates of JapanesefirmswerelocatedinEastAsia(AndoandKimura,2005).

Complementary data from the Japanese ExternalTrade Organization (JETRO) show the large flow ofJapanese FDI to the original five ASEAN members.Between1967and1992,JapaneseFDItothesefivecountriesaveragedabout15percentofallitsoutflowsand 30 per cent of all Japanese FDI to developingcountries.60 Taking into account all sources of FDI,annual inflows to the five ASEAN countries grewsignificantlyduringthisperiod,startingfromlessthanabilliondollarsin1970toreachnearlyUS$13billionin1992.Theseflowsrepresenteda largeshareofallFDI going to developing countries, averaging morethanone-fifthduring the1970sand remainingaboveone-sixthinthe1980s(seeFigureD.20).

Whiletheincreasedregionalizationoftradeinpartsandcomponents would not have been possible withoutASEAN'sopennesstotradeandforeigninvestment,thismaynothavebeensufficientforproductionnetworkstoflourish. Production networks require low trade costs.Theyalsorequirepredictability ineconomicpolicy.EveniftariffswerebeingloweredbyASEANcountries,tradecosts could still be a problem because of inadequate

infrastructural services (such as transportation andtelecommunications)orbureaucraticredtape.

Asproductionnetworksexpand,theyresult ingreatereconomic integration. Differences in legal systemsand economic institutions among countries in suchareas as product and services standards, intellectual

TableD.4: AseAn-5 exports, 1967-92 (Milliondollars)

yearParts and

components exports

total exportsshare

(per cent)

1967 154.9 8,867.0 1.7

1970 235.1 12,213.7 1.9

1980 3,905.2 135,657.5 2.9

1990 38,562.2 276,095.8 14.0

1992 60,637.9 356,829.4 17.0

Source:CalculationsusingUNComtradedata.

Figure D.19: share of parts and components in intra-regional trade

Source:CalculationsusingUNComtradedata.

Intra-ASEAN P&C exports2 per cent

Intra-ASEAN P&C exports18 per cent

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property rights protection, investment protection, andaccess to dispute settlement mechanisms becomemore critical as a potential hindrance to productionsharing. To keep the momentum of productionnetworksgoing,countriesincreasinglyneededtoturntheirattentiontopoliciesbeyondtariffreduction.

Two recent papers by Pomfret and Sourdin(2009 and 2010) substantiate this view of the roleplayed by the ASEAN free trade area. They maintainthatASEANcountriesusedtheirPTAasavehicleforconcerted trade facilitationand that thedriving forcebehind these policies was the emergence ofinternational production networks and the desire ofASEAN governments to increase the efficiency ofthesearrangements.Progressinreducingtradecoststhrough improved customs administration and otherfacilitation measures benefits all trade and so gainsaccrue to members and non-members alike. It isthereforepossibletousetradecostsbetweenASEANmembersandcountrieswhoarenotpartiestothePTA(suchasAustralia)tomeasuretheimpactofASEAN'stradefacilitationinitiatives.

Pomfret and Sourdin find that the simple average ad valorem trade costs associated with the ten ASEANcountries'exportstoAustraliadeclinedfrom10.3percentin1990to3.9percentin2007,whichwasmuchmorepronouncedthanthedropintheglobalaverage.The results are similar if data from other countriessuchastheUnitedStatesorBrazilwereusedinstead.Theauthorsnotethatmostoftheobservedreductionin tradecosts relative to theglobalaverageoccurredbefore2002,whenASEANwasconstructing its freetrade area and there was little global movementtowardsimplementingtradefacilitationmeasures.

Anotherimportantelementthatmayhaveplayedarolein the creation of regional rules and institutions was

theexpansionofASEAN'smembership.Inthe1990s,fournewmembers,Cambodia,LaoPDR,MyanmarandViet Nam, acceded to the organization.61 Theeconomies of the new members were different fromthe older members both in terms of their stage ofdevelopment and their market orientation. Lao PDRandVietNamweresocialisteconomiesandCambodiawas just emerging from a long civil war. With theexception of Myanmar, none were GATT/WTOmembersatthattime.

The ASEAN Free Trade Area in 1992 was only thestart of thePTAprocess. Itwas followedby servicesand intellectual property agreements in 1995, aninvestment agreement and dispute settlementmechanism in 1996, and a framework agreement onmutual recognition arrangements for standards in1998. In sum, the trajectory followed by the ASEANPTA process began with the regionalization of tradeand production and culminated with the creation offormal regional rules and institutions to oversee athrivingandintegratedregionaleconomy.

The focus of this discussion on production networksandASEANisnotintendedtosuggestthatregionalismin South-East Asia is only about trade. As notedpreviously, the Association was partly intended tomanage territorial disputes among some of itsfoundingmembersandtocontainanyfalloutfromthewar in Indochina. With respect to these goals, theAssociation has outdone even its most optimisticexpectations. The region has been largely free ofmajor conflict since the end of the war in Indochina.The organization has played a key role in managingbig-power rivalries in East Asia. It has arguablyfacilitated the integrationofCambodia,LaoPDRandViet Nam into the international community. BothCambodiaandVietNamarenowmembersoftheWTO

FigureD.20: FDI flows to AseAn-5 and as share of FDI to developing countries, 1970-92

Source:UNCTADFDIdatabase(seehttp://unctadstat.unctad.org/).

1970

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andamongthefastestgrowingdevelopingeconomies.Lao PDR is in the process of accession to the WTO.As isthecaseofothersuccessfulmodelsofregionalcooperation,thecreationofregionalpublicgoodshasalsoproducedglobalbenefits.

(c) CostaRica

Productionnetworksareoftenassociatedmostcloselywith the Asia-Pacific region and Eastern Europe.Countries from other regions, however, may also beinvolved in international production networks wheretheyalsoplayapartintheprocessofPTAformation.

Monge-Ariño (2011)providesan insightfulaccountofCostaRica'stradepoliciesoverthepastfewdecades.The country has managed to combine an activeagenda in multilateral trade negotiations at the WTOwith the negotiation of several preferential tradeagreements. Its trade opening started in the mid-1980s with the unilateral reduction of import tariffsand continued with the accession to the GATT in1990. Further trade opening resulted from theUruguay Round (concluded in 1994) as well as fromPTAs negotiated with Mexico, Chile, the DominicanRepublic, Canada, the Caribbean Community(CARICOM), Panama, the United States, China,Singapore and the EU (see Table D.5). In addition,negotiations for a PTA with Peru began in 2010 andnegotiations for a PTA with South Korea areanticipated to begin in 2011. Costa Rica's policy oftrade opening has been accompanied by a strongemphasis on attracting FDI, particularly in high-techmanufacturingandservicesactivities.

These policies resulted in significant changes in thestructure of Costa Rica's exports, leading to asubstantialriseintheshareofmanufacturingexportsas well as trade in services in total exports, and adecrease in the dependence of the Costa Ricaneconomy on traditional export commodities, such ascoffeeandbananas(Echandi,2006).CostaRicaalsosaw an increase in its participation in internationalproduction networks, with 43 per cent of its totalmerchandise exports in 2009 directly related to fivemain supply chains: electronics, medical devices,automotive products, aeronautic/aerospace productsandfilm/broadcastingdevices(Monge-Ariño,2011).

OneofthepivotalmomentsinCostaRica'sinvolvementin international production networks came with thedecision by Intel in 1996 to establish a US$ 300million semiconductor assembly and test plant in thecountry(WorldBank,2006).ThevarietyofgoodsandservicesproducedinCostaRicaandexportedaspartofthesenetworksisrelativelywideforaneconomyofCostaRica'ssize.Theyrangefromcomputerpartsandmedicalequipmenttopartsforcarsandairplanes,andservices such as the design of turbines for airplanesand the first ever plasma-propelled engine for spaceshuttles.

The overall average for the domestic component ofexports associated with production networks was36 per cent in 2009, ranging from 72 per cent inaeronautics/aerospace to 22 per cent in electronics(Monge-Ariño, 2011). The joint contribution of labourandcapitaltothedomesticcomponentofexportswas40percentin2009,whilelocallyprovidedservicesandsuppliesaccountedforalmostone-sixthandone-tenth,

TableD.5: Costa Rica’s preferential trade agreementsPtA Current partners entry into force

CACMElSalvador,Guatemala,Honduras,Nicaragua

23September1963

CostaRica–Mexico Mexico 1January1995

CostaRica–Chile Chile 15February2002

CostaRica–DominicanRepublic DominicanRepublic 7March2002

CostaRica–Canada Canada 1November2002

CostaRica–CARICOM

Trinidad&Tobago 15November2005

Guyana 30April2006

Barbados 1August2006

CostaRica–Panama Panama 24November2008

CAFTA-DR-USUnitedStates,ElSalvador,Guatemala,Honduras,Nicaragua,DominicanRepublic

1January2009*

CostaRica–China China **

CostaRica–Singapore Singapore **

AACUE EU–27 ***

* ThisdatereferstowhentheagreemententeredintoforceforCostaRica.** Negotiationfinishedinearly2010andsubmittedforlegislativeapproval;entryintoforceexpectedin2011.***Negotiationcompletedinearly2010;legal“scrubbing”isexpectedtobecompletedinearly2011.

Source:Monge-Ariño(2011).


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respectively. The contribution of capital is moresignificantintheelectronicssector,whiletherespectivecontributionsoflabourandlocallyprovidedservicesaremoresignificantintheaeronautic/aerospacesector.

The link between production networks and PTAsseems apparent in Costa Rica's agreements with theUnited States (United States-Dominican Republic-Central America Free Trade Agreement) and withChina.62 The share of parts and components in totaltrade, a customary indicator of production sharing,rose rapidly with both countries between 1995 and2008. While total two-way trade with the UnitedStatesgrewbyabout11percentannually,TableD.6shows that parts and components trade expanded atabouttwicethatrate.

Alongwiththestrongtradeperformancebetweenthetwocountries,USFDIflowsrosemorethaneighteen-

foldbetween1982and2008,fromUS$142milliontoUS$2.6billion (seeFigureD.21).Asaconsequence,Costa Rica's share of US FDI to Central America63climbedfromlessthan3percentin1982toabout20percentin2008.

TurningtoCostaRica'slinkswithChina,two-waytradegrewbyanannualaveragerateofnearly30percentbetween 1995 and 2008, while trade in parts andcomponents grew at more than twice that rate (seeTableD.7).Overall,tradeinpartsandcomponentsnowmakeupabouthalfofCostaRica'stradewithChina.

These facts are consistent with the explanation thatCosta Rica's participation in international productionnetworks was an important trigger for its tradeagreementswiththeUnitedStatesandChina.

TableD.6: Costa Rica’s two-way trade with the united states, 1995-2008 (Milliondollars)

Items 1995 2008Average annual growth

(Per cent)

Parts&components 209.3 2,600.6 21.4

Allmerchandisegoods 2,537.6 9,571.4 10.8

Shareofpartsandcomponents(%) 8.2 27.2

Source:UNComtrade.

TableD.7: Costa Rica’s two-way trade with China, 1995-2008 (Milliondollars)

Items 1995 2008Average annual growth

(Per cent)

Parts&components 1.1 694.2 64.2

Allmerchandisegoods 50.1 1,478.4 29.7

Shareofpartsandcomponents(%) 2.2 47.0

Source:UNComtrade.

FigureD.21: Costa Rica’s share of us FDI flows to Central America, 1982-2008

Source:USDepartmentofCommerce,BureauofEconomicAnalysis.

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4. Africanregionalcooperation:lessonsfromdeepintegration?64

NotallPTAsarepromptedbyinternationalproductionnetworks and the trend towards deep integration.African regional cooperation is a case in point. Deepintegrationmayneverthelessholdsomeusefullessonsthat can increase the returns from the process ofAfricanintegration.Muchofthesubsequentdiscussionwill refer to the experience of Sub-Saharan Africa.Hence it is essential not to lose sight of efforts bycountriesinNorthAfricatointegratewithoneanotherorwiththerestofthecontinent.EffortsatintegrationinNorthAfricaincludetheAgadiragreement(ofwhichJordan, a Middle Eastern country, is also a member)and the Arab Maghreb Union (AMU), which wascreated as the North African building block of thecontinent-wideAfricanEconomicCommunity.

ThegeopoliticalconfigurationofAfricahasbeenlargelydetermined by the political forces of colonialism. ThebordersofAfricancountriesdemarcatedthecoloniesofthe European powers, not the emergence of nationstatesinAfrica.Afragmentedcontinentistheresult,withsmallmarkets, smalleconomies,anda largenumberoflandlocked countries significantly limiting developmentoptions. Fragmentation is associated with the lack ofeconomiesofscaleintheproductionanddistributionofgoodsandservicesandtheimpactofscaleonthecostof public goods. In the early years of independence,attentionfocusedstronglyontheneedtoovercometheproblems of scale and fragmentation. Continentaleconomic and political unification was accepted as arational response in order to create a larger economicspaceforindustrializationandeconomicdevelopment.

This was an era of economic planning, and Africa’sleadership believed that economic planning would bemore practicable at a regional, and ultimatelycontinental, level. Underpinning this policy approachwastheconvictionthatthepathtodevelopmentwouldbe industrialization, and diversification away fromreliance on primary commodity production. Theindustrialization-regionalintegrationlinkswereclear.Alarger, protected market would provide the space forviableindustrializationtoreplacecertainimports.Thiswasatthetimeawell-acceptedstrategyfordevelopingcountries. Theaimwas toestablishabroad rangeofindustries across different sectors. Economicunification was seen as a solution to Africa’sdevelopment dilemma, and political unification wasrequired to make economic integration work. Morerecent experience has confirmed that politicalconsiderations are also key drivers of many Africanintegration arrangements. However, even in thesecases, regional integration remains a politicalarrangementthatmustbejustifiedineconomicterms.

Theambitionof regionaleconomic integrationand thecommitment to develop through industrialization were

important during the first decades of independence,and thisprovided themotivation for theLagosPlanofAction (LPA). The LPA was an initiative of theOrganisationofAfricanUnity(OAU),adoptedbyHeadsof State in April 1980, and actively supported by theUnitedNationsEconomicCommissionforAfrica(ECA).

The LPA emphasized the expected contribution ofindustrialization and the 1980s became the “IndustrialDevelopmentDecadeinAfrica”.Theproposedframeworkfor industrializationwasthedivisionofthecontinentintoregionalintegrationareasthatwouldeventuallyconstitutea united African economy, the African EconomicCommunity. To achieve this, the ECA supported threeregional integration arrangements: i) the EconomicCommunityofWestAfricanStates(ECOWAS),whichwasestablishedin1975,predatingtheLPA;ii)thePreferentialTrade Area (PTA) covering East and Southern Africa,which was the precursor of the Common Market forEastern and Southern Africa (COMESA); and iii) theEconomicCommunityofCentralAfricanStates(ECCAS).The Arab Maghreb Union was established in 1989,completingthecoverageofthecontinent.

Apartheid South Africa was at this stage still excludedfrom theAfrican integrationplan.TheSouthernAfricanDevelopment Coordination Conference (SADCC) wasestablished in1980,supportedby theEuropeanUnion,withthespecificaimofreducingeconomicdependenceon South Africa. SADCC was not a market integrationarrangement.ItsbroaddevelopmentmandatefocusedonregionalcooperationtoensureindependencefromSouthAfrica for countries that were known as the frontlinestates.65 As such, SADCC focused on cross-border,sector-specific projects, such as regional developmentcorridorsandtheSouthernAfricanPowerPool.

In anticipation of South Africa’s democratic transition,SADCC was transformed into the Southern AfricanDevelopment Community (SADC) in 1992. South AfricajoinedSADCin1994,thusbecomingpartofthecontinentalintegrationplan.IncontrasttoSADCC,SADCadoptedanexplicitmarket integrationagendaandisagoodexampleof a linear model of progressive integration in Africa.Although the SADC Treaty (and subsequently the SADCTrade Protocol) does not articulate a detailed plan forintegration, the detail was provided in the RegionalIndicative Strategic Development Plan of 2003. Thisstrategicplanprovidesfortheestablishmentofafreetradeareaby2008,acustomsunionin2010,acommonmarketin2015,monetaryunionin2016andtheintroductionofasinglecurrencyin2018.66Thisapproachwasalsoadoptedby the East African Community (EAC), established in199967andalsobyECOWASinWestAfrica.ProgressinECOWAStoestablishafreetradeareahasbeenveryslowandthecustomsunionisstillworkinprogress.

The SADC roadmap and the EAC integration planreflect the general trend in Africa to adopt a linearmodelofprogressiveregionalintegration,characterizedby ambitious targets. Of 14 regional economic


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communities that existed in 2001, nine have a fulleconomicunionasthespecifiedobjective,oneaimstobecome a common market (COMESA), one is anestablishedcustomsunion(theSouthAfricanCustomsUnion) with no plans to move beyond this, while theremaining three aim for intra-regional free trade orregional cooperation.Theseagendasshare theaimoftransforming the African economic landscape andestablishing “a strong united bloc of nations” over aperiodofjustmorethanthreedecades.

An important step in this process requires thestrengtheningofthebuildingblocksofregionaleconomiccommunities. This involves an evolutionary process,moving from free trade areas and customs unions to acommon market covering the continent (EconomicCommission for Africa, 2004). The member states ofCOMESA,SADCand theEAChaveundertaken recentcommitments to establish a Tripartite Free Trade Areaconsistingofthe26memberstatesoftheseagreements.This is seen as an important step in addressing theproblem of overlapping membership, a key feature ofAfricanregionalintegrationagreements.68

African regional integration focuses primarily onreducing barriers to trade in goods. Trade in servicesbecomes a feature of the regional integration modelwhenthecommonmarketstageisreached,buttodateservices have received very little attention in formalAfrican integration arrangements. This is also true offorays by African countries into preferential tradeagreements with external partners. The inclusion ofservices(andalsootherbehind-the-borderissues,suchas investment, competition policy and governmentprocurement)hasprovencontentious.

Africa’s regional integration initiatives have achievedlimited results, raising doubts about the approachadoptedtoaddressingfactorsthatinhibitregionaltrade.Barrierstotradethatraisethecostsofdoingbusinesscan be classified as border or behind-the-bordermeasures. African regional free trade arrangementshave focused on border measures, and primarily ontariffs. Tariffs are undeniably an important barrier buttheymaynotbethemostimportantone.

Abundant anecdotal evidence suggests that time-consuming and inefficient border procedures may bemore important than tariffs in inhibiting intra-regionaltrade.Multiplebordercrossingsforgoodstoreachland-lockedcountriesaddsignificantlytothetransactioncostsof intra-regional trade. Many other constraints besidesborder barriers increase the transaction costs of trade.Geography is an important consideration. Given thelimitedavailabilityofnavigableinlandwaterwaysandthecheaptransportthisallows,thelogisticalcostsoftradeingoodsarehigh.Thisisexacerbatedbypoorlydevelopedtransport systems, characterized by low per capitadensitiesofrailandroadtransportinfrastructure,whichincolonialtimeswasdesignedtotransportprimaryproductstoport.Poorlydevelopedcross-countryroad,airandrailconnectionsaretheoutcome(McCordetal.,2005).

Transport costs in Africa are still among the world’shighest. For example, shipping a car from Japan toAbidjan costs US$ 1,500 whereas the comparablecost for transporting thesamecar fromAddisAbabato Abidjan would be US$ 5,000 (EconomicCommissionforAfrica,2004).Bothinfrastructuralandregulatory forces are at work. Overall, the high costand unreliability of transport services contribute to abusiness environment in which firms are forced tokeep higher levels of inventories, ruling out thepossibility of adopting cost-saving managementsystemsfor“justintime”production(Collier,2000).

Thelackofskillsandcapitaltoestablishandoperatemoderncommunicationsystems,combinedwithsmallbusiness communities that do not allow financiallyviablebusinesspublications,meanthatbusinessnewsandinformationrequiredforinformeddecision-makingisanotherimportantconstraint.69Fixed-linetelephoneservices are limited and unreliable, with high callcharges, especially for international calls. In mostAfrican economies the provision of fixed-line phoneservices is still the exclusive preserve of publicmonopolies.Businesscontractsrequireinformationoncomparative prices and depend on reliable, fast andlow-cost access to market information. Information isessential to efficient market outcomes, and a lack ofreadily available information at reasonable cost willraise trade transactioncosts.Although thesebarriersalso constrain trade with the rest of the world, theirimpactonintra-regionaltradeisparticularlyimportant.

The barriers discussed so far feature strongly on thedemand side of intra-regional trade. These demand-side factors, however, may arguably be much lessimportant than the weak supply-side capacity ofAfricaneconomies. Indeed, itmaybeargued that thereal problem facing African economies is not marketaccess (borderconstraints)but rather thecapacity toproducetradableproductscompetitively.

Expandingmarketaccessby loweringthetransactioncosts of trade is necessary, but will not guaranteeeconomicgrowthanddevelopment.Enhancedmarketaccess without the capacity to produce goods andservicestobenefitfromthoseopportunitieswillfailtoproduce higher economic growth. Effective supply-side capacity depends on sound macroeconomic andmicroeconomic policies, good governance, well-developed institutional capacities, adequateinfrastructure and a sound business environmentcapableofattractinginvestment.

Supply-side constraints to efficient production couldbe partly addressed by a deep regional integrationagenda. No single, ready-made recipe exists foreffectivedeepregionalintegration.Amongthefactorsrelevant toAfricaare integrationofservicesmarkets,tradefacilitation,improvedmarketintelligence,disputesettlement mechanisms, revenue systems lessdependent on trade taxes, funding for cross-border


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infrastructure, and financing for regional institutions(Lamy,2010).Developmentpartnersandinternationalinstitutions could assist this process by recognizingthattheemergenceofregionalgroupingsisrelevanttothe planning and implementation of developmentassistance. The WTO, for its part, is progressivelyregionalizing its Trade Policy Reviews and is nowencouragingtheregionalizationofAidforTrade,whichaims to help developing countries develop the trade-related skills and infrastructure needed to implementandbenefitfromtradeagreementsandtoexpandtheirtrade.

5. Conclusions

While not discounting other explanations for PTAs, acentralfocusoftheliteratureonthissubjecthasbeenonpreferentialtariffs.Asaconsequence,muchoftheeconomic analysis of the effects of PTAs hasconcentratedonthetrade-creationandtrade-diversionimpactsofdiscriminatoryaccesstoindividualmarkets.

The analysis in this section demonstrates that PTAsare not only about lowering tariffs. Ample evidenceshowsthatcommitmentsinPTAscoveralargenumberofnon-tariffpolicyareasandhavebecomedeeper.Asfaras tariffsareconcerned, theproliferationofPTAshas eroded preference margins over time. If tariff-related reasons do weigh with countries engaged innegotiating PTAs, they may be more concerned withavoiding negative discrimination than securingpreferential tariffs. Furthermore, there is evidence –bothstatisticalandthroughcasestudies–ofaroleforproductionnetworksinPTAformation.

Two importantconclusionsfollowfromtheanalysis inthissection.First,researchneedstofocusincreasinglyon the reasons for establishingPTAs thatgobeyondthe reductionof tariffs.Secondly, further reflection isneededontheimplicationsforthemultilateraltradingsystemofdeeper integration inPTAs. This andotherquestions bearing on coherence between PTAs andthe multilateral trading system are the subject of thenextsectionofthisreport.


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Endnotes1 SeeWorldTradeOrganization(WTO)(2007).

2 Startingfromatheoreticalmodelofintra-industrytrade,AndersonandvanWincoop(2003)derivedagravity-typereducedformequationforthebilateraltradebetweentwocountries,wheretradebetweentwocountriesdependontheirgrossdomesticproducts(GDPs)andtheirrelativetradecosts.Inparticular,theyshowthatinatheoreticallyfoundedgravityequation,tradebetweentwocountries,AandB,whereAistheimporterandBistheexporter,dependsnotonlyontheirbilateraltradecosts,butalsoontheoveralllevelofbarriersthatexportsofcountryBfaceintherestoftheworld,andtheoveralllevelofrestrictiontoimportsthatcountryAimposesontherestoftheworld.

3 AsimilarapproachhasbeenusedbyHoekmanandNicita(2008)andCarrèreetal.(2008).

4 TheestimateisbasedonastandardgravitymodelaugmentedbytheRPMindex.

5 Recallthatover70percentistradedatanMFNratebelow5percentandlessthan15percentoftradeshowsrelativepreferencemarginsgreaterinabsolutevaluesthan2percent.

6 SeeKuijper(2010).

7 SeeHsu(2006).

8 SeeKuijper(2010).

9 SeeHsu(2006).

10 SeevanDamme(2006).

11 SeeKwakandMarceau(2006);Hillman(2009).

12 SeeKwakandMarceau(2006).

13 SeeHornetal.(2010).

14 ASEAN-ChinaandMERCOSUR-India.

15 Thisfigureiscurrentasof1March2011,countingnotificationsforagreementsthatarecurrentlyinforce.

16 ThefourmodesforsupplyingservicesunderGATSincludecross-bordertrade(mode1),consumptionabroad(mode2),commercialpresence(mode3),andtemporarymovementofnaturalpersons(mode4).

17 ExamplesofagreementsusingtheGATSapproachinclude,forexample,MERCOSURandAFAS(ASEANFrameworkAgreementonServices).

18 TherestoftheagreementsnotifiedunderGATSArticleVareagreementsthatdonoteasilyfitintotheGATS-typeornegative-listcategoriessincetheyaimatdeepregionalintegration,suchasagreementsbetweentheEUandEUcandidatecountries.

19 MostUnitedStatesPTAs,includingallthosenotifiedafter2003,donotincludeaseparatechapterontemporaryentryforbusinesspersons.

20 Forexample,anumberofmorerecentagreementshaveusednegative-listmodalitiesforamarketaccessobligationmodelledonGATSArticleXVIthatappliestoallmodesofsupply.InNAFTA,thereisnobindingobligationalongthelinesofGATSArticleXVI,whileinGATS-typeagreementssuchobligationsapplyonthebasisofapositive-listapproach.SeeRoyetal.(2007).

21 SeeMattooandSauvé(2010).

22 FororiginalWTOmembers,thesearethecommitmentsmadeintheperiod1995-97.

23 SeeRoyetal.(2007)and(2008);MarchettiandRoy(2008b),FinkandMolinuevo(2008a)and(2008b),Miroudotetal.(2010).

24 OnthatseeMattooandWunsch-Vincent(2004).

25 SeeRoyetal.(2007).

26 FiguresinthissectionrelyonanextensionofthedatasetusedinRoyetal.(2007),Royetal.(2008),andMarchettiandRoy(2008b).Itcovers68PTAsinvolving53WTOmembers(countingtheEU-15asone).ThelistofWTOmembers(andtheiracronyms)andthesetofservicesagreementscoveredcanbefoundinAppendixTablesD.2andD.3respectively.ThisincludesPTAsnotifiedunderArticleVoftheGATSbetween2000and2010,aswellasafewPTAsthathavebeensigned,buthavenotyetenteredintoforceandbeennotified.ForeachpartytoeachPTA,thecommitmentsundertakenformarketaccessandnationaltreatmentineachservicesub-sectorhavebeencomparedtothoseundertakenintheGATSandthoseproposedinthemostrecentGATSofferintheDDA.Thedatasetcoversmode1(cross-bordersupply)andmode3(commercialpresence),andlooksatcommitmentsthatareGATS+.Furtherinformationonthedatacanbefoundat:http://www.wto.org/english/tratop_e/serv_e/dataset_e/dataset_e.htm

27 SeeMarchettiandRoy(2008b).

28 Asnotedpreviously,anegativelistidentifiessectorsormodesinrespectofwhichcommitmentsdonotapply,whileapositivelistapproachdoesthereverse.

29 SeeFinkandMolinuevo(2008b),Royetal.(2007).

30 FortheimpactofregimetypeonPTAs,see,amongothers,Mansfieldetal.(2008).Roy(2010)looksattheimpactofdemocracyonlevelsofGATScommitments.

31 See,forexample,ChaudhuriandKarmakaronvariousbusinessservices,Zhangonpostalandcourierservices,Marchettionfinancialservices,RoyonaudiovisualanddistributionservicesorTuthillontelecommunicationservicesinMarchettiandRoy(2008a).Commitmentsoneducationandprofessionalservices,amongothers,arealsoexaminedinRoyetal.(2008).

32 SeeCarzaniga(2008).

33 SeeStephensonandDelourme,(2010).SeealsoSauvéandWard(2009)ontheEU’smode4commitmentsinthePTAwiththeCARIFORUM.

34 SeeMiroudotetal.(2010);FinkandMolinuevo(2008b).

35 SeeAdlungandMolinuevo(2008),Bergeretal.(2010).

36 SeeAdlungandMorrison(2010).

37 SeeUNCTAD(2010).

38 Seehttp://www.unctadxi.org/templates/Page____1007.aspx.

39 Houdeetal.(2007)referstotheformeras“GATS-inspired”agreementsandtothelatteras“NAFTA-style”agreements.

40 Analternativetothetotalnumberofprovisionsisamethodthat“scores”thevariousprovisionsintheinvestmentchapterforthecommitteddegreeofopenness.SeeforexampleDeeetal.(2006).


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41 Additionalinformationhasbeencollectedontheexistenceofmutualrecognitionarrangements.

42 SeeRauchandTrindade(2002)foranassessmentoftheimportanceofinformationcostsfortrade.

43 SeeCollinsandRodrik(2000).

44 Theextraterritorialapplicationofcompetitionpolicymayraisesovereigntyconcerns.Statesmaypreferengagementinthisareathroughdiscussionandpoliticalnegotiation.Anotherpossibleexplanationforthesecarve-outsfromdisputesettlementisthatcompetitionprovisionsarenewtosomePTAmembers,particularlydevelopingcountries.Whiledevelopingcountriesmightbewillingtoacceptcompetitionpolicyprovisions(e.g.implementcompetitionlaw,establishacompetitionauthority,oractonanti-trustandabuseofdominantposition),theymaybeuncertainabouthowquicklyorhowsuccessfullytheycanfullyimplementthesecommitments.

45 SeetheanalysisinSectionCwhichdemonstrateswhy,undercertainconditions,trade-diversioneffectsareabsentwhenregulatorybarriersareremovedinPTAs.

46 SeeRavenhill(2009)andRavenhill(2010)forascepticaltakeonthisinterpretationofEastAsianintegration.HearguesthattheprimarymotivationfortradeagreementsinEastAsiahasbeentosecurediplomaticorstrategicgains.

47 SeestudiessuchasBaierandBergstrand(2007),SilvaandTenreyro(2006),SoloagaandWinters(2001),GhoshandYamarik(2004),Aitken(1973),Bertstrand(1985),Frankel(1997)andFrankeletal.(1995).

48 ThisanalysisdrawsonOreficeandRocha(2011)(forthcoming).

49 Principalcomponentanalysisisamathematicalprocedurethatorthogonallytransformsanumberofpossiblycorrelatedvariables–inourcasethedifferentprovisionsincludedinanagreement–intoanumberofuncorrelatedvariablescalledprincipalcomponents.Thetransformationisdefinedinsuchawaythatthefirstprincipalcomponentaccountsforthehighestlevelofvariabilityinthedata.Eachsucceedingcomponentinturnhasthehighestvariancepossibleundertheconstraintthatitbeorthogonal(thatis,uncorrelated)totheprecedingcomponents.

50 FordetailsonhowtheindexonTBTshasbeenconstructedseeSectionD.2.Theindexoncompetitionpolicyisbuiltastheunweightedsumofthreedifferentelements.Thefirstelementfocusesonthegeneralobjectivesofanagreement.Thiselementtakesthevalueofonewhenevertheseobjectivespromoteandadvanceconditionsoffaircompetitionbetweenpartiesorestablishcooperationbetweentheminthisfieldandzerootherwise.Thesecondelementrepresentsthecountofthetotalnumberofcompetitionrelatedprovisionsthatarepresentbothinthecompetitionpolicychapterandinothersectionsofanagreementsuchasinvestmentandservices.Thethirdelementcountsthenumberofhorizontalprinciplessuchtransparency,non-discriminationandproceduralfairnessthatareincludedintheagreement.

51 SeeTeh(2009)andPiermartiniandBudetta(2009).

52 Gravityequationsarederivedfrommodelsthatseektoexplainorpredicttherelationshipbetweenaparticular(dependent)variable(inthiscasebilateraltradeinpartsandcomponents)andasetofother(independentorexplanatory)variableswhosevaluescanbeestimated(inthiscaseelementsofdeepintegration).

53 Endogeneityariseswhenanexplanatoryvariableinanequationiscorrelatedwiththeerrortermoftheequation,andtheerrortermistheunexplaineddeviationofsampledatafromtheirunobservable“true”value.StudiessuchasBaierandBergstrand(2007)showthatomittedvariables,andtoalesserextentsimultaneity,arethetwomostimportantsourcesofendogeneitybiascausedbyPTAs.TheomittedvariablesproblemofPTAsarisessincetheerrortermmayretaintheeffectofsomeunobservablecountry-specificpolicyvariables,whichatthesametimeaffectbothtradeandtheprobabilityofformingaPTA.If,forexample,theformationofaPTAalsoinducesreformsintrade-restrictivedomesticregulation,thelikelihoodofanFTAishigher(sincetheexpectedgainsfromtheFTAarehigher),andtheomissionofthedomesticregulationvariablewillbiasthePTAcoefficientdownwards.Asimultaneityproblemcanarise,forinstance,whengovernmentsoftwocountriesthattrademorethantheir“natural”leveloftrademaybeinducedtoformaPTA,asthereislessprobabilityoftradediversion.Inthiscase,thePTAcoefficientswillbeupwardbiased.

54 Specificallyweestimateafixed-effectgravityregression:In(xijt )= aij + ait + ajt + β1(PTAijt * DEEPNESSij )+ εijt wherexijtrepresentstheimportsinpartsandcomponentsfromcountryitocountryjintimet;αijarefixedeffectscapturingcountry-pairspecificvariablessuchasdistanceorthefactthatcountriessharethesameborderorthesamelanguage;αitandαjtarereporterandpartnertimespecificfixedeffectsandcapturefactorssuchasthesizeofacountryoritsmultilateraltraderesistance.β1 isthecoefficientofourinterestanditcapturestheeffectofdeepintegrationontrade.Finally,εijtistheerrorterm.

55 Foradescriptionoftheprosandconsofalternativemeasuresofinternationalfragmentationofproduction,seeWorldTradeOrganization(WTO)(2008),Box14.

56 ForaclassificationofgoodsbelongingtothecategorypartsandcomponentsseeSectionB.3

57 SeepaperssuchasBaierandBergstrand(2004)andBergstrandetal.(2010).

58 Specificallyweregressthefollowingequation:DEPTHij = a + β1(PC_shr)ij + β2Xij + εij wherePc_shrijistheaverageshareoftradeinintermediatesovertotaltradebetweencountriesiandjbetween1980andtheyearbeforetheagreementissignedandXisavectorofcontrolvariablesfortheeconomicdeterminantsofPTAsas(i)theeconomicsizeoftheinvolvedcountries(representedbythesumofthelogsofrealGDPofthetwocountries,GDPSUM);(ii)theeconomicsimilaritybetweenthetwocountries(representedthelogoftheproductofcountryishareofbothcountries’realGDPwithcountryjshare);(iii)thedifferenceintherelativefactorendowments(representedbytheabsolutevalueofthelogdifferencebetweencountries’percapitaGDP,GDPDIF);(iv)itssquarevalues(SQGDPDIF);(v)distanceand(vi)remoteness.

59 Includedinthiscategoryareindustriesthatmanufacturegeneralmachinery,electricalmachinery,transportequipment,andprecisionmachinery.

60 Forthisspecificcalculation,developingcountriesaredefinedasallcountrieslessAustralia,NewZealand,Canada,theUnitedStates,theEuropeanFreeTradeAgreement(EFTA)membersandEC-9(France,Germany,Italy,UnitedKingdom,Ireland,Denmark,Belgium,LuxembourgandNetherlands).

61 VietNamdidnotbecomeamemberuntil1995.LaoPDRandMyanmarbecamemembersin1998;whileCambodiabecameamemberin1999.


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62 Onecannot,ofcourse,discountthepossibilitythatothermotivationsmayhavealsoplayedarole.GriswoldandIkenson(2004),forinstance,havearguedthattheCAFTA-DR-USagreementenhancesimportantUSforeignpolicygoalsinaregionthathasexperiencedseverecivilstrifeintherecentpast.

63 CentralAmericaincludesBelize,CostaRica,ElSalvador,Guatemala,Honduras,NicaraguaandPanama.

64 ThisdiscussionisbasedonHartzenberg(2011).

65 Angola,Botswana,Lesotho,Malawi,Mozambique,Swaziland,Tanzania,ZambiaandZimbabwe.

66 Thefreetradeagreementadoptedin2008hasnotyetbeenfullyimplementedandataministerialtaskforcemeetinginMarch2010itwasdecidedtopostponetheestablishmentofthecustomsunion,withoutcommittingtoaspecificdeadline.

67 TheEACwasfoundedwhenthepresidentsofKenya,TanzaniaandUgandasignedtheCommunity’streatyin1999.BurundiandRwandahavesincejoinedtheEAC.AprotocoltopreparethewaytowardsacustomsunionwassignedinMarch2004,andacommonmarketprotocolwassignedinJune2010.ThecurrentEACisarevivalofanearlierpost-independencearrangement,alsotheEastAfricanCommunity,whichwasinitiatedbytheEastAfricanTreatyforCooperationsignedin1967.ThisEACcollapsedin1977.

68 AtripartitesummitoftheHeadsofStateandGovernmentofCOMESA,SADCandEACcountrieswasheldinKampala,Uganda,on22October2008.TheSummitapprovedtheexpeditiousestablishmentofafreetradeareaencompassingthememberstatesofthethreeagreements.IntegratingthethreeregionalcommunitiesisseenasanimportantstepinbuildingtheAfricanEconomicCommunityenvisagedintheAbujaTreaty.

69 CollierandVenables(2008)makethepointthatlargesocietiescanbebetterinformedthansmallsocietiesbecauseoftheexistenceofscaleeconomiesinthecommercialmedia.TheymentionthatinAfricaonly“SouthAfricacomesanywhereclosetoprovidingamarketinwhichspecialistjournalsareviable”.


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AppendixTableD.1: List of PtAs and results of Hms mapping

PtADate of

entry into force

member

number of provisions

Wto+ Wto-xWto+

Leg. enf.Wto-x

Leg. enf.

ANDEANCommunity 25-May-88 Developing 4 11 3 3

ASEANfreetradearea 28-Jan-92 Developing 2 0 2 0

ASEAN-Australia-NewZealand

01-Jan-10 Developed-Developing 11 8 11 5

ASEAN-India 01-Jan-10 Developing 9 0 8 0

ASEAN-Korea,Rep.of 01-Jan-10 Developing 12 11 11 8

Australia-NewZealand 01-Jan-83 Developed 8 2 6 1

Australia-Singapore 28-Jul-03 Developed-Developing 13 8 12 7

Australia-Thailand 01-Jan-05 Developed-Developing 14 8 13 5

CAFTA-DR-US 01-Mar-06 Developed-Developing 13 6 13 6

CEFTA 01-May-07 Developed-Developing 13 3 13 3

CIS 30-Dec-94 Developing 9 0 9 0

COMESA 08-Dec-94 Developing 10 19 7 4

Canada-EFTA 01-Jul-09 Developed 11 2 10 1

Canada-Peru 01-Aug-09 Developed-Developing 13 7 11 5

Chile-Australia 06-Mar-09 Developed-Developing 13 9 13 6

Chile-China 01-Oct-06 Developing 11 20 8 12

Chile-Japan 03-Sep-07 Developed-Developing 14 6 14 3

Chile-Korea,Rep.of 01-Apr-04 Developing 14 7 13 6

China-ASEAN 01-Jan-05 Developing 6 1 4 0

China-HongKong,China 01-Jan-04 Developing 5 3 5 0

China-NewZealand 10-Oct-08 Developed-Developing 13 8 13 8

China-Pakistan 01-Jul-07 Developing 9 2 9 2

China-Peru 01-Mar-10 Developing 12 13 12 2

China-Singapore 01-Jan-09 Developing 10 6 10 4

CommonEconomicZone 20-May-04 Developing 12 5 12 2

EAEC 08-Oct-97 Developing 6 8 6 8

ECEnlargement(12) 01-Jan-86 Developed 6 15 6 14


ECEnlargement(25) 01-May-04 Developed 8 16 8 16


TreatyofRome 01-Jan-58 Developed 10 12 10 9

EU-Albania 01-Dec-06 Developed-Developing 11 31 10 8

EU-Algeria 01-Sep-05 Developed-Developing 9 27 8 5

EU-BosniaHerzegovina 01-Jul-08 Developed-Developing 9 2 9 2

EU-CARIFORUM 01-Nov-08 Developed-Developing 13 14 13 7

EU-Cameroon 01-Oct-09 Developed-Developing 11 5 7 2

EU-Chile 01-Feb-03 Developed-Developing 13 27 13 4

EU-Croatia 01-Mar-02 Developed-Developing 12 29 10 4

EU-Côted'Ivoire 01-Jan-09 Developed-Developing 8 4 6 0

EU-Egypt 01-Jun-04 Developed-Developing 10 25 9 3

EU-FYRMacedonia 01-Jun-01 Developed-Developing 12 29 10 5

appendix tables


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AppendixTableD.1: List of PtAs and results of Hms mapping (continued)

PtADate of

entry into force

member


Wto+ Wto-xWto+

Leg. enf.Wto-x

Leg. enf.

EU-FaroeIslands 01-Jan-97 Developed 5 2 5 1

EU-Iceland 01-Apr-73 Developed 6 1 6 1

EU-Jordan 01-May-02 Developed-Developing 13 20 9 5

EU-Lebanon 01-Mar-03 Developed-Developing 8 3 8 2

EU-Montenegro 01-Jan-08 Developed-Developing 11 2 10 2

EU-Morocco 01-Mar-00 Developed-Developing 10 18 9 4

EU-Norway 01-Jul-73 Developed 6 1 6 1

EU-OverseasTerritories 01-Jan-71 Developed-Developing 8 17 7 6

EU-PalestinianAuthority 01-Jul-97 Developed-Developing 11 20 8 3

EU-SouthAfrica 01-Jan-00 Developed-Developing 10 26 8 2

EU-SwitzerlandLiechtenstein

01-Jan-73 Developed 6 1 6 1

EU-Syria 01-Jul-77 Developed-Developing 4 4 4 1

EU-Tunisia 01-Mar-98 Developed-Developing 11 20 9 4

EU-Turkey 01-Jan-96 Developed-Developing 10 4 9 3

ECOWAS 24-Jul-93 Developing 7 13 5 3

EFTA-Israel 01-Jan-93 Developed-Developing 9 4 8 2

EFTA-Korea 01-Sep-06 Developed-Developing 13 4 13 4

EU-SanMarino 01-Apr-02 Developed 4 3 4 1

EU-Serbia 01-Feb-10 Developed-Developing 9 3 9 2

GCC 01-Jan-03 Developing 5 8 4 4

India-Singapore 01-Aug-05 Developing 11 7 11 5

Japan-ASEAN 01-Dec-08 Developed-Developing 9 10 9 10

Japan-Indonesia 01-Jul-08 Developed-Developing 9 8 9 4

Japan-Malaysia 13-Jul-06 Developed-Developing 10 6 10 5

Japan-Mexico 01-Apr-05 Developed-Developing 12 9 12 9

Japan-Philippines 11-Dec-08 Developed-Developing 11 8 9 5

Japan-Singapore 30-Nov-02 Developed-Developing 12 7 11 3

Japan-Switzerland 01-Sep-09 Developed 12 8 12 7

Japan-Thailand 01-Nov-07 Developed-Developing 9 9 9 4

Japan-VietNam 01-Oct-09 Developed-Developing 12 5 12 4

Korea,Republicof-India 01-Jan-10 Developing 14 11 13 4

Korea,Republicof-Singapore

02-Mar-06 Developing 12 9 12 4

MERCOSUR 29-Nov-91 Developing 9 3 9 3

MERCOSUR-India 01-Jun-09 Developing 7 0 7 0

NAFTA 01-Jan-94 Developed-Developing 14 8 14 7

PAFTA 01-Jan-98 Developing 2 0 2 0

RussianFederation-Ukraine

21-Feb-94 Developing 4 1 4 0

SACU 15-Jul-04 Developing 7 4 4 0

SAFTA 01-Jan-06 Developing 4 0 2 0

SADC 01-Sep-00 Developing 11 1 10 0

Turkey-EFTA 01-Apr-92 Developed-Developing 11 2 10 2


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PtADate of

entry into force

member


Wto+ Wto-xWto+

Leg. enf.Wto-x

Leg. enf.

US-Australia 01-Jan-05 Developed 14 8 14 6

US-Bahrain 01-Aug-06 Developed-Developing 12 4 12 4

US-Israel 19-Aug-85 Developed-Developing 11 0 10 0

US-Jordan 17-Dec-01 Developed-Developing 6 5 5 4

US-Morocco 01-Jan-06 Developed-Developing 14 6 13 6

US-Oman 01-Feb-09 Developed-Developing 13 6 13 6

US-Peru 01-Feb-09 Developed-Developing 14 7 14 7

Ukraine-Belarus 11-Nov-06 Developing 6 1 6 1

Ukraine-Kazakhstan 19-Oct-98 Developing 4 1 4 1

Ukraine-Turkmenistan 04-Nov-95 Developing 4 1 4 1



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AppendixTableD.2: Acronyms and membersAcronyms member Acronyms member

ARG Argentina KNA SaintKittsandNevis

ATG AntiguaandBarbuda KOR Rep.ofKorea

AUS Australia LCA St.Lucia

BHR Bahrain LIE Liechtenstein

BLZ Belize MAC Macao,China

BRA Brazil MAR Morocco

BRB Barbados MEX Mexico

BRN BruneiDarussalam MYS Malaysia

CAN Canada NIC Nicaragua

CHE Switzerland NOR Norway

CHL Chile NZL NewZealand

CHN China OMN Oman

COL Colombia PAK Pakistan

CRI CostaRica PAN Panama

DMA Dominica PER Peru

DOM DominicanRep. PHL Philippines

EC EuropeanUnion PRY Paraguay

GRD Grenada SGP Singapore

GTM Guatemala SLV ElSalvador

GUY Guyana SUR Suriname

HKG HongKong,China CHT ChineseTaipei

HND Honduras THA Thailand

IDN Indonesia TTO TrinidadandTobago

IND India URY Uruguay

ISL Iceland USA USA

JAM Jamaica VCT SaintVincentandtheGrenadines

JOR Jordan VNM VietNam

JPN Japan



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AppendixTableD.3: List of services agreements in the database used for this reportKorea(Rep.)-India Japan-Thailand EFTA-Chile

ASEAN-Korea(Rep.) Chile-Japan Korea(Rep.)-Chile

ASEAN-Australia-NewZealand Chile-China EU-Chile

Honduras-ElSalvador-Taipei,Chinese

India-Singapore Chile-ElSalvador

Peru-China Panama-Singapore China-Macao,China

Japan-VietNam US-Bahrain China-HongKong,China

Japan-Switzerland EFTA-Korea(Rep.) US-Singapore

Chile-Colombia CostaRica-Mexico US-Chile

Canada-Peru Japan-Malaysia Singapore-Australia

Panama-Taipei,Chinese Mexico-Honduras EFTA-Singapore

Nicaragua-Taipei,Chinese Jordan-Singapore Japan-Singapore

China-NewZealand Mexico-Guatemala Chile-CostaRica

Australia-Chile Mexico-ElSalvador US-Jordan

China-SingaporeDominicanRep.-Cent.America-USA

NewZealand-Singapore

US-Peru Korea(Rep.)-Singapore EFTA-Mexico

US-Oman US-Morocco Chile-Mexico

Japan-Philippines Thailand-NewZealand EU-Mexico

EU-CARIFORUM Mexico-Nicaragua US-Korea(Rep.)

BruneiDarussalam-Japan ASEAN-China Mercosur(6thnegotiatedround)

Japan-Indonesia Japan-Mexico ASEAN(7thpackage)

Panama-Chile Panama-ElSalvador US-Colombia

Pakistan-Malaysia Thailand-Australia US-Panama

Pakistan-China US-Australia



162

AppendixTableD.4: the effects of deep integration on production networks

Dependent variabletrade in parts and components (log)

(1) (2) (3) (4) (5) (6) (7)

PTAij 0.299***

(0.020)

PTAij*Numberofprovisions

0.0165***

(0.001)

PTAij*NumberofWTO-Xprovisions

0.0265***

(0.002)

PTAij*NumberofWTO+provisions

0.0310***

(0.002)

PTAij*PrincipalComponentAnalysisIndex

0.0773***

(0.007)

PTAij*TBTIndex 0.0138***

(0.001)

PTAij*CompetitionPolicyIndex

0.0308***

(0.002)

Countrypairfixedeffects

yes yes yes yes yes yes yes

Country-timefixedeffects

yes yes yes yes yes yes yes

Observations 60,473 60,473 60,473 60,473 60,473 27,524 32,733

R-squared 0.328 0.328 0.327 0.327 0.327 0.434 0.414

Numberofcountrypairs

3,485 3,485 3,485 3,485 3,485 1,386 1,657

Note:Standarderrorsinparentheses***p<0.01,**p<0.05,*p<0.1

Source:WTOSecretariatestimates.

AppendixTableD.5: the effects of trade in parts and components on deep integration

DependentVariable NumberofProvisionNumberofWTO-X

provisionNumberofWTO+

provisionPrincipalComponent

AnalysisIndex

Shareoftradeinpartsandcomponentsovertotaltrade(ln)

0.0880***(0.028)

0.0107(0.024)

0.0630***(0.017)

0.0234***(0.006)

CountryfixedeffectsObservationsR-squared

yes2,5720.962

yes2,5720.955

yes2,5720.917

yes2,5720.927

Note:Standarderrorsinparentheses***p<0.01,**p<0.05,*p<0.1.distanceandremoteness.Othercontrolvariablesincludedintheregression:GDPSUM,GDPSIM,GDPDIF,SQGDPDIF

Source:WTOSecretariatestimations.


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AppendixFigureD.1: variations in the level of commitments offered in different PtAs: Australia, Chile, Republic of korea, singapore and united states

Note:ThisFigureusesanindexthatcapturesimprovementsin“partial”commitmentsfromoneagreementtothenext.GATSstandsforGATScommitmentsandoffer.Scoresof0,0.5and1aregivenforuncommitted,partiallycommittedandfullycommittedsubsectors,respectively,formodes 1 and 3. It also captures improvements in partial commitments by attaching to them between 0.5 and 1. This Figure underscoresdifferencesbetween thecommitmentsamemberundertakes indifferentPTAs,but isnotbestused tocompareGATS+commitments thatdifferentmembersundertake.Theindexisbroughtontoa0-100scale,with100representingfullcommitmentsinallsubsectorsandrelevantmodes.ThelegendoftheacronymsforthemembersisprovidedinAppendixTableD.2.

Source:FromupdateddataMarchettiandRoy(2008).

0 2010 30 40 50 60 70 80 90 100

USA-GATS

USA-SGP

USA-PER

USA-PAN

USA-OMN

USA-MAR

USA-KOR

USA-JOR

USA-DR-CAFTA

USA-COL

USA-CHL

USA-BHR

SGP-PAN

SGP-USA

SGP-NZL

SGP-KOR(ASEAN)

SGP-KOR

SGP-JPN

SGP-JOR

SGP-IND

USA-AUS

SGP-GATS

SGP-CHN(ASEAN)

SGP-EFTA

SGP-CHN

SGP-AUS

SGP-ASEAN

KOR-GATS

KOR-USA

KOR-SGP

KOR-IND

KOR-EFTA

KOR-CHL

KOR-ASEAN

CHL-GATS

CHL-USA

CHL-SLV

CHL-KOR

CHL-JPN

CHL-EFTA

CHL-EC

CHL-CRI

CHL-COL

AUS-GATS

AUS-USA

AUS-THA

AUS-SGP

AUS-ASEAN


164

A perennial policy question is how the multilateral trading system is affected by the rise of preferential trading agreements (PTAs). Is multilateral trade cooperation compromised by burgeoning regionalism? Should we see these different approaches as complementing or competing with each other? Are there synergies, or inevitable conflicts? Building on the analysis of the report so far, this final section examines these questions.

e. The multilateral trading system and pTas


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Contents 1. Systemiceffectsofpreferentialtariffliberalization 166

2. DeepPTAprovisionsandthemultilateraltradingsystem 168

3. RegionalismandtheWTO:historicalperspective 182

4. TherelationshipbetweenPTAsandtheWTO 187


• Deep integration is often non-discriminatory in nature.

• Global production networks can result in PTAs with tariff and non-

tariff measures that are more consistent with the principles of the

multilateral trading system.

• A large number of disputes between PTA members are brought to

the WTO dispute settlement system. On average, about 30 per cent

of WTO disputes are between members who are parties to the same

PTA.

• A critical-mass approach to decision-making in the WTO may be

required, at least in the short term, to move forward on an agenda

that creates greater coherence between PTAs and the multilateral

trading system.


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1. Systemiceffectsofpreferentialtariffliberalization

Inthe late1980sandearly1990s,aseriesofeventsled analysts to focus on the systemic effects ofregional integration (Baldwin, 2009).1 Regionalismrose in North America, where the Canada-UnitedStatesPTAwasfollowedbytheNorthAmericanFreeTrade Agreement (NAFTA) negotiations. It alsoreignited in Europe with the Single European MarketinitiativeandthedisintegrationoftheSovietUnion.Atthe same time, the prospects for a prompt andcomprehensivecompletionoftheUruguayRoundwereshroudedinuncertainty.

Thepossibilityofacausallinkbetweentheexpansionof regionalismanddifficulties incoming toclosure inmultilateral negotiations could not be ignored. Thisturned the regionalism debate into a systemicdiscussion. This section provides a short overview ofthe literature in this area, drawingon several surveysthat have been published recently: Baldwin (2009),FreundandOrnelas(2010)andWinters(2011).

The broad concern of this literature is the relationbetween discriminatory and non-discriminatory tariffliberalization.Thestandardapproachistostudywhetherpreferential tariff cuts lead to a reduction or to anincreaseinthemost-favourednation(MFN)tariff,whichis applied by WTO members on a non-discriminatorybasis.AsdiscussedinSectionC,theevidencesofarisnot conclusive. However, there are some studies thatfocusontheeffectofpreferentialtariffliberalizationonnon-discriminatory tariff liberalization.2 Due to thepaucity of adequate data, opportunities for convincingempirical work are limited. The literature is thereforemostly theoretical, and its predictions are oftensupportedonlybyanecdotalevidence.

(a) DoPTAsfosterorhindermultilateraltariffreductions?

A number of different mechanisms have beenidentified through which PTAs could foster or hindermultilateraltradeopening.

AsdiscussedinSectionC,theKemp-Wantheoremisa theoreticalbenchmarkshowing thatPTAsneednothave adverse effects on multilateral tariff reductions.StartingfromasituationwhereallcountrieshaveMFNtariffs, groups of nations can always raise theircollectivewelfarebyformingatradebloc.Apiecemealenlargement of the bloc will raise bloc members'welfare,andthehighestwelfarewillbereachedwhenallnationsarepartofthebloc(KempandWan,1976).Thistheoreticalresultrestsontwostrongassumptions.First,PTAmembersmustsetexternal tariffsat levelsthatfreezetheirtradeflowswiththerestoftheworld.Secondly, lump-sum transfers between membersensurethattheyallgainfromthePTA.3

Thefearofpreferenceerosionisanimportantaspectof the relationship between preferential andmultilateral tariff opening.4 In a world where moreopen tradewouldbe in the interestof all nationsbutwhere individual nations fearing erosion of theirpreferences would veto it, regionalism can helpachieve global trade opening. Baldwin (2009)illustratestheargumentwithanexamplewhereHomecountrysignsseparatePTAswithPartner1andwithPartner2,therebyformingaso-calledhubandspokesystem. This system puts Home in a favourableposition as it combines opening trade on the importsidewithpreferentialtariffsontheexportside.Home,the hub, is likely to oppose WTO talks aimed atachieving more open trade for fear of preferenceerosion.Despitethis,Homeanditstwopartnerscouldreach global trade opening, not through multilateralnegotiations, but rather through a PTA between thetwospokes.AsBaldwinshows,thetwopartnerswouldalways prefer global trade opening to the hub-and-spokesituation.

Thefearofpreferenceerosioncan,however,constitutea potent force of resistance to multilateral tariffreductions. The economic literature has shown thattwoormorenationscan formaPTAwhich increasestheirjointwelfareattheexpenseofthirdnations.Sucha PTA will hinder multilateral trade opening becauseits removal will be resisted by member countriespreciselytoavoidpreferenceerosion.Thiscanbetruenotonly ifPTAmembers increasetheirexternalMFNtariffs, but also when external tariffs are frozen.Baldwin (2009) provides an example in which at asufficiently lowinitialtariff, thegainsofmaintainingaPTAthatreducesthird-countrywelfareareworthmorethanthestandardgainsofglobaltradeopening.5

Developingcountriesthatweregrantednon-reciprocalpreferential access to developed countries’ marketsare particularly concerned by preference erosion,particularly where reduced advantages frompreferentialtariffsarenotoffsetbythegainsinmarketaccessduetotariffcutsongoodsthatdonotreceivepreferences.6

Politicaleconomy factors canalsoaffect thepaceatwhich preferential tariffs are extended to non-membersonaMFNbasis. IfPTAsaretrade-creating,theywillincreasethesizeofexportsectorsandreducethesizeofimport-competingsectors.Ifpoliticalpoweris proportional to the size of the sector, the PTA willincrease support for trade opening.7 In particular, itcanmake itpoliticallyoptimal forgovernments tocutMFNtariffstolevelsthatwouldhavebeenundesirablewithoutthePTA.8

Along the same lines, if workers have imperfectinformationonhowtheywillbeaffectedbymoreopentrade, they may initially oppose global trade openingbut accept a PTA, which is an intermediate form oftrade barrier reduction (Frankel et al., 1995). A PTA


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may inform workers on how they will be affected byglobal trade opening and make an MFN approachpoliticallyfeasible.

Thepoliticaleconomymodelsdiscussed inSectionC(Grossman and Helpman, 1995; Krishna, 1998),however, offer some insights as to why PTAs mightinhibit multilateral tariff reductions. In such models,interest groups might seek primarily trade-divertingPTAs, i.e. agreements that provide enhancedprotection.9 In Krishna's model the extent of tradediversiondeterminesthedegreeofpoliticaloppositiontoamultilateralagreement thatwouldfindsupport intheabsenceof thePTA. Intuitively, if there is littleorno trade diversion, firms from each member countryobtainhighermarketshares (andprofits) in theothermember’s market but lose domestic profits, with anoverallsmalleffectonnetprofits.However,ifthePTAallows bloc firms to displace those from excludedcountries in each other’s markets, it surely enhancesprofitsforallfirms,attheexpenseofoutsiders(FreundandOrnelas,2010).10

The result that specific interestgroupsmight opposemultilateral tradeopening thatwouldbesupported inthe absence of a PTA is also obtained in a median-votersettingbyLevy(1997).HeshowsthatabilateralPTAmightofferdisproportionately largegains tokeyagentsinacountry,makingthemunwillingtosupporta multilateral agreement, which would therefore beblocked. This might be the case, for instance, if thetwocountrieshavesimilarfactorendowments,sothata lot of trade within the PTA is intra-industry trade,with limited redistributive effects. A move towardsmultilateralopeningwouldalterdomesticfactorprices,creating winners and losers and adding only modestgainsfromincreasedvarietyorspecializationbasedoncomparativeadvantage. Inthiscase,themedianvoterwould oppose such a move, and the PTA acts as anobstacletomultilateraltradeopening.

SomePTAsmaybeconcludedpartlyinpursuitofnon-economic objectives, such as understanding andreconciliation between former enemies (e.g. FranceandGermany),orbetweennationswithformercoloniallinks (Schiff and Winters, 1998). As discussed inSectionC,someauthorshavearguedthatthesenon-economic objectives might lead member countries tooppose further multilateral trade opening. In a modelby Limão (2007), PTAs allow partner countries toextract mutual cooperation on the non-trade issue,using preferential tariffs as bargaining chips. Theprospect of dissipating this possibility via multilateraltrade opening might make countries less likely tofavouraglobalapproach.11

PTAs may also increase the adjustment costsassociatedwithmultilateral tradeopeningwhenfirmshave to make sunk, sector-specific investments toproduce. As shown by McLaren (2002), in such asituationtheex postgainsfrommultilateralreductions

can be reduced relative to those from preferentialtrade opening, and the latter emerges in equilibrium.Thereasonisthefollowing:iffirmsexpectglobaltradeopening to arise, they will invest in sectors ofcomparativeadvantage,soeverycountrywillbecomehighlyspecialized.Inthissituation,theex antegainsofmultilateral trade opening materialize, and suchopening is likely to occur. If, however, firms expect aPTA to be signed, they will invest in goods in whichexcluded countries have a comparative advantage,because external tariffs will render these goodsexpensive. For similar reasons, firms from excludedcountries will invest in goods where PTA membershave a comparative advantage. As PTA countriesbecome specialized relative to each other, and lessspecializedrelativetooutsiders,thegainsfromglobaltrade opening will be reduced. As McLaren (2002)explains, the resulting regionalism is “insidious”because it is an inferior outcome for all participants,and it emerges only because it prompts sunkinvestmentsthatreducethevalueofmultilateraltradeopening.

Finally,oppositiontofurthermultilateraltariffopeningbyPTAmembersmightcomefromexcludedcountries.The logic is as follows: if PTA members reduce theirexternal tariffs for political economy reasons aftersigning an agreement, this might result in pure tradecreation.AsarguedbyOrnelas(2005b),non-membersbenefitfromsuchPTAsbyobtainingincreasedmarketaccesstomembercountrieswithouthavingtoreducetheir own tariffs, as would be required under amultilateral agreement. Therefore, non-members mayturnagainstmultilateraltradeopeningthattheywouldsupportintheabsenceofthePTA.12

The overview of the literature thus suggests that theeffect of regionalism on the prospects of multilateraltradeopeningwilldependonanumberoffactors.Theresults depend on how much members and non-members stand to gain from a PTA, and how muchtheywouldlosefrommultilateraltradeopening,ontheimportance of political economy considerations inpolicyformation,andontheextentoflock-ineffectsofpreferential trade opening. Moreover, results dependon whether regionalism is open or not (Yi, 1996); onthepresenceofdissimilaritiesinendowmentsorcosts(SaggiandYildiz,2009);ontherulesofthemultilateraltrade system (Bagwell and Staiger, 1999; Saggi andYildiz, 2009); as well as on the formal enforcementconstraints(BagwellandStaiger,1997a:1997b).

(b) Evidenceonthesystemiceffectsofregionalism

Whenthetheoryisinconclusive,themostnaturalthingtodoistoturntoempiricalevidence.Afirststrandofliterature tests whether MFN and preferential tariffsare complements or substitutes.13 As discussed inSectionC,differentresultsemergefordevelopinganddeveloped countries. While in the former group of


168

countries preferential trade agreements appear toreduceexternaltariffs,inthelattergroupofcountriestheyseemtoincreasethem.MostofthecontributionsdonotdistinguishbetweenMFNtariffsthathavebeennegotiatedatthemultilaterallevelandunilateraltariffreductions.14ThenotableexceptionsareLimão(2006)and Karacaovali and Limão (2008), who explicitlyconsider the effect of preferential trade opening onmultilateraltradeopeningattheUruguayRoundintheUnitedStatesandtheEuropeanUnion,respectively.15

A second strand of literature investigates thecorrelationbetweenPTAformationandmultilateralism.One often-used example of regionalism promotingmultilateral trade opening is when the United States,which for many years had been advocatingmultilateralism,convertedtoregionalisminthe1990sand thereby revived the Uruguay Round negotiations(Bergsten and Schott, 1997).16 Mansfield andReinhardt(2003)observethatmorePTAsareformedduring multilateral negotiations than at other times.They interpret this result as evidence consistent withmultilateralism promoting PTAs as devices to obtainbargaining leverage within the multilateral regime(pressuring outsiders to open their markets orescapingfromfree-riders).

Ageneralproblemwith theapproachof linkingPTAswithmultilateraltraderoundsisthatthelatterarerareevents. Moreover, the practice of multilateral traderounds is to negotiate multilateral opening with moreor less ambitious scenarios of trade opening, ratherthan opting for full or no multilateral opening.Therefore,adirecttestofwhetherPTAsdecreasethelikelihood of signing multilateral trade openingagreements is impossible (World Trade Organization(WTO),2007).

Anecdotal evidence can be found in support both oftheview thatPTAs facilitate furthermultilateral tradeopening and of the view that they hinder it.17 On theone hand, there is anecdotal evidence that PTAsincreaseexcludedcountries’ incentivetomoveonthemultilateral front to avoid trade diversion. A relatedargument is that the last three rounds of multilateraltradenegotiationshave started in tandemwithmajormoves towards regional integration, which issometimes taken as evidence of the building blockrelationshipbetweenthetwoprocesses.Furthermore,the cost from overlapping PTAs can trigger arationalization of the system – as in the case of thePan-EuropeanCumulationSystem–or a recourse tothe multilateral system – as in the case of the WTOInformationTechnologyAgreement.18

Ontheotherhand,ithasbeenarguedthattheconcernforpreferenceerosionhascontributed to the stallingof multilateral negotiations and has actually beenreflected in less multilateral trade opening, see forinstanceCurtisandVastine(1971).Furthermore,thereis also evidence that the engagement in regional

negotiationsmaystalltheprocessofmultilateraltradeopening by absorbing resources away from themultilateral negotiations (World Trade Organization(WTO),2007).

2. DeepPTAprovisionsandthemultilateraltradingsystem

While the literature on the systemic effects ofpreferential tariffs isrichandveryactive,sofar therehasnot beenmuch researchon the systemiceffectsof other, “deep” integration, provisions. Availableresults suggest that in some deep integration areas,such as technical barriers to trade (TBT), multilateralregulation may not be economically optimal orpolitically feasible. Because deep integration is oftenMFN innature, however, such regulationmayalsobeless necessary. Indeed, the literature has identified anumberofmechanismsthroughwhichdeepintegration“automatically” supports further opening, or at leastdoes not entail negative static effects on themultilateraltradingsystem.

(a) Deepintegrationisoftennon-discriminatoryinnature

Bytheirverynature,somedeepintegrationprovisionsarede facto extended tonon-membersbecause theyare embedded in broader regulatory frameworks thatapply toall.Anexample isprovidedbyservices tradeopening. Barriers to trade in services are generallybehind-the-border, regulatory measures. Even thoughsomeservicesbarrierscould inpracticebeapplied ina differentiated manner depending on the suppliers'countryoforigin(e.g.restrictionsonthemovementofpersons, foreign equity restrictions, or foreign directinvestment screening), one expects that barriersremovedor relaxedasa resultofaPTAbeextendedde facto to non-parties. This also makes mosteconomicsense,andmaylimitanyeconomicdistortionresultingfromservicesPTAs.19

Evidence suggests that in certain cases, preferentialtreatment was granted to PTA parties, but properanalysis of this is made difficult by the absence ofcomprehensive information on the treatment appliedbycountries toservicesandsuppliersof their tradingpartners.Thisiscompoundedbythefactthatanalysisof non-discriminatory treatment in services wouldneed toconsidernotonly treatmentspecified in lawsand regulations, but also de facto treatment − forexample, which suppliers receive operating licences,which are sometimes limited in number. Furthermore,given the importance of first-mover advantage forsuppliers in a number of services sectors,20 whatmatters is whether non-preferential treatment isavailable forall suppliersofdifferentorigins from themomenttradeopeningtakesplace.Whilethismaywellbethesituationmostofthetime,informationislacking.


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The fact that services commitments in PTAs can benon-discriminatoryalsosuggeststhatanytechnicaloreconomic obstacle to the multilateral extension ofsuch PTA commitments as part of the Doha Roundwould be limited. It can be hoped that preferentialcommitments made by several WTO members maketheir way into these members' conditional offers andinject momentum in the Doha services negotiations.Thishasnothappenedinofferscurrentlyonthetable– which for the most part were submitted in 2005 –therefore suggesting that other factors are at play,either within the Doha negotiations or domestically.One such factor may be that, in the context of thegrowing number of preferential trade agreements inrecentyears,anumberofcountriesmaywishtokeepleverage for their PTA negotiations, wherecommitments thatgobeyond theGeneralAgreementon Trade in Services (GATS+ commitments) areexchanged as part of the overall trade-off betweenparties (e.g. against preferential goods access), eventhough the resulting overall outcome is lesseconomically significant than what the Doha Roundcanproduce,includingforthesePTAparties.

Anotherfactortoconsideristhatrulesoforigin(RoOs)for services do not carry the same potential fordistortionastheydoforgoodstrade.RoOsinservicesPTAs are usually liberal, along the lines of GATSArticleV(6),21althoughtherearecertainexceptions.22This reduces the extent of the spaghetti bowl effect(seeSectionC).

For mode 1 (cross-border supply), PTAs generallyfocusontheterritorialpresenceoftheproviderratherthan on its nationality or the origin of the service,according origin status to the services provided byentities located in a PTA partner nation. For mode 2(consumption abroad), the supplier's nationality isunimportant as well; the focus is on the territory inwhich the service is supplied and consumed. Formode3(commercialpresence),RoOstypicallyaccordorigin status to firms with “substantive businessoperations” within the PTA region, irrespective of thenationalityofbusinessowners.Inotherwords,theonlyrequirement is to establish a legal presence and acertain levelofcommercialactivity inoneof thePTAmembers.23

Inotherareas,suchasmutualrecognitionagreements(MRAs)ontesting,RoOsareabsent.Iftwonations(forexample, the United States and Singapore) sign anagreement whereby the United States acceptsproducts tested in Singapore laboratories,independentlyoftheirorigin,Singaporecanbecomearegional hub for testing and conformity assessment.Neighbouring countries can ship their products thereto be certified before being exported to the UnitedStates.ThelackofRoOsautomaticallymultilateralizesthebilateraltestingMRA,reducingthespaghettibowleffect(Baldwinetal.,2009).

Competitionpolicyprovisions inPTAsarealsomostlycharacterizedbynon-discrimination(Teh,2009;Dawarand Holmes, 2010). Competition disciplines usuallyoperatethroughtheuseofdomesticregulations.WhileitisnotimpossiblefortheseregulationstobetailoredtofavourenterprisesoriginatingfromPTApartners, itmay be costly to do so and becomes even moredifficultasthenumberofPTAstowhichacountryisasignatoryincreases.Transparencyandinparticulartheobligation to publish laws promoting competition willprovide information that becomes (simultaneously)availabletoPTAandnon-PTAmembersalike.

The substantive obligations in the competition policychapters of PTAs generally involve applyingcompetition laworsettingupacompetitionauthority.Totheextentthatenforcementofcompetitionlawinacountry reduces the market power of domesticincumbents, the prospects of foreign enterprises,whether they are from a PTA member or not, areimproved. Carrying out the competition obligationsalso opens up opportunities for new foreign entrants(either from PTA or non-PTA members) to challengedomesticincumbents.

Moreover, therearepositiveeffects fromcompetitionprovisions,particularlyiftheyarecontainedinregionalagreements(DawarandHolmes,2010).Therecanbeeconomies of scale from the creation of a regionalcompetitionauthority.Even ifnocentralizedauthorityis established, benefits can come from information-sharing and cooperation among enforcementauthorities. There could be demonstration effects tootherjurisdictionswhenacompetitionauthorityinonePTA member takes action against anti-competitivebehaviour. Eventually, more common competitionnorms and practices within the PTA will preventregulatory arbitrage, where enterprises locatethemselves in a jurisdiction in the PTA with relativelylaxcompetitionpolicy.

Finally,PTAsmaydirectly refer toWTO rules. Lesser(2007)arguesthatthemajorityoftechnicalbarrierstotrade (TBT) provisions in PTAs signed after 1995reaffirm the parties' rights and obligations under theWTO TBT Agreement and make reference to itsobjectives.

Furthermore, most transparency commitmentsincluded in PTAs are similar in nature to the onesincluded in the WTO TBT Agreement. Finally,provisionsthatrequirepartiestoprovideanexplanationin case of non-recognition of standard-relatedmeasures and mechanisms supporting furthercooperationamongparties (e.g. technical assistance,jointstandardization)caninfactsupportandenhancethe implementation of the WTO TBT Agreement,supportingthemultilateraltradingsystem.


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BoxE.1:Investment provisions in international agreements: is there a potential for third-party discrimination?

Theprocessofgradualopeningofforeigndirectinvestment(FDI)hasbeentheoutcomeofamulti-layeredprocess combining autonomous MFN investment opening, commitments made in the context of bilateralinvestmenttreaties(morethan2,700todate),24andonlymorerecentlycommitmentsmadeinPTAs.Despitethe progress in investment provisions in PTAs, investment remains overwhelmingly regulated by bilateralinvestmenttreaties(BITs).

InvestmentprovisionsaretypicallyincludedinPTAstofosterinvestmentflowsbetweenmembercountries.Some provisions are clearly aimed at protecting investors, without increasing barriers to investment fromthirdcountries(BacciniandDür,2010).TheinvestmentchaptersofPTAsnormallyincludeabsolutestandardsoftreatmentprovidingaminimumlevelofprotectionforinvestors.Inmanycases,theyreflecttheactualstateofdomesticlegislationconcerningFDIandthelevelofcommitmentachievedinearlierBITs.Theprovisionsregarding investment protection are either directly included in the text of the agreement, such as in theagreements signed by the United States, or they are indirectly referred to in agreements providing thatinvestorsshouldbetreatedinaccordancewithcustomaryinternationallaw(Kotschwar,2009).

Ithasbeennoted,however,thatthecreationofaPTAmaybeasourceofinvestmentdiscrimination,wherebypotential investors from excluded countries are put at a disadvantage vis-à-vis investors from membercountries. This can occur through two channels: one direct and the other one indirect (Baccini and Dür,2010).First,investmentdiscriminationcanresultdirectlyfromtheinclusionofprovisionsthatopenupcertainsectorsforinvestmentonlyonapreferentialbasis.AllPTAsincluderelativestandardsoftreatment,namelyMFNandnationaltreatment(NT).25MostrecentPTAs,includingtheonessignedbytheUnitedStatesandtheonesamongAsiancountries,tendtoprovidebothMFNandNTduringallphasesoftheinvestment(pre-andpost-establishment).26Relativestandardsoftreatmentcanprovideacompetitiveadvantagetoinvestorsfrommembercountriesvis-à-visinvestorsfromnon-membercountries,especiallyintheservicessector.Forinstance, the PTA between Australia and the United States relaxes the requirements for governmentscreeningofFDIforUScompaniesinvestinginAustralia(BacciniandDür,2010).

Secondly,investmentdiscriminationcanresultindirectlyfromdiscriminatorytariffreductions.AssumefirmsfromcountriesAandBareengaged inmarket-seekingFDI incountryC.Theysource inputsdomestically,andimportthemintoCattheMFNtariffτC.APTAbetweenAandC,thateliminatestariffsonintermediaryinputs from A, creates investment discrimination by putting investors from country B at a competitivedisadvantage.However,thereisverylittleempiricalevidenceontheactualincidenceofsuchdiscrimination.

The extent of potential investment discrimination also depends on the RoOs included in the PTA. LiberalRoOs in the services sector, for instance, reduce the discriminatory aspects of investment provisions forservicesproviders.Thereis,however,considerablevariationinthestrictnessofrulesoforiginforinvestmentacrossPTAs(BacciniandDür,2010).Moreover,oneshouldconsidertherelationbetweentheprovisionsofPTAsandtheonescontainedinBITs.

BITs are traditionally about the protection of investment that is already established in the host countries(DiMascio andPauwelyn,2008), guaranteeing compensation in casesof expropriationand repatriationofprofits. In the early BITs, what mattered for host country governments was the flexibility to differentiatebetween national and foreign governments, not so much among foreign investors. Nonetheless, a hostcountrycouldwishtoexerciseselectivescreeningovertheadmissionofforeigninvestorsandthetermsoftheir admissionaspartof itspolicies topromotenational investments.Forexample, it couldwish toofferinvestmentincentivesonlytocertainforeigninvestorsonadiscriminatorybasis.DespiteanimprovementinabsolutestandardsoftreatmentinrecentBITs,mostofthemstilldonotcoverpre-establishmentorentryofinvestments,accordingNTand/orMFNonlyonceinvestmentsareinthecountry.Forthisreason,andalsobecause theydonot cover tariff reductions,Baccini andDür (2010)argue thatBITsarenot very likely tolowerPTAs’potentialforinvestmentdiscrimination.

It should be noted that investment discrimination need not imply a reduction in FDI flows from excludedcountriesintomembercountries.Tariffdiscriminationmayleadtotariff-jumpingFDI(i.e.theestablishmentofaproductionfacility inamembercountry, throughFDI, inordertoavoidatariff).StudiesfindingthatPTAsattractFDIfromthirdcountries,suchasteVeldeandBezemer(2006),donot, therefore,provideevidenceagainstPTA-driveninvestmentdiscrimination.


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(b) SeveralmechanismssupportingfurtherliberalizationarefoundinPTAs

First, PTAs may include “non-party” MFN clauses.Theseclausesstipulate theextension tocurrentPTApartners of preferences or concessions that membercountriesmayhavegrantedinthepastormaygrantinthe future to third nations.27 In the case of servicesand government procurement for instance, suchprovisionsensure that futureandmoreadvantageouscommitmentswithothernon-memberpartnersshouldbe granted to PTA partners as well (Fink andMolinuevo, 2008). Many PTA procurement provisionsrequire third-partyMFNguaranteessoas to limit theextent to which preferential procurement isundermined by subsequent PTAs (Baldwin et al.,2009).28

Secondly, there is a tendency to replicate trade-opening rules in PTAs because template approachesare often used for PTAs. The spread of the NAFTA-style telecommunication competition provision is anexample. Baldwin et al. (2009) argue that the largenumber of countries that have included this provisionin PTAs suggests that it is progressively becoming anorm.Theyfurtherarguethatharmonizationtoasingleregulatory regime, including a common set of rulesthat governments apply to private firms in manynations, tends to foster competition and trade and itcannotbeconsideredpreferential.

Another example is provided by NAFTA's investmentprovisions, in particular performance requirements.These provisions have spread in Latin America andbeyond.Fifteencountrieshaveagreednever toapplyperformance requirements against foreign investorsfrom any jurisdiction. Another 36 countries havecommitted to forgo the application of suchrequirements,howeveronlyagainstCanadianandUSinvestors(Baldwinetal.,2009).

Alongsimilarlines,asarguedbyAndersonetal.(2010),“thegovernmentprocurementprovisionsofRTAshavemade feasible a significant further expansion of themembership of the Government ProcurementAgreement (GPA), in the event that parties decide totakethisstep.”

Thirdly,dominoeffects (Baldwin,1993)pointing in thedirectionofprogressiveextensionofpreferentialmarketaccess might be at play also for deep integrationprovisions.Considertheexampleof theGPA.WiththeEUenlargementfrom15to25members,non-EUGPAmembers started facing more competition ingovernmentprocurementbothinthe15EUincumbents(fromthetennewcomers)andinthetenEUnewcomers(fromthe15incumbents).Asareactiontothisformoftrade diversion, the non-EU GPA members startedpressuring the new EU members to join the GPA.29SimilardominoeffectscanbediscernedinallcasesinwhichcountriesexcludedfromaPTAfindthemselvesin

a position to adopt similar provisions to the onesadoptedbymembercountries toavoid tradediversion.The implementationbycountries intheEuropeanFreeTrade Association (EFTA) of competition policy normsthatmimictheonesofEUcountriescanbeinterpretedasawayofensuringthatfirmsinEFTAcountriesdonotfind themselves at competitive disadvantage vis-à-visfirmsintheEuropeanUnion(Baldwinetal.,2009).

(c) Theeffectsofglobalproductionsharing

The presence of international fragmentation ofproductioncanalterpolitical-economyforcesinfavourof theadoptionof tariff andnon-tariffmeasures thatare less discriminatory, and more consistent with theprinciples of the multilateral trading system. TheunderlyinglogiccanbeexplainedwiththeexampleofthePan-EuropeanCumulationSystem(PECS)ofrulesoforigin(Baldwinetal.,2009).

Firms from EU countries started to relocate labour-intensive stages of production in low-wageneighbouring nations from the 1990s. At the sametime, the European Union engaged in bilateralagreements with a number of countries both fromCentral and Eastern Europe and from the SouthernMediterranean. These agreements contained non-harmonized rules of origin, giving rise to a spaghettibowl effect that restricted firms’ ability to sourceintermediate goods from the cheapest source(Gasioreketal.,2009).

Moreover, the downsizing of production in theEuropean Union, also due to competition fromemergingAsiancountriessuchasChina,reducedthenumberandpoliticalinfluenceofEU-basedproducersof intermediate inputs which benefited from theprotectionist effects of the spaghetti bowl. Thepolitical economy forces thus turned in favour ofharmonizing rules of origin across PTAs, to avoid thecost of different administrative requirements, andpermitting diagonal cumulation (i.e. allowing EU finalgood producers to source inputs from a wider set ofcountrieswithoutfearoflosingoriginstatus).ThiswasaccomplishedwiththesigningofthePECSin1997.30

International fragmentationofproductionmayalsobeadriver of deep integration, and of the multilateralextensionofdeepprovisions.Examplescanbefoundinthefieldoftechnicalbarrierstotrade(TBTs),theopeningof markets for trade in services and the presence ofcontingency measures within trade commitments(Baldwinetal.,2009).InTBTs,unbundlingofproductionmayhelpexplaintheadoptionofinternationalstandards,at least in parts and components, in industriescharacterized by global sourcing (e.g. electronics).Concerningtheopeningofmarketsfortradeinservices,offshoring is likely to create an incentive for nations toapply international standards to improve thecompetitivenessoftheirownexportersandtomaketheirownservicesmarketsmoreattractivetoforeigninvestors.


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Finally, unbundling of production may create greatersupport for new multilateral rules on contingencymeasures, such as safeguards, anti-dumping andcountervailingmeasures,intradecommitments.Whenfirms engage in outsourcing, they prefer measuresdiscouraging the impositionof contingencymeasuresin as many bilateral trading relationships as possible,ratherthaninanyonebilateraltraderelationship.Thisunderlies the producer support for the spread of acommon or similar set of rules on the application ofcontingencymeasures(Baldwinetal.,2009).

(d) RelationshipbetweentheWTOandPTAdisputesettlementsystems

As noted in Section D, the vast majority of PTAsestablishsomekindofdisputesettlementmechanism.Porges(2010)presentsasurveyofdisputesettlementmechanisms in PTAs. She describes thesemechanisms as generally falling into the followingthree types: (i) diplomatic or political mechanisms(such as the Latin American Integration Association,ALADI); (ii) standing tribunals (such as the EuropeanUnionandtheAndeanCommunity);and(iii)referraltoadhocpanels(suchasNAFTAandotherUSFTAs,EUFTAswithChile,theRepublicofKoreaandMexico,theAssociation of Southeast Asian Nations Enhanced

Dispute Settlement Mechanism, and the SouthernCommonMarket−MERCOSUR).ThesurveyindicatesthatreferraltoadhocpanelsisthedominantmodelforPTA dispute settlement mechanisms. A slightlydifferent classification is used in Ramirez Robles(2006), which classifies the mechanisms as:(i) diplomatic; (ii) quasi-adjudicative; and (iii) “hybrid”,(i.e.mechanismsthathavefeaturesofbothmodels).

The relationship between the WTO and PTA disputesettlement mechanisms has received considerableattention in the trade literature and somecommentators have cautioned about potential risksfrom the coexistence of dispute settlementmechanisms at different levels (multilateral, regionaland bilateral) that may have overlapping jurisdictions.In this subsection, we first describe how thejurisdictions of the WTO and PTA dispute settlementsystems may overlap. We then discuss the concernsthat have been raised and the recommendations thathavebeenmadetoreducetherisksofconflict.ThisisfollowedbyareviewofthehandfulofWTOdisputesinwhich therelationshipof theWTOdisputesettlementsystemandaPTAdisputesettlementmechanismhasbeen raised as an issue. Finally, we present data onthe use of the WTO dispute settlement system bymemberswhoarepartnersinaPTA.

BoxE.2:making rules of origin more compatible with the multilateral trading system

It has been argued in this report that rules of origin (RoOs) are likely to strengthen the “spaghetti bowl”effect of PTAs. In view of this adverse effect, various commentators have argued in favour of reformingRoOs,makingthemmoretransparentandcompatiblewith theprinciplesof themultilateral tradingsystem(see for instance Cadot and de Melo, 2007).31 This box discusses the system of “cap and convergence”proposedbyEstevadeordaletal.(2009a)andsupportedbyBaldwinandThornton(2008),basedonthetwoconceptsof“multilateralization”and“convergence”.

"Multilateralization”ofRoOsreferstotheestablishmentofmultilateralrulesthatlimittherestrictivenessandcomplexityofRoOsinPTAs(Estevadeordaletal.,2009a).Accordingtotheauthors,suchruleswouldensurethat “at least the qualifying production methods in a given sector remain relatively similar across exportmarkets”. They claim that multilateralization should ideally be coupled with “convergence”, which is the“unificationofmultipleoverlappingexistingRTAsintoasinglecumulationzonewithanew,singlelistofrulesoforigin”,likeintheEuropeanPECS.

Theproposedsystemof“capandconvergence”wouldincreasetransparency(oneofthekeyprinciplesofthemultilateral trading system).Moreover, it couldbe subject toWTOdiscipline.Estevadeordal et al. (2009a)suggestthatthenon-preferentialRoOscurrentlynegotiatedattheWTOcouldserveastheglobalbenchmarkwithwhichtocomparetheoverall restrictivenessofRoOsofagivenPTA.Thiswouldbeanalogousto theGeneralAgreementonTariffsandTrade(GATT)ArticleXXIVrestrictiononacustomsunion'sexternaltariff,whichcapsitattheaverageofthetariffspreviouslychargedbythemembers(BaldwinandThornton,2008).Thisprovidesanotherstrongreasonforconcludingthelong-standingnegotiationsonnon-preferentialrulesoforiginattheWTO.

Therationaleforcouplingconvergencewithcappingisthefollowing:largercumulationzonesincreasetrade,especiallyamongthecurrentspokecountries(seeSectionC).However,observedrestrictivenessofRoOsispositively correlated with the size of the cumulation zone, measured as the combined GDP of members(Estevadeordaletal.,2009b).LargercumulationzonescouldthereforeendupwithhighlyrestrictiveRoOsthat would serve to isolate production within each zone, increasing trade diversion and reducing globalefficiency.TradediversionforthirdnationsjustifiesinvolvementoftheWTOthroughmultilateralizationeffortsaimedatlimitingtheoverallrestrictivenessofRoOswithinagivencumulationzone.


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(i) Overlapping jurisdictions

Article 23.1 of the WTO's Dispute SettlementUnderstanding (DSU) provides that “(w)hen Membersseek the redressofaviolationofobligationsorothernullification or impairment of benefits under thecovered agreements or an impediment to theattainmentofanyobjectiveofthecoveredagreements,theyshallhaverecourseto,andabideby,therulesandprocedures of this Understanding.” The AppellateBody has explained that “Article 23.1 lays down afundamental obligation of WTO Members to haverecoursetotherulesandproceduresoftheDSUwhenseeking redress of a violation of the coveredagreements” and “establishes the WTO disputesettlement system as the exclusive forum for theresolutionofsuchdisputes"32(AppellateBodyReport,US / Canada – Continued Suspension,para.371).

Recourseto theWTOdisputesettlementsystemmaybe had where a WTO member considers that anybenefits accruing to it directly or indirectly under theWTO agreements are being impaired by measurestaken by another member. Thus, in principle, a WTOmember may not have recourse to the WTO disputesettlementsystemtoprosecuteanallegedviolationofa PTA obligation.33 The potential for overlappingjurisdiction arises where an issue is regulated bothundertheWTOandthePTA.Porges(2010)observesthat “(a)lmost all PTAs overlap with the WTOAgreement,asbothPTASantheWTOrequirenationaltreatment and ban quantitative restrictions on trade.Indeed,manyPTAssimplyincorporateGATTArticlesIIIandXIbyreference”.

PTAs takedifferentapproaches tohow they regulatetherelationshipbetweentheirowndisputesettlementmechanism and that of the WTO. Porges (2010)identifies the following four approaches. Most PTAsuse the “fork-in-the-road” approach which allows theparty initiating the dispute to choose between themultilateral or the PTA fora. However, once it hasinitiatedthedisputeinoneforum,theotheroption(beitthePTAmechanismormultilateralone)isnolongeravailable to it. (See, for example, theNAFTAand theColombia-EU PTA.) The NAFTA has a provision(Article 2005(4)) under which the respondent partymayrequireanenvironmentaldisputetobeaddressedattheregionallevel,evenifthecomplainingpartyhasinitially chosen the multilateral fora. This provision isthe subject of apendingdisputebetween theUnitedStates and Mexico (discussed further below). A thirdapproach,whichhasbeenusedinfarfewerPTAs,istoestablish the PTA dispute settlement mechanism astheexclusiveforumwherethematterisoneregulatedunder the PTA. The EU-Mexico and EU-Chile PTAstake the opposite approach, requiring disputesinvolving a breach of a PTA obligation that areequivalent in substance to a WTO obligation to bebroughttotheWTO(Porges,2010).

Therearemanyfactorsthatcaninfluenceacountry'sdecisiontobringadisputetooneforumovertheotherwherethechoiceisavailabletoit.HorlickandPiérola(2007)examinea listoffactorsthatmayberelevant,including:thetypeofmeasurethatisbeingchallenged,theapplicable law, issuesofstanding, the time-frameof the proceedings, the remedies available, and thepossibility of other countries participating in thedispute as third parties. According to Horlick andPiérola(2007),“thecautiousdecision-makingprocessto choose the appropriate forum requires weighingandbalancingofall these factors inaccordancewiththeultimateneedsandobjectivesofthecomplainant”.

(ii) Concerns over the coexistence of the WTO dispute settlement system and PTA dispute settlement mechanisms

TheconcernsraisedaboutthecoexistenceoftheWTOdispute settlement system and the increasing numberof dispute settlement mechanisms of PTAs revolvearoundtwosetsofissues.Thefirstsetofissuesderivefrom the view that the proliferation of PTA disputesettlement mechanisms could undermine the WTOdispute settlement system's status as a public good.ThosewhoholdthisviewconsiderthattheWTOdisputesettlement system has positive externalities formembersthatarenotpartiestoaparticulardispute.

Drahos(2005),forexample,notesthattheinterpretationof the WTO agreements provides greater certainty toWTO rules. He also observes that when a respondentmember brings an infringing measure into conformitywith its WTO obligations, this will be of benefit to themembership at large because of the MFN principle.Thus, Drahos (2005) proposes that where a disputeconcernsamatter regulatedunderboth theWTOandthe PTA, it be brought to the WTO. Davey and Sapir(2009)takeadifferentapproachandproposethattheWTO should require members that do not belong to aPTA to be allowed to participate in the PTA disputesettlementforumasthirdparties.

Theothersetofconcernsrelatestothepossibilitythata dispute is brought under both the WTO and PTAdisputesettlementmechanisms.Herethere isconcernover the inefficiency of litigating similar matters twiceandmoreimportantlyaboutfairnesstotherespondentparty thatwouldhave todefend itself in two fora (seeKwakandMarceau,2006).ThereisalsoconcernaboutthemoreextremesituationinwhichtheWTOandPTAfora issueparallelorconsecutiveconflictingdecisions.One way of reducing the risks of this happening isthrough stricter jurisdictional clauses in PTAs thatprecludeadisputefromgoingtobothforaorforeclosebringingadisputetotheWTOoveramatterregulatedunderthePTA(MarceauandWyatt,2010).Thisraises,however, the question of the extent to which suchclauseswouldbindWTOadjudicatorybodies.


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At the other extreme, there is the risk that thejurisdiction of the WTO could be gradually “carvedout”. For the moment, it appears that few PTAscompletely close off access to the WTO disputesettlement,butratherleavethechoiceofforumtothecomplaining party. The data discussed below showthat an important number of disputes betweenmembers that are partners in a PTA continue to bebroughttotheWTOdisputesettlementsystem.Somecouldalsoconceiveofmakingchanges to theWTO'sDispute Settlement Understanding to regulate therelationshipwithdisputesettlementforaofPTAs.Thisapproach, however, has not been taken up by WTOmembers in the negotiations to improve the DisputeSettlementUnderstandingcurrentlyunderway.

Theacademicliteraturediscussesothermorecomplexarrangementsthatcouldminimizetherisksofconflictsandpromotemorecoherencebetweenthemultilateraldisputesettlementsystemandthedisputesettlementsystems of PTAs. For example, there has beendiscussion of making exhaustion of PTA disputeresolution procedures a prerequisite to initiation ofWTO dispute settlement (see Kwak and Marceau,2006). Another suggestion is to create a system ofpreliminary references from the dispute settlementsystems of PTAs to the WTO dispute settlementsystemwheretheissueconcernstheinterpretationofprovisionsoftheWTOagreements(Kuijper,2010).

Commentators have also referred to severalinternationallawdoctrinesthatcouldbeusedtoavoidor resolve conflicts between overlappingjurisdictions.34 The doctrine of res judicata or finalityrefers tosituationswhereamatterhasbeendecidedbyacompetentadjudicativebodybarringitsrelitigationin subsequent proceedings. Lis Alibi Pendens, for itspart, refers to parallel proceedings and is a principlepursuant to which once a dispute is pending in oneforum, it cannot be brought before another forum.However, for these doctrines to apply, there must bean “inextricable link”between theproceedings,whichusuallyisunderstoodasanidentityofthepartiesandof the issues (Shany, 2005). Thus, application of thedoctrinescanbeavoidedincertaincircumstances.35

Undertheprincipleofcomityorforum non conveniens,an adjudicative body could seek to avoid exercisingjurisdictionoveradispute if it considers that itwouldbe more appropriate for another tribunal to exercisejurisdiction. There is considerable debate as to theapplicability of these principles to resolve a potentialconflict of jurisdiction involving the WTO disputesettlement system and a PTA dispute settlementmechanism(seeKwakandMarceau,2006).TheWTOdispute settlement system is available to WTOmembersasofright;theydonothavetoseekleavetostart theprocessunder thecurrent rules.Thus,somewouldconsiderthatapplyingtheseprerequisitescouldonlybeeffectedthroughachangeintherules.

As discussed below, questions about the relationshipbetweentheWTOdisputesettlementsystemandPTAdisputesettlementmechanismshavecomeup inonlyahandfulofWTOdisputes.Itshouldbenotedthatsofar concerns over potential conflicts have notmaterializedtotheextentthatsomehadfeared.36Thisis not to say that it is not important to think throughissuesarisingfromthecoexistenceofthemultilateralandPTAsettlementsystems.

(iii) Issues relating to PTA dispute settlement raised in WTO disputes

Asnotedearlier,issuestouchingontherelationshipoftheWTOdisputesettlementsystemandPTAdisputesettlementmechanismshavecomeup inahandfulofWTOdisputes.InArgentina – Poultry,Argentinaarguedthat Brazil was “estopped” from pursuing the disputeat the WTO because Brazil had first challenged theanti-dumpingmeasuresintheMERCOSURforum.ThepanelrejectedArgentina'sargument,notingthattherewas “no evidence on the record that Brazil made anexpressstatementthatitwouldnotbringWTOdisputesettlement proceedings in respect of measurespreviouslychallengedthroughMERCOSUR”.Moreover,thepanelfoundthat:

"Inparticular,thefactthatBrazilchosenottoinvoke its WTO dispute settlement rightsafter previous MERCOSUR disputesettlementproceedingsdoesnot,inourview,mean that Brazil implicitly waived its rightsunder the DSU. This is especially becausetheProtocolofBrasilia,underwhichpreviousMERCOSUR cases had been brought byBrazil, imposes no restrictions on Brazil'sright to bring subsequent WTO disputesettlement proceedings in respect of thesame measure. We note that Brazil signedthe Protocol of Olivos in February 2002.Article 1 of the Protocol of Olivos providesthat once a party decides to bring a caseunder either the MERCOSUR or WTOdispute settlement forums, that party maynot bring a subsequent case regarding thesamesubject-matterintheotherforum.TheProtocolofOlivos,however,doesnotchangeourassessment,sincethatProtocolhasnotyet entered into force, and in any event itdoesnotapplyinrespectofdisputesalreadydecidedinaccordancewiththeMERCOSURProtocol of Brasilia. Indeed, the fact thatparties to MERCOSUR saw the need tointroducetheProtocolofOlivossuggeststousthattheyrecognisedthat(intheabsenceof such Protocol) a MERCOSUR disputesettlementproceedingcouldbe followedbya WTO dispute settlement proceeding inrespectofthesamemeasure.”(PanelReport,Argentina–Poultry,para.7.38)


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Alternatively,ArgentinaarguedthatifBrazilwereentitledtobringthedisputetotheWTO,“thenthePanelisboundbytheearlierMERCOSURrulingonthemeasureatissueinthiscase”as“theearlierMERCOSURrulingispartofthenormativeframeworktobeappliedbythePanelasaresult ofArticle31.3(c) of theVienna Convention”. Thisargumentwasalsorejectedbythepanel,whichexplaineditsreasonsasfollows:

"Rather than concerning itself with theinterpretation of the WTO agreements,Argentina actually argues that the earlierMERCOSURTribunal ruling requiresus torule in a particular way. In other words,ArgentinawouldhaveusapplytherelevantWTO provisions in a particular way, ratherthan interpret them in a particular way.However,thereisnobasisinArticle3.2oftheDSU,oranyotherprovision,tosuggestthat we are bound to rule in a particularway, or apply the relevant WTOprovisionsinaparticularway.Wenotethatwearenoteven bound to follow rulings contained inadoptedWTOpanelreports,soweseenoreason at all why we should be bound bytherulingsofnon-WTOdisputesettlementbodies.”(PanelReport,Argentina – Poultry,para.7.41)

Thepanelreportinthatcasewasnotappealed.

TheissuealsoaroseinMexico – Taxes on Soft Drinks,where the United States was challenging certain taxmeasuresandbook-keepingrequirementsimposedbyMexicoonsoftdrinksandotherbeverages thatusedsweetenersotherthancanesugar.MexicoarguedthattheWTOdisputewas“inextricablylinkedtoabroaderdispute regarding access of Mexican sugar to theUnited States' market under the NAFTA.” Mexicorequested the panel to decline jurisdiction over thedispute. According to Mexico, WTO panels have“implied jurisdictional powers” and these include “thepower to refrain from exercising substantivejurisdiction incircumstanceswhere 'theunderlyingorpredominantelementsofadisputederivefromrulesofinternational law under which claims cannot bejudicially enforced in the WTO, such as the NAFTAprovisions' or 'when one of the disputing partiesrefusestotakethemattertotheappropriateforum'.”

The Appellate Body affirmed the panel's finding that,under the DSU, it had no discretion to decline toexercise its jurisdiction in that case. Before reachingthis finding, however, the Appellate Body noted thatMexicohadnotarguedthatthesubjectmatternortherespectivepositionsofthepartieswereidenticalintheNAFTA and WTO disputes and Mexico had notidentifiedalegalbasisthatwouldallowittoraise,inaWTO dispute settlement proceeding, the marketaccess claims Mexico was pursuing under NAFTA.Furthermore, itwasundisputed thatnoNAFTApanel

hadyetdecidedthe“broaderdispute”towhichMexicohad alluded and Mexico had acknowledged that the“exclusion clause” of Article 2005(6) of NAFTA hadnotbeenexercised.Thus, theAppellateBodydidnot“express any view on whether a legal impediment totheexerciseofapanel'sjurisdictionwouldexistintheevent that features such as those mentioned abovewerepresent.”(AppellateBodyReport,Mexico – Taxes on Soft Drinks,paras.44-57)

Anothercasethathasbeendiscussedintheliteratureis a dispute between Canada and the United Statesover the imposition by the latter of anti-dumping andcountervailing duties on imports of softwood lumberfromthe former.Variousaspectsof thisdisputewerethesubjectof litigation inboth theWTOandNAFTA.At onepoint an injury determinationmadeby theUSinvestigating authority was found to be lacking by aNAFTA panel, while a WTO panel upheld it. Theconflict nevertheless was eventually resolved whenthe decision of the WTO panel was eventuallyoverturned upon review by the Appellate Body(Hillman,2009).37

The relationship between the dispute settlementmechanisms of NAFTA and the WTO has surfacedagaininamorerecentdisputebetweenMexicoandtheUnitedStates. In2009,Mexico requested thataWTOpanelexaminetheconsistencyofcertainrequirementsconcerning the labelling in the United States of tunaproductsas“dolphinsafe”(WT/DS381/4).Inresponse,the United States invoked Article 2005(4) of NAFTA,which it considers to require that in certain types ofdisputes, if thedefendingpartymakessucharequest,NAFTAratherthananyotherforumshouldbethesolevenue of the dispute. The United States initiated adisputeunderNAFTAchallengingMexico'sdecisionnotto move the dispute from the WTO to NAFTA, asrequested by the United States (United States TradeRepresentative (USTR), 2010). Both proceedings arepresentlyongoing.

(iv) WTO disputes between WTO members that are partners in a PTA

Inthissubsection,weexaminedataonWTOdisputesbetween WTO members who are partners in a PTA.Dataon thenumberofdisputes refer to requests forconsultations, which is the first step under the WTOdispute settlement procedures. The data concernparticipationbyWTOmembers(whoarePTApartners)as complainants and respondents, and does notinclude participation as third parties. Moreover, theexercise looks only at WTO dispute settlement anddoes not examine whether the disputes could havebeen brought under the PTA dispute settlementmechanism.Certainlyamorecompleteanalysiswouldrequire looking at whether the disputes could havebeentakentothePTAdisputesettlementmechanism.Notwithstandingthislimitation,thedataprovidesomeusefulinsights.


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First, the data show that WTO members that arepartners inaPTAcontinuetohavefrequentrecoursetotheWTOdisputesettlementsystemtoresolvetradedisputes (the methodology employed in Tables E.1 toE.3 and Figure E.1 is explained in Box E.3). AsillustratedinTableE.1,82ofthe443disputesbroughttotheWTOupto2010werebetweencomplainantandrespondentmemberswhoatthetimewerepartnersina PTA. Disputes between PTA partners represent19per centof all disputes. The ratio is higherwherethecomplainant isadevelopingcountry(28percent)thanwhenitisadevelopedcountry(13percent).Thisis probably explained by the fact that the UnitedStates, the European Union, Japan and China do nothavePTAsbetweenthem,andtheyhavebeenpartiesinanimportantnumberofdisputes.

The largest share of the disputes between PTApartners brought to the WTO is made up of disputesbetweenparties toNAFTA,but therealsohavebeenWTO disputes between WTO members that arepartnersinotherPTAs,asillustratedinFigureE.1.

As depicted in Table E.2, the share of WTO disputesbetweenPTApartners increasedsteadilysince1995,reaching a peak of 50 per cent in 2005. Since then,thesharehasremainedaround30percent,althoughit was significantly below this number in 2009. ThesteadyincreaseintheshareofdisputesbetweenPTApartnersmaybepartlya reflectionof thenegotiationof new PTAs, but is more likely a reflection of thediversification of parties making use of the WTOdispute settlement system. An interesting point that

TableE.1:Frequency of requests for consultations, by development level and existence of PtAs in force between the parties, 1995-2010 (Totalnumberofpairsofmembers/pairswithaPTAinforce)

ComPLAInAnt

Developed Developing LDC totAL

DE

FE

ND

AN

T

Developed 154/24 115/10 0/0 269/34

Developing 102/8 71/39 1/1 174/48

LDC 0/0 0/0 0/0 0/0

totAL 256/32 186/49 1/1 443/82

Source:WTOSecretariatbasedonLegalDivision'sandRTA'sdatabases.Thetabletakesaccountof419requestsforconsultationsundertheWT/DSdocumentseriesasof31December2010,whichaccountforatotalof443pairsofmembers(i.e.complainant-defendant).SeeBoxE.3.

FigureE.1: PtAs in force at the time of the request for consultations, 1995-2010


Arm

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comes out of Table E.2 is that the share of disputesbetweenPTApartnersthatadvancetothepanelstage(45 per cent) is very close to the overall average,indicatingthatadisputebetweenPTApartnersisjustas likely tobesettledat theconsultationsstageasadisputebetweennon-PTApartners.

Table E.3 compares the number of times a particularWTO agreement has been the subject of a disputebetweenPTApartnerswiththenumberoftimesithasbeen invoked in all disputes. There are significantdifferences with respect to some of the agreements,thoughitmaybedifficulttodrawconclusionsinmanycases given the small number of disputes involvingcertain agreements. The most frequently citedagreementsindisputesbetweenPTApartnersaretheGATT 1994, the Anti-dumping Agreement, the

Subsidies and Countervailing Measures (SCM)Agreement, the Agreement on Safeguards, and theAgreement on Agriculture. Interestingly, subsidy andsafeguards disputes make up a larger share ofdisputes between PTA partners (intra-PTA) than ofoveralldisputes,whileintra-PTAdisputesinvolvingtheGATT1994representalowersharethanoverall.

Porges (2010) offers some possible explanations forthe continued use of WTO dispute settlement bymembersthatarepartnersinaPTA:theWTO's“familiarinstitutions” and “unblockable” dispute settlementprocedures; thepossibility tosuspendMFNtariffsandother WTO obligations (particularly where the PTA'smarginofpreferenceislow);thebroaderpoolofneutralpanellists; the broader issue scope of the WTO; thepossibility of forming alliances; access to assistance

TableE.2:Requests for consultations, by year and subsequent procedures, 1995-2010

Yearofrequestforconsultations

Request for consultations With a panel established

Totalrequestsfor

consultations

Totalpairsofmembers

Pairsw/aPTAinforceTotalpanelsestablished

Totalpairsofmembers

Pairsw/aPTAinforce

No. Share(%) No. Share(%)

1995 22 25 1 4.0 12 12 0 0.0

1996 42 50 3 6.0 19 24 1 4.2

1997 47 47 2 4.3 20 20 1 5.0

1998 43 43 3 7.0 15 15 1 6.7

1999 31 35 4 11.4 17 17 1 5.9

2000 30 30 7 23.3 11 11 3 27.3

2001 27 36 12 33.3 11 20 7 35.0

2002 34 34 7 20.6 23 23 5 21.7

2003 28 28 9 32.1 16 16 4 25.0

2004 20 20 5 25.0 9 9 1 11.1

2005 12 12 6 50.0 5 5 1 20.0

2006 18 18 6 33.3 13 13 4 30.8

2007 15 15 5 33.3 7 7 4 57.1

2008 17 17 4 23.5 10 10 4 40.0

20091 16 16 2 12.5 n.a. n.a. n.a. n.a.

20101 17 17 6 37.5 n.a. n.a. n.a. n.a.

totAL 419 443 82 18.5 188 202 37 18.3

Note:Thenumbersforeachrowwerecalculatedfortheyearinwhichtherequestforconsultationswasmade(i.e.theyalwaysrefertothesamegroupofrequestsforconsultationsmadeinthatyearandnottothenumberofpanelsestablishedduringaparticularyear).

1Thefiguresrelatingtothenumberofpanelsestablishedfortheperiod2009-2010werenotincludedbecausetheyarenotcomparable(i.e.duetoongoingprocedures).

Source:WTOSecretariatbasedonLegalDivision'sandRTA'sdatabases.SeeBoxE.3.


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TableE.3: Wto Agreements cited in the requests for consultations, 1995-2010

WTOAgreement

no. of references to the Agreements1

In requests where a pair of members has a PtA in force

FrequencyShareof

references(percent)

Frequency

Shareofreferencesindisputesbetween

PTApartners(percent)

Shareofoverallreferences(percent)

GATT 1994 (adjusted)2 227 31.0 31 23.7 13.7

SubsidiesandCountervailingMeasures 86 11.7 16 12.2 18.6

Anti-dumping 84 11.5 27 20.6 32.1

Agriculture 66 9.0 12 9.2 18.2

TBT 41 5.6 7 5.3 17.1

Safeguards 38 5.2 15 11.5 39.5

SPS 37 5.0 6 4.6 16.2

ImportLicensing 34 4.6 4 3.1 11.8

TRIPS 29 4.0 1 0.8 3.4

TRIMs 27 3.7 1 0.8 3.7

GATS 22 3.0 3 2.3 13.6

ATC 16 2.2 1 0.8 6.3

CustomsValuation 15 2.0 5 3.8 33.3

RulesofOrigin 7 1.0 2 1.5 28.6

Gov.Procurement 4 0.5 0 0.0 0.0

totAL 733 100 131 100 17.9

1ReferencestotheDSUandtheMarrakeshAgreementEstablishingtheWTOwerenottakenintoaccount.

2SeeBoxE.3foradescriptionoftheadjustmentmethodologyused.


fromtheAdvisoryCentreonWTOLaw;themultilateralsurveillanceprocess;theinstitutionalizedframeworkfortaking countermeasures; and the fact that the cost ofWTO dispute settlement is included in a member'sannualassessment,whileinmostPTAs,thepartiespaythepanellists,orpayforthecostofthetribunal.

(e) Caveats:mechanismsgeneratingnegativesystemiceffects

Some of the deep provisions contained in new-eraPTAs can contain discriminatory aspects, creating atensionwiththemultilateraltradingsystem.Themostprominent examples are the area of contingencymeasures(anti-dumpingandsafeguards).

(i) Discriminatory aspects in anti-dumping rules in PTAs

Recent research suggests that the risk of tradediversion may extend beyond tariffs. Prusa and Teh

(2010)uncoverwhattheycallaprotectionanaloguetothe trade creation-trade diversion impact of PTAs inthe area of anti-dumping. Anti-dumping provisions inPTAs result in members being spared from anti-dumping actions (“protection reduction”) while non-PTAmembersfaceevengreateranti-dumpingscrutiny(“protectiondiversion”).

TheideathatPTAsmayhavethisdistortionaryeffectisnotnew. Inaseriesofpapers,Bhagwati (1992:1993)and Bhagwati and Panagariya (1996) conjecture thatdue to its “elastic” and selective nature, anti-dumpingcanincreasetheriskofprotectiondiversionfromPTAs.According to their explanation, contingency measuresaredrivenbyimportvolume.Whoistargetedintheanti-dumpingpetition is entirely up to thediscretionof thedomesticindustry.

If anti-dumping provisions make PTA members moredifficult to sanction, the domestic industry will simplytarget other sources. As a result, we might see anincrease in anti-dumping protection directed towards


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BoxE.3:methodology

A Data sources The tables and graphs in this section are based on a specialized dataset that was developed based ondatabasesmaintainedbytheLegalAffairsdivisionandtheRegionalTradeAgreementsunitoftheWTO.Thedatasetincludesatotalof419requestsforconsultationssubmittedundertheWT/DSdocumentseriesasof31December2010.

B "Pairs” of members (i.e. complainant-defendant)Sevenrequestsforconsultationsinvolvedmorethanonecomplainant(i.e.DS16,DS27,DS35,DS58,DS158,DS217andDS234),whichmeantitwasnotpossibletoestablishwhetheraPTAwasinforcebetweentheparties without creating a bias in the figures. For this reason, the 419 requests for consultations as of31 December 2010 were re-expressed as 443 pairs of complainants-defendants. Figures relating to theprevalenceofaPTAatthetimeoffilingtherequestforconsultationswerederivedonthisbasis.

C Adjusting the references to the GAtt 1994SantanaandJackson(2011)notedthat,becausecomplainantstendtocitea largenumberofagreementsandprovisionsintheirrequestsforconsultationsundertheDSU,frequencycountsofprovisionscitedtendtooverestimatetheimportanceoftheGATT1994.ThisismainlybecausereferencestocertainGATTArticlestendtobesubsidiaryinnaturewhenmadetogetherwithother“specialized”agreementsorevenArticlesintheGATT.Forexample,thecomplainantinatypicalanti-dumpingcasewillnormallyclaimthatthedefendantis in breach of provisions in the Agreement on Anti-dumping, Article VI of the GATT, and that the anti-dumpingduty imposed is inviolationof the tariffbinding (Article II:1(b)of theGATT)and theMFNclause(ArticleIoftheGATT).

Inspiteof the fourArticlescited, theGATTnormallyplaysasecondary role in thesedisputes.Similarly,arequest for consultations citing both Articles II and XIX of the GATT is almost certainly a case aboutsafeguards and not about tariff bindings. To minimize the incidence of those secondary references, andfollowingtheprincipleoflex specialis,SantanaandJacksonproposedamethodologythatdoesnottakeintoaccount references to certain Articles of the GATT 1994 when cited together with other provisions. Theadjustmentsareasfollows:

1.Article I was excluded when a reference was made in the same dispute to the Agreements on Anti-dumping, Safeguards, SCM (related to countervailing duties - CVD), sanitary or phytosanitary measures(SPS),ortechnicalbarrierstotrade(TBT),orwhenareferencewasmadetoArticleVIoftheGATT(i.e.CVDoranti-dumpingrelated).

2.Article II was excluded when a reference was made in the same dispute to the Agreements on Anti-dumping,CustomsValuations,SafeguardsorSCM(CVDrelated),orretaliationunderArticle22oftheDSU.ItwasalsoexcludedwhenareferencewasmadetoGATTArticlesVI(i.e.CVDoranti-dumpingrelated)orXIX(safeguards).

3.Article IIIwasexcludedwhena referencewasmade in thesamedispute toeither theSPSor theTBTAgreements.

4.ArticleVIwasexcludedwhenareferencewasmadeinthesamedisputetoAnti-dumpingorSCM(CVDrelated)Agreements.

5.ArticleXIwasexcludedwhena referencewasmade in thesamedispute to theSafeguards,SPS,TBTAgreements,aswellasGATTArticlesXIIandXIX.

6.ArticleXVIwasexcludedwhenareferencewasmadeinthesamedisputetotheSCMAgreement(relatedtotheprovisionofsubsidies),ortoArticles3,6-11oftheAgreementonAgriculture.

7.ArticleXIXwasexcludedwhenareferencewasmadeinthesamedisputetotheSafeguardsAgreement

Onthebasisofanadjusteddataset,anagreementisconsidered“cited”ifoneormoreofitsprovisionsarecitedinaspecificrequestforconsultations.


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non-PTAmemberswheninfacttheinjurytodomesticindustry mostly stems from imports from other PTAmembers.38 The work by Prusa and Teh (2010)provides the first empirical support for thisconjecture.39 Their findings are especially relevantgiven the prominence of anti-dumping in the tradepolicy arena. Anti-dumping has long been thecontingency measure of choice and its prominencehasincreasedoverthepasttwodecades.Thenumberof countries using anti-dumping has increased five-foldandtheannualnumberofanti-dumpinginitiationshasmorethandoubled(Prusa,2005).

Figure E.2 shows a discernible difference in thepattern of anti-dumping activity of countries beforeandafterenteringintoaPTA.MeasuringtimerelativetotheyearthePTAwasenacted,yearzeroistheyearthePTAwasestablished,yeart–1istheyearbeforewhileyear t+1istheyearafter,etc.Noticethatduringthe years prior to the establishment of the PTAenactment,intra-PTAanti-dumpingactivityisgrowing.Thenumberofanti-dumpinginitiationsdropsharplyinthe year of establishment (t = 0) and remain muchlower in subsequent years as compared to the yearsprior to enactment. On average, during the ten yearsprior to establishment there were 29.5 anti-dumpingcases per year and during the ten years followingestablishmenttherewerejust23.6casesperyear.

There is another way to show how PTA membershipchangesthepatternofanti-dumpingactivity.TableE.4depicts anti-dumping filings when countries aredistinguishedbetween(i)thosewhoaremembersofaPTAand(ii)thosewhoarenot,andthetimeperiodisdistinguished between pre- and post-PTAestablishment. As seen, countries file about 58 percentofanti-dumpingcasesagainstnon-PTAcountries

priortoPTAenactmentbutaremarkable90percentfollowingenactment.Again,thisstronglysuggeststhatPTAsarechangingthepatternofprotection.

While illustrative, are these patterns statisticallysignificant (unlikely to have occurred by chance)?Furthermore, there may be other provisions in PTAsthatcanexplainthepattern intheanti-dumpingdata.PTAs often liberalize investment, thus increasing thelevel of FDI flows between PTA partners. The fall inanti-dumping activity between PTA members mightthus arise because imports are sourced frommultinational affiliates. Another concern is that theresults may be entirely driven by the big users(European Union and the United States) or targets(China)ofanti-dumping.

Prusa and Teh's econometric analysis (a methodknown as difference-in-difference regression)establishesthatthepatternsdonotarisesimplyfromchance.40 In addition, they find that PTAs cause asmuch as a 60 per cent reduction in anti-dumpingdisputes between PTA members. This result is notsolelydrivenby thosePTAs thathaveabolishedanti-dumping (forwhom intra-PTAanti-dumpingactivity is

FigureE.2: Intra-PtA anti-dumping initiations

Source:PrusaandTeh(2010).

30

35

40

45

50

20

25

15

10

5

0

Num

ber o

f AD

cas

es

29.5 cases/yr 23.6 cases/yr

Time (relative to enactment of PTA)

PTA enactment

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

TableE.4:Anti-dumping initiations by PtA status

target country

Non-PTAcountry PTAcountry

Pre-PTA 506 370

58% 42%

Post-PTA 3,554 375

90% 10%

Source:PrusaandTeh(2010).


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essentially eliminated). When they only look at thosePTAs that have adopted PTA-specific anti-dumpingrules,theyfinda33-55percentreductioninintra-PTAanti-dumpingactivity. Theyfindnosignificantchangeinanti-dumpingactivityforPTAswithoutPTA-specificanti-dumpingrules.

Their econometric estimates also suggest that PTAscausea10-30percentincreaseinthenumberofanti-dumpingfilingsagainstnon-PTAmembers.Takingtheprotection reduction and diversion results together,they find that the reduction in intra-PTA activity ismorethanoffsetbytheincreaseinactivityagainstthefar larger set of non-PTA members. Overall, theyconclude that PTAs increase the number of anti-dumpingfilingsbyperhapsasmuchas10percent.

Theirresultsappeartobeextremelystable.Evenwhenthey excluded the EU, NAFTA and China individuallyfrom their analysis, the results were essentiallyunaffected.Totakeaccountofthepossibleeffectsofother PTA provisions, they included FDI flows and ameasure of the investment liberalization in each PTAbased on work done by Dee et al. (2006) and Dee(2008). While investment provisions in PTAs reducetheincidenceofanti-dumpingdisputes,theycontinuedto find that anti-dumping rules remain a significantindependentexplanationforthereductioninintra-PTAanti-dumpingcases.

(ii) Discriminatory aspects in safeguard rules in PTAs

There are typically two types of safeguard actionswhich are covered in PTAs: “bilateral” and “global”safeguard actions.41 Bilateral safeguard actions aremeanttoapplyonlytothetradeofotherPTAmembers.Theyprovidea temporaryescape formemberswhen,asaresultofundertakingthecommitmentsundertheagreement, increased imports from PTA partnersresultinseriousinjurytothedomesticindustry.Globalsafeguard actions, on the other hand, are triggeredunderGATTArticleXIX(EmergencyActiononImportsof Particular Products) and the Agreement onSafeguards. Multilateral rules require that anysafeguard measures be applied on a non-discriminatory basis. Typically, the PTA provisions onglobalsafeguardactionsspecifytheconditionsunderwhichPTApartnerscouldbeexcludedfrommultilateralsafeguardactionsinvokedbyamember.

While most of these PTAs state that their safeguardprovisionsareinaccordancewithordonotaffecttheirmembers'rightsandobligationsunderthemultilateralagreements,manygoontoexcludetheimportsofPTApartnersfromglobalsafeguardactions.42

The conditions under which imports from PTAmembers can be excluded from a global safeguardaction are if those imports do not account for asubstantial share of total imports and if they do not

contributetoseriousinjurytothedomesticindustryorthethreatthereof.43

TheAgreementonSafeguardsrequiresthatsafeguardmeasures be applied to all imports irrespective ofsource (non-discrimination). Thus, the exclusion ofPTA partners from a safeguard action poses apotential conflict between regional and multilateralrules.ThisconflicthasbeenaddressedinanumberofWTO dispute cases (Argentina–Footwear, United States–Wheat Gluten, United States–Line Pipe and United States–Steel).Inthesecases,theinvestigatingauthority had included imports from all sources inmaking the determination that imports were enteringin such increased quantities so as to cause seriousinjury to the domestic industry. However, instead ofapplying safeguard measures to all importsirrespective of their source, the country invoking thesafeguard action excluded its PTA partners.44 In allfour cases, the Appellate Body has ruled against theWTO member which included its PTA partners in thesafeguard investigation but excluded them in theapplicationofthesafeguardmeasure.

The key concept that underlines all these cases hasbeen called “parallelism”.45 In brief, parallelismprohibits any differences in the application ofsafeguards measures.46 In the case of PTAs,parallelism means that when a WTO member hasconducted a safeguard investigation consideringimports from all sources, it cannot, subsequently,withoutanyfurtheranalysis,excludeimportsfromPTApartners from the application of the resultingsafeguard measure. In order to be able to excludeimportsfromPTApartners,theinvestigatingauthoritymust establish explicitly that imports from non-PTAsources alone caused serious injury or threat ofserious injury to the domestic industry. Theinvestigatingauthority, initscausalityanalysis,shouldfurtherensure that theeffectsof theexcluded (PTA)imports are not attributed to the imports included inthesafeguardmeasure.

Whiletheelaborationoftheprincipleofparallelismbythe Appellate Body in these four cases has clarifiedone issue, WTO jurisprudence has not provided adefinitive ruling to what extent GATT Article XXIVcouldbereliedonbyaWTOmember toexcludePTApartners from the application of a safeguardmeasure.47 The provisions excluding PTA partnersfrom global safeguard actions raises concerns aboutincreased discrimination against non-members andtrade diversion. Although WTO dispute settlementpanelshaveruledagainstexcludingPTApartnersfromsafeguard measures if imports from those PTApartners had been included in the investigation, theyappeared tohavedonesoonquitenarrowgrounds–on the lack of parallelism in the application ofsafeguard measures. So far the Appellate Body hasnotruledonwhethersuchexclusionswillbejustifiableunder GATT Article XXIV. Conceivably, under a


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different set of circumstances, exclusion of PTApartnersfromsafeguardmeasurescouldpassmuster.

(iii) Other mechanisms

The non-discriminatory nature of deep provisionsmight in principle create adverse systemic effects,namely political-economy and third-countryresistances to further multilateral liberalization. Ifpreferential liberalization is non-discriminatory innature, it might be opposed by political-economyforces, because higher market shares (and profits) intheothermember’smarketmightbemorethanoffsetby the loss of domestic profits vis-à-vis firms frompartnersandnon-members.48

Secondly, the non-discriminatory nature of deepprovisions may undermine the willingness ofdeveloping countries to engage in multilateralnegotiations with developed countries with theobjectiveofexchangingdeepregulatorycommitmentswith market access for goods (Chauffour and Maur,2011).Thisisbecausepreferentialtariffsareboundtobeerodedovertime,whereasregulatorycommitmentsarebothpermanentandMFN;therebytheycannotbeused as bargaining chips over time and vis-à-visdifferentcountries.

Thirdly, it has been argued that lock-in effects ofregulatoryharmonizationwithinagivenPTAmayhavenegative systemic effects (World Trade Organization(WTO), 2007). Competing PTAs with incompatibleregulatory structures and standards may lock-inmembers. This can constitute a threat to themultilateral trading system for two reasons. First, itundermines the principles of transparency andpredictability of regulatory regimes. Secondly, it mayhinderfurthermultilateralliberalization.Arecentstudy(Piermartini and Budetta, 2009) has found evidenceofdistinct “families”ofPTAswithdifferentiated rulesontechnicalbarrierstotrade.Thestudyshowsthatanumber of regional arrangements that have theEuropean Union as the hub include provisions toharmonizethestandardsofthespokepartnercountrytoEUstandards.TotheextentthattheadjustmenttoEuropean standards requires making investments,theseprovisionsmay lock-inacountrytotheregionalarrangement, thus making movement towardsmultilateralliberalizationcostly.

Finally,ithasbeenarguedabovethatthird-partyMFNclauseshavethepotentialtoreducethediscriminatorynatureof preferential agreements.However, a varietyofPTAsdonot contain third-partyMFNclauses (e.g.China – ASEAN). In this case, the provisions of theagreement effectively discriminate vis-à-vis thirdcountries, and there is the risk of discriminatorytreatmentbetweendifferentpartiesofdifferentPTAssigned by the same country (Houde et al., 2007). Intheir services and investment chapters, other PTAsincludesectoralexceptionstotheautomaticextension

ofthethird-partyMFNtreatment.Excludedsectorsdonot therefore automatically benefit from the bettertreatmentoffutureagreements.However,asreportedbyHoudeetal.,veryfewsectorsareconcerned.

Moreover,asarguedbyAdlungandMorrison(2010),anumberofagreementsexcludesomeofthepotentiallymost distortive types of intervention from third-partyMFNobligations(e.g.allsubsidiesareexcludedunderthe Australia-United States Free Trade Agreement –AUSFTA). The Economic Partnership Agreements(EPAs)thattheEUconcludedwithAfrican,Caribbeanand Pacific (ACP) countries contain MFN clausesrequiring that, if an ACP country concludes asubsequent PTA with a major trading economy otherthan theEU, suchas theUnitedStatesorBrazil, theEUshouldautomaticallyreceivethebenefitsconcededinsuchPTA.AsarguedbyPauwelyn(2009),inclusionof thisclause in recentEPAs iscontroversial. Itcouldin fact have a chilling effect on third countriesqualifying as “major trading economies” that werepreviously interested in concluding a PTA with ACPcountries.

3. RegionalismandtheWTO:historicalperspective

The MFN principle is at the core of the multilateraltradingsystem.Nevertheless,fromitsverybeginnings,the multilateral trading system has allowed somespaceformembercountriestogranteachothermorepreferential treatment under free trade areas orcustomsunions.Asonecommentatorhasputit,“(t)hereal thrust of the GATT had been to control andcontaindiscriminationratherthaneliminateit”(Hudec,1990). The rules applicable to free trade areas andcustomsunionsunderArticleXXIVoftheGATThavebeenincorporatedintotheWTOwithlittlechangeandthemanyinterpretativequestionsthatariseunderthatprovision remain intensely debated today.49 Althoughthere are still many observers who would like to seethe rules clarified and strengthened, recent effortshavefocusedonimprovingtransparency.

(a) TheoriginsoftheGATT

Preferentialtradingarrangementswereoneofthemainissues of concern of some of the countries thatparticipated inthenegotiationsfortheestablishmentofan International Trade Organization (ITO), whicheventuallybecamethebasis for theGATT. Inparticular,some countries saw the ITO negotiations as anopportunity to dismantle certain existing preferentialtrade arrangements, such as the preferences betweenterritoriesbelongingtotheBritishCommonwealth,whiletheBritishseemedwillingtodismantlethesepreferencesonlyiftheyobtainedmeaningfulaccesstoothermarkets,particularly the United States (Hudec, 1990). Indeed,several commentators note that this was an importantobjectivefortheUnitedStates,whichmadeaproposalto


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allow preferences only between territories that formedpart of a customs union and later accepted interimarrangements that would lead to a customs union. Agroup of developing countries that included Syria andseveral Latin American countries sought to widen theexceptiontoincludefreetradeareas.

The language adopted at the Havana Conference of1947-48,whichwaslater incorporatedintotheGATT,allowed for free trade areas and customs unions, aswellasinterimarrangementsleadingtotheirformation.Several explanations have been put forward bycommentators to explain the eventual acceptance ofpreferencesunder free tradeareas, especiallyby theUnitedStates,whichinitiallyhadopposedthem.

Inarecenthistoricalstudy,Chase(2006)summarizesthe reasons that were traditionally given for theacceptance of free trade areas within the frameworkof the GATT: the need to compromise to reachagreements (Viner, 1950); discouraging aconsolidation of the Commonwealth preferences(OdellandEichengreen,1998);encouragingEuropeanintegration (Bhagwati, 1991; Odell and Eichengreen,1998); or pressure from certain developing countries(Haight,1972;Mathis,2002;WorldTradeOrganization(WTO), 1995). Chase (2006) disagrees with thesetraditional views and, based on his archival research,suggests that the United States and Canada weresecretly negotiating a bilateral free trade agreementand the United States changed its position on freetrade areas to accommodate this eventuality.AccordingtoChase(2006),theUnitedStatesdidnothave to make a new proposal because it saw anopportunity in the proposal allowing free trade areassubmittedbyLebanonandSyria.

ArticleXXIVof theGATT recognizes “thedesirabilityof increasing freedom of trade by the development,through voluntary agreements, of closer integration”,yetcautions“thatthepurposeofacustomsunionorofafree-tradeareashouldbetofacilitatetradebetweentheconstituent territoriesandnot to raisebarriers tothe trade of other contracting parties with suchterritories.” Article XXIV:5 establishes that theprovisionsoftheGATT“shallnotprevent,asbetweentheterritoriesofcontractingparties,theformationofacustomsunionorofafree-tradeareaortheadoptionofaninterimagreementnecessaryfortheformationofacustomsunionorofafree-tradearea”.

For purposes of Article XXIV, a customs union isunderstood as “the substitution of a single customsterritory for two or more customs territories, so that(i) duties and other restrictive regulations of commerce(except, where necessary, those permitted underArticlesXI,XII,XIII,XIV,XVandXX)areeliminatedwithrespect to substantially all the trade between theconstituentterritoriesoftheunionoratleastwithrespectto substantially all the trade in products originating insuch territories,and, (ii) ... substantially thesameduties

andotherregulationsofcommerceareappliedbyeachofthemembersoftheuniontothetradeofterritoriesnotincluded in the union”. A free-trade area is “a group oftwoormorecustomsterritories inwhichthedutiesandotherrestrictiveregulationsofcommerce(except,wherenecessary, those permitted under Articles XI, XII, XIII,XIV,XVandXX)areeliminatedon substantially all thetrade between the constituent territories in productsoriginatinginsuchterritories”.

Article XXIV sets out additional conditions that mustbe met by customs unions and free trade areas.Generallyspeaking,inbothcases,thedutiesandotherregulationsapplieduponformationmaynotbehigheror more restrictive than previously. In the case ofcustomsunions, thedutiesor regulationsmaynotbe“on thewhole”higher than the “general incidence”ofthe duties and regulations of commerce previouslyapplicable in the constituent territories. Interimagreements for the formation of a customs union orfreetradeareamustinclude“aplanandschedule”fortheformationofthecustomsunionorfreetradearea“within a reasonable length of time”. Certainnotification requirements also apply underArticle XXIV. Furthermore, Article XXIV includesprovisions on frontier traffic (Article XXIV:3) and onobservanceofGATTobligationsbyregionaland localgovernments and authorities (Article XXIV:12).Specific exceptions for preferences between certainneighbouring countries (for example, Lebanon andSyria; Belgium-Luxembourg-Netherlands) wereincludedinArticleIoftheGATT.

(b) DevelopmentsduringtheGATTyears

The creation of the European Economic Community(EEC) and its association agreements were theprincipalfocusofthediscussionsaroundArticleXXIVduring the early years of the GATT. CommentatorsdescribeintensedebatesamongtheGATTcontractingparties on the consistency of the EEC with therequirementsofArticleXXIV.ThecompatibilityoftheTreatyofRomewiththerequirementsofArticleXXIVwasnotresolvedbythecontractingparties.AsLadreitdeLacharrière(1987)notes, in1958,thecontractingparties considered it “more fruitful if attention couldbedirectedtospecificandpracticalproblems,leavingaside for the time being ... debates about thecompatibilityoftheRomeTreaty”withtheGATT.50

Eventually the GATT contracting parties opted forresolving some of the tariff issues surrounding theformation of the EEC as part of the Dillon Round(Hoda, 2001). The EEC association agreements withother countries were also the subject of intensedebates. Here the concern was about the lack of aclearcommitment to full liberalizationormembership.EFTA's notification also gave rise to discussions,particularlybecauseofitsexclusionofagricultureandfisheries (Hudec,1990).Anotheragreement thatwasnotifiedatthetimewasALALC,whichincludedseveral


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LatinAmerican countries, andwhich raisedconcernsastotheambitiousnessoftheliberalizationprogrammeand its objective of promoting infant industries51

(Hudec,1990).

At the time, therewasnostandingbodyof theGATTthatwasresponsibleforreviewingagreementsnotifiedunder Article XXIV. Instead, these agreements werereviewed by individual working parties. GATTcontracting parties did not adopt definitive reportswithrespecttotheseagreements.Mostcommentatorsagreethat,despitethemanyquestionsraisedbysomecontractingpartieswithrespecttothePTAsthatwerenotified, what essentially developed was a policy oftolerance towards theseagreements.Jackson (1969)observes that generally speaking the practice of theGATT was of “a high degree of tolerance for a widediversity of regional arrangements”. Nevertheless, herecognizes that “legal discussions about criteria inArticleXXIVandconsultationsmayhaveenabled theinterestsofpartiesthatwerenotmemberstoregionalarrangements to influence those regionalarrangementsinawaythatsoftenedtheirdetrimentalimpactonthetradeofnon-members”.

Another importantdevelopmentduringtheGATTwastheadoptionoftheDecisiononDifferentialandMoreFavourable Treatment, Reciprocity and FullerParticipation of Developing Countries, commonlyknown as the “Enabling Clause”. In addition toproviding a basis for unilateral tariff preferences fordevelopingcountries,theEnablingClauseprovidesanexemption from theMFNobligation inArticle Iof theGATT for “(r)egional or global arrangements enteredinto amongst less-developed contracting parties forthe mutual reduction or elimination of tariffs and, inaccordance with criteria or conditions which may beprescribed by the CONTRACTING PARTIES, for themutualreductionoreliminationofnon-tariffmeasures,onproductsimportedfromoneanother”.

A totalof124agreementswerenotified to theGATTbetween1948and1994.Of these,however,only38remained in force in 1995 when the WTO wasestablished.AsexplainedinaWTOSecretariatReport,this reflects “inmostcasestheevolutionover timeoftheagreementsthemselves,astheyweresupersededby more modern ones between the same signatories(most often going deeper in integration), or by theirconsolidation into wider groupings” (Crawford andFiorentino,2005).

Discriminatory treatment underPTAsbecamea topicof increasing concern over the years. In 1983, theDirector-GeneraloftheGATTcreatedanindependentgroupofseveneminentpersonstostudyandreportonthe problems facing the international trading system.ThegroupissueditsreportinMarch1985.Commonlyreferred to as the “Leutwiler Report”, one of itsconclusions is that “(t)he rules permitting customsunions and free-trade areas have been distorted and

abused” and that “(t)o prevent further erosion of themultilateral trading system, they need to be clarifiedandtightened”.

The Report indicated that, while the EuropeanCommunity and EFTA met the conditions inArticleXXIV, “many agreements presentedunder therules, including some agreements between theEuropeanCommunity and its associates, fall short ofthe requirements”. It further cautioned that “(t)heexceptions and ambiguities which have thus beenpermitted have seriously weakened the trade rules,andmake itverydifficult to resolvedisputes inwhichArticle XXIV is relevant”. Accordingly, the Reportproposesthat“GATTrulesoncustomsunionsandfreetrade-areas should be examined, redefined so as toavoidambiguity,andmorestrictlyapplied,sothatthislegalcoverisavailableonlytocountriesthatgenuinelyuse it to establish full free trade among themselves”(Leutwiler,1985).

(c) PTAsintheUruguayRound

During the Uruguay Round, a group of countries thatincludedAustralia,India,Japan,NewZealandandtheRepublic of Korea favoured strengthening thedisciplines of Article XXIV. Japan, in particular,proposed among others, improving the consultationsbefore and after agreements were reached;establishingafirm time limiton “interimagreements”,to ensure that members moved to genuinely opentrade;clearlydefining“general incidence”ofdutiesorother regulations; and limiting the credit that a newcustomsunioncouldclaimif thegeneral incidenceofduties or regulations was actually lower than before.India,for itspart,proposedreviewingtherequirementthat duties and other restrictive regulations beeliminatedon“substantiallyalltrade”betweenthePTApartners(Croome,1995).

Inasecondsetofproposals,Japansoughttoimprovethe procedures for examination of preferential tradeagreements, suggesting the establishment of specialprocedures, separate from GATT dispute settlement,to assess and discuss compensation for damagescausedbypreferentialagreementstothetradeofnon-members. Some of those who opposed this proposalsuggested that surveillance of preferential tradeagreements could be undertaken under the newly-created Trade Policy Review Mechanism (Croome,1995).

AnotherissuediscussedduringtheUruguayRoundinconnectionwithpreferentialtradeagreementswastheobligationinArticleXXIV:12relatingtofederalstates.This point was initially raised by India, but was latertakenupbytheEuropeanCommunity,whichpresentedaproposal to tightenArticleXXIV:12byaffirming thefull responsibility of GATT members for measurestaken by their regional or local governments orauthorities(Croome,1995).


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Ultimately, the discussion coalesced around the ideaof negotiating an Understanding on Interpretation ofArticleXXIV,whichwould focuson thecalculationofthelevelofdutiesbeforeandafteracustomsunionisformed,reasserttheobligationtocompensate,setoutrequirements for interim arrangements, limit the“reasonable period of transition” to ten years unlessotherwise authorized, and acknowledge that mattersarising under Article XXIV could be submitted todisputesettlement.

Despite initial opposition from the EuropeanCommunity(whichwantedfullercreditincompensationnegotiations for tariff reductions made by groupmembers and was dissatisfied with the text onArticle XXIV:12), India (which considered the textdisproportionately weak), and Yugoslavia (whichobjected to the text on Article XXIV:12), theUnderstanding on Interpretation of Article XXIV wasadopted and became part of the Uruguay Roundagreements(Croome,1995).

An additional development of significance during theUruguay Round was the inclusion in the GATS of aprovisiononpreferentialagreements relating to tradeinservices.52

(d) DevelopmentsintheWTO

(i) Committee on Regional Trade Agreements

The WTO Committee on Regional Trade Agreements(CRTA)wasestablishedbytheGeneralCouncilin1996(WT/L/127). It was initially foreseen that the CRTAwouldcarryout theexaminationsof theregional tradeagreements notified to the WTO, thus taking over thefunctionsoftheindividualworkingpartiesoftheGATT.Despite the establishment of the CRTA in 1996, theexamination of RTAs resulted in stalemate. Between1996 and 2001 not a single examination report hadbeen adopted by the CRTA, in part due to continuingdisagreements over the inherent ambiguities in GATTArticleXXIV, the lackof informationsubmittedbyRTAparties, and the fact that the determination ofconsistency was to be made by all WTO members,includingthosewhoseRTAswereunderexamination.

In December 2006, WTO members adopted on aprovisional basis a new transparency mechanism forregional trade agreements (WT/L/671).53 The newmechanism calls on members to provide an “earlyannouncement”oftheirinvolvementinnegotiationsfora regional trade agreement, requires members topromptly notify a newly concluded regional tradeagreement, and sets out a schedule for itsconsideration by WTO members.54 The mechanismprovides that consideration of notified regional tradeagreements should conclude within a year from thedate of notification. For this purpose, parties to a

regional trade agreement are required to submitcertain data to the WTO Secretariat, such as tariffconcessions, MFN duties, rules of origin and importstatistics.

Based on this data, the text of the agreement, andinformation from other sources, the WTO Secretariatprepares a factual presentation that is intended toassist members in their consideration of the notifiedregionaltradeagreement.WTOmembersarecurrentlyreviewing the transparencymechanismwithaviewtomaking it permanent. The transparency mechanismplacesemphasisonthe“consideration”ofRTAsratherthan on their “examination”, which may be viewed bysome as a tacit acknowledgement by members thattheir interests would be better served by focusingeffortsonimprovingtransparency.

WTO members are also engaged in negotiations aspart of the Doha Round aimed at “clarifying andimproving disciplines and procedures under theexisting WTO provisions applying to regional tradeagreements.” Negotiations are to “take into accountthe developmental aspects of regional tradeagreements” and have been taking place in theNegotiatingGrouponRules.55

The CRTA reported that, as of 1 November 2010, 479regionaltradeagreements,countinggoodsandservicesnotificationsseparately,hadbeennotifiedtotheGATT/WTO, 288 of which were in force at the time.56 Thesefigures correspond to 375 “physical” agreements, ofwhich197were inforce(117goods,1servicesand79goodsandservices).Ofthe288notifications,174werenotifiedunderGATTArticleXXIV,31undertheEnablingClause, and 83 under GATS Article V. A total of 92regional trade agreements had been considered underthe Transparency Mechanism since its adoption inDecember2006.57

(ii) Dispute settlement

Despite the concerns expressed by many observersregarding the compatibility of many notified regionaltrade agreements with Article XXIV of the GATT,issuesrelatingtoregional tradeagreementshavenotfigured prominently in WTO dispute settlement. ThemostimportantissuethatcameupwasthequestionofwhethertheconsistencyofaregionaltradeagreementwithArticleXXIVcouldbeexamined inWTOdisputesettlement.InTurkey–Textiles,theAppellateBodyheldthat panels have the authority to examine whether aregional trade agreement meets the requirements ofArticle XXIV. The burden of establishing that theregional agreement meets the requirements ofArticleXXIVfallsontherespondentWTOmembertotheextentthatit invokestheregionalagreementasadefencetojustifyadiscriminatorymeasure.

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reactions from commentators. Roessler (2000) hasargued that the examination of the consistency ofregional trade agreements was a matter that shouldhavebeen reservedexclusively to theWTO'spoliticalorgans and specifically to the CRTA. By contrast,Davey (2011) has suggested that WTO disputesettlement could be used to further clarify thedisciplinesofArticleXXIV.WTOmemberssofarhavebeen reluctant to use the WTO dispute settlementsystem to enforce the obligations of Article XXIV oftheGATTandArticleVoftheGATS.

Issuesconcerning the relationshipbetween theWTOdisputesettlementsystemandthedisputesettlementsystems of PTAs have been discussed in connectionwithahandfulofWTOdisputes.Thesedisputeswereaddressed in subsection E.2. In this subsection, weaddress the small number of disputes in whichArticleXXIVhasbeenexplicitlyraised.

Asnotedabove, thecasethathasdealtmostdirectlywith the requirements of Article XXIV is Turkey – Textiles.Inthiscase,theAppellateBodyexaminedtherequirementsapplicabletocustomsunionsundersub-paragraph5ofArticleXXIVandexplainedthatapartyinvoking this provision to justify an otherwise WTO-inconsistentmeasuremustestablishthatthefollowingtwo conditions have been fulfilled. First, it “mustdemonstrate that the measure at issue is introducedupontheformationofacustomsunionthatfullymeetsthe requirements of sub-paragraphs 8(a) and 5(a) ofArticle XXIV”. Secondly, it must show that “theformationofthatcustomsunionwouldbepreventedifitwerenotallowedtointroducethemeasureatissue”(AppellateBodyReport,Turkey – Textiles,para.58).

Article XXIV has also been raised in the context ofseveral safeguard cases, where the issue has beenwhether a WTO member could exclude one of itspartners in a preferential trade agreement from theapplicationofasafeguardmeasure indeparturefromArticle 2.2 of the Agreement on Safeguards. ThesecaseswerediscussedinsubsectionE.2.

Ameasure takenpursuant toaPTAbecamerelevantin a dispute in which Brazil invoked the GeneralExceptions in Article XX of the GATT to justify animport ban on retreaded and used tyres on publichealth grounds. As a result of a decision by aMERCOSURtribunal,however,theimportbanwasnotapplied to imports of remoulded tyres fromMERCOSURmembers.

The panel found that “(t)he exception of remouldedtyres originating in MERCOSUR therefore does notseem to be motivated by capricious or unpredictablereasons”andthat“(t)otheextentthattheexistenceofsome discrimination in favour of other members of acustomsunionisaninherentpartofitsoperation,thepossibility that such discrimination might arisebetween members of MERCOSUR and other WTO

Members as a result of the implementation of theMERCOSUR Agreement is not, in our view, a prioriunreasonable”.

Thepanelneverthelessnotedthat“thefactthatwegivedue consideration to the existence of Brazil'scommitments under MERCOSUR in our assessmentdoes not imply that the exemption must necessarily bejustified. Rather, we must now examine the manner inwhichtheimportbanisapplied,takingintoaccounttheexistenceofanexemptionforMERCOSURmembers,inorder to determine whether the discrimination arisingfrom the MERCOSUR exemption is arbitrary orunjustifiable”.Becausethepanelfoundthatthe“volumesofimportsofretreadedtyresundertheexemptionappearnot to have been significant”, it concluded that “themeasure'sabilitytofulfilitsobjectivedoesnotappeartohavebeensignificantlyunderminedbytheoccurrenceofimports fromothersources,even in thepresenceofanexemptionforMERCOSURimports”.

Therefore, thepanelconcluded that “theoperationofthe MERCOSUR exemption has not resulted in themeasure being applied in a manner that wouldconstitutearbitraryorunjustifiablediscrimination”.Thepanel also relied on its analysis of the volume ofimports to conclude that the MERCOSUR exemptiondid not result in the import ban being a disguisedrestrictiononinternationaltrade(PanelReport,Brazil-Retreaded Tyres,paras.7.272-7.289and7.354-7.355).

TheAppellateBodydisagreedwiththepanel'sfinding,explaining that the ruling of the MERCOSUR arbitraltribunal was not an acceptable rationale for thediscrimination, because it bore no relationship to theprotection of public health, the legitimate objectivepursued by the import ban under Article XX(b), and“even[went]againstthisobjective,tohoweversmalladegree”. The Appellate Body held “that theMERCOSURexemptionhasresultedintheImportBanbeingappliedinamannerthatconstitutesarbitraryorunjustifiablediscrimination”.

Moreover,theAppellateBodydisagreedwiththepanel'sconsideration of the volumes of imports. According tothe Appellate Body, the analysis of “whetherdiscrimination is 'unjustifiable' will usually involve ananalysis that relates primarily to the cause or therationaleofthediscrimination”,anddoesnotdependon“the quantitative impact of this discrimination on theachievementof theobjectiveof themeasureat issue”.For thesamereason, theAppellateBodyreversedthepanel'sfindingthattheimportbanwasnotappliedinamanner that constituted a disguised restriction oninternational trade (Appellate Body Report, Brazil–Retreaded Tyres,paras.228-229).

A point emphasized by the Appellate Body was that“before the arbitral tribunal established underMERCOSUR, Brazil could have sought to justify thechallenged Import Ban on the grounds of human,


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animal, and plant health under Article 50(d) of theTreatyofMontevideo”,yetBrazildecidednottodoso.TheAppellateBodyobservedthat“Article50(d)oftheTreaty of Montevideo, as well as the fact that Brazilmight have raised this defence in the MERCOSURarbitral proceedings, show, in our view, that thediscrimination associated with the MERCOSURexemptiondoesnot necessarily result froma conflictbetweenprovisionsunderMERCOSURandtheGATT1994”(AppellateBodyReport,Brazil–Retreaded Tyres,para.234).

4. TherelationshipbetweenPTAsandtheWTO

(a) Coherenceininternationaltradegovernance

The quest for coherence between regionalism andmultilateralism is nothing new. In the early days of themultilateral trading system, economic thinking focusedonthewelfareeffectsofPTAs.AsexplainedinSectionC,themainfindingwasthattheseeffectswereambiguousformembersandgenerallynegativeforthirdparties.AsPTAs were mostly about tariff reductions, multilateralmarket opening which, even if it does not meancompletelyopentrade,reducesdiscrimination,wasseenas superior to preferential opening.58 In this context,ensuring coherence was understood as accepting thatPTAsandthemultilateralsystemcouldcomplementeachotherwhileimposingdisciplinesaimedatminimizingthenegativeeffectsthatPTAscouldhave.

As mentioned above, in the 1990s, the expansion ofregionalism brought the coherence issue back to theforefront.Manyanalysts re-examined the relationshipbetweenthetwoapproaches,thistimefocusingonthesystemiceffectsof regional integration.TheyshowedthatPTAscouldeitherbesteppingstonesorstumblingblocksontheroadtomultilateralmarketopening.Thisliterature,however,didnotprovidemuchguidanceonhowtoimprovecoherence.

WhethertheyviewthemultilateraltradingsystemandPTAs as complementing each other or think that themultilateral system is simply superior to the regionalapproach, observers broadly agree that “the case forfindingwaysofstrengtheningtheabilityoftheWTOtoinfluenceanddisciplinePTAs,oratleasttoblunttheirmoreexclusiveanddistortingfeatures,remainsstrong”(Low,2008).59Subsection3hasshownhowsinceitsinception the multilateral system has accommodatedpreferential trade agreements. GATT/WTO membershave largely taken a non-confrontational and non-litigiousapproach.Approachestoimprovingcoherencehave focused on the weaknesses of multilateraldisciplines and how they could be fixed. This sub-section summarizes the debate and briefly discussesthe main proposals. It appears that feasibility is themainissueandpoliticaleconomyisthekey.

Recentdevelopments inPTAactivitymaywell changethe perspective on coherence. As documented inSection B, PTA activity accelerated noticeably from1990 onwards. The number of PTAs had more thandoubled by 1995 and more than quadrupled by 2010,resulting in close to 300 active PTAs today. Aspreviously discussed, new PTAs – or at least some ofthem–arequalitativelydifferentfromolderones.Whilepart of recent PTA activity has consisted of theconsolidation and rationalization of bilateralarrangements, there has also been a trend towardsbilateral deals across the world. Since 1995, PTAactivity has increasingly crossed regional boundaries.ThecoverageofPTAsintermsofbothpolicyareasandproductshasalsowidenedanddeepenedovertime.

This has led some observers to think that regionalismhas entered a “new era” where the old analyticalframework is no longer valid and where ensuringcoherencenolongermeansmerelyimposingmultilateraldisciplines on discrimination. Baldwin (2010), forinstance,seesrecentPTAsasprovidingtheframeworkto underpin the “production unbundling” thatcharacterizesagrowingshareofworldtrade.Inhisview,twenty-firstcenturyregionalismismoreaboutreducingfrictional tradebarriersandthecostofdoingbusinessandremovingdomesticentrybarriers thanabout tariffpreferences. Given that preferential agreements onsuch behind-the-border measures do not typicallyinduce trade diversion, their systemic implicationscannot be analysed using the traditional stumblingblock/steppingstoneframework(seeSectionC).

The political economy of more recent PTAs is alsoabout a lot more than preferential tariffs. First,accordingtoBaldwin(2010),onlyafewcountriescanplayaleadingroleinsuchagreements.PTAsmotivatedbyproductionsharing,inparticularbetweendevelopedanddevelopingcountries,maybeseenasanexchangeof factories for the relaxation of behind-the-borderbarriers andassurances tooffshoringfirms that theirinvestmentsandintellectualpropertywillbesafe.Fewcountries, inBaldwin'sview,havethesortoffactoriesthatcanbeexchangedfordeepreformofbehind-the-bordermeasures.

Secondly, negotiating behind-the-border reform in theWTOmaynothelptodirectlyfosterinwardinvestment.Thirdly,thenatureofbehind-the-borderpoliciesmakesit difficult to multilateralize PTAs. For example, theprinciple of subsidiarity (see below) may apply in thatsomeareasmaybestbedisciplinedat the regional orbilateral level. These considerations lead Baldwin(2010) to the conclusion that “it is, thus, possible andevenlikelythatthenewdisciplinesformanindependentsystemofgovernancethatdoesnot intersectmuch,orat all, with Marrakesh rules”. If this is the case, thecoherencechallengeposedbyrecenttrendsinregionalagreements may be quite different from that arisingfromdiscriminatorytariffreductions.Itmaybethatnewinternational trade rules are being negotiated and


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decidedoutsidetheWTOinasettingwheredifferencesin power are greater and in the absence of the basicprinciplesofnon-discriminationandreciprocity.60

Whether and how this new challenge needs to beaddressedisanopenquestion.Furtherresearchwillbenecessary tounderstandbetter thesystemiceffectsofdeep integration. One issue that may require furtherinvestigation is the effects of power asymmetries andoptionsformitigating them.Also,asalreadymentioned,the principle of subsidiarity could be used to assesswhether measures agreed at the bilateral or regionallevelneedtobesubmittedtomultilateraldisciplines.6162Thisprinciplestatesthat“actiontoachieveagreedpolicyobjectives should be taken at the lowest level ofgovernment capable of effectively addressing theproblem at hand” (Sauvé and Beviglia-Zampetti, 2000).Because countries have different tastes, cultures,endowments,orinstitutions,theirsocialchoicesdiffer.Atthesametime,efficiencycriteriasuggestthatregulatoryregimesshouldapplytothelargestpossiblecommunities.

Given this trade-off, the subsidiarity principle statesthatthedeterminationofregulatoryregimesshouldbeas decentralized as possible unless action in onejurisdiction has an impact in others (spillovers) –resulting in cross-border external effects(externalities),orthecreationofeconomiesofscaleorpublic goods, in which case they too should beconsulted.Inotherwords,“unlesstherearesignificantspillovers,thereisnoefficiencycaseforimposingonesetof standardsacrossdifferent regulatorydomains”(RolloandWinters,2000).

A basic rationale for international cooperation onregulation is that the cost of complying with differentstandards may be high. Economies of scale (acrosscountries)andscope(acrossissues)arelikelytoexistinrule-making. However, conflicts of interest can arisebetween countries with permissive regulations andcountries with strict regulations that make multilateralcoordination hard and perhaps in some instancesundesirable. If these factors are sufficiently prevalent,mutual recognitionandharmonizationofproductnormsand testingmayworkbetterbilaterallyandplurilaterally(between relatively similar countries) than multilaterally.Whiletheremaybeconcernsregardingpossiblenegativethird-party effects of common or mutually recognizedstandards and shared conformity assessment in PTAs,empiricalevidencesuggeststhattheEU'ssinglemarketprogrammeincreasedaccessatleastasmuchforthird-partyfirms(MayerandZignago,2005).63

Finally, the fact that PTAs where preferential tariffsare still important have not disappeared means thatboththenewandtheoldcoherencechallengesneedtobetackledatthesametime.Theevidencepresentedin Section D suggests that only a (relatively small)number of the new PTAs have little or nothing to dowithpreferentialtariffs,andthattariffpreferencesstillplay a role in many new agreements. The next sub-

section provides a short summary of the debate onexisting multilateral disciplines. This overview isfollowedbyadiscussionofsomeof themainoptionsforimprovingcoherence.

(b) MultilateraldisciplinesonPTAs

As explained in subsection 3, the multilateral systemhas generated three core provisions to deal withregionalism. The first provision is GATT Article XXIV,whichallowsdeparturesfromMFNforcustomsunionsandFTAs.TheUruguayRoundUnderstandingon theInterpretation of Article XXIV of the GATT seeks toclarify the criteria and procedures for assessing neworenlargedagreementsand to improve transparency.The second provision is the “Enabling Clause”, whichrelaxes (some of) the GATT provisions on PTAs fordeveloping countries in the name of “special anddifferential treatment”forthisgroupofcountries.ThethirdprovisionisArticleVoftheGATS,whichsetsoutthe rules forPTAs in theservicesfield.Asdiscussedabove,WTOmembersmorerecentlyalsoadoptedonaprovisional basis a new transparency mechanism forregionaltradeagreements.

Over the years, a number of concerns regarding theeffectiveness of the multilateral oversight of regionalagreementshaveemerged (Davey,2011;Low,2008).First,ithasbeenarguedthatanumberofArticleXXIVprovisions defy uncontested legal interpretation and,more generally, are deficient.64 The debate hasfocusedontheinterpretationof:

• Paragraphs 5(a) and 5(b) of GATT Article XXIV,whichstatethat“thedutiesandotherregulationsofcommerce” imposedon thirdpartiesshouldnot “onthe whole be higher or more restrictive than thegeneral incidence” of the pre-PTA duties andregulations;65

• Paragraphs 8(a) and 8(b) of GATT Article XXIV,which state that duties and other restrictiveregulations of commerce should be eliminated withrespect to “substantially all the trade” between theconstituent territories,andParagraph1(a)ofGATSArticle V, which states that an RTA should have“substantialsectoralcoverage";

• Paragraph3oftheUnderstandingontheInterpretationof Article XXIV of the GATT, which states that the“reasonable length of time” within which theimplementation of an RTA should take place shouldexceedtenyearsonlyinexceptionalcases.

Secondly, several gaps in the GATT/WTO legal andinstitutional framework have been identified. Theabsenceofdisciplinesregardingrulesoforiginforfreetradeagreements, inparticular, hasbecomean issuewith the multiplication of such agreements and theresulting expansion of a spaghetti/noodle bowl.Similarly, there is no indication regarding howagricultural tariff quotas should be treated in


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preferential agreements, whether members of suchagreementsareallowedtoexcludetheirPTApartnersfromtheapplicationofcontingencymeasuresappliedto the trade of third parties, or whether PTA partiesmay or may not apply safeguards on their trade witheach other. Another question that has been raised iswhether the special and differential treatmentprovisions for developing country PTAs should beextendedbeyondthoseintheEnablingClause.66

Thirdly, while the law of the GATT/WTO may haveinfluenced PTA negotiations, in practice, it has neverbeen used to impose discipline on discriminatoryreciprocaltradeagreements(Davey,2011;Low,2008).Governments have almost never agreed throughestablished procedural arrangements whether anygiven PTA is in conformity with the multilateral rules.Procedural requirements such as notifications havebeenpartiallyobservedatbestanddisputesettlementfindingshavenothelpedaddressexistingweaknessesinthedisciplines.

In theeyesofsomeobservers, it is revealing that theTransparency Mechanism for Regional TradeAgreements is the only result of the Doha Roundnegotiations that has been allowed to go forwardindependently of the full results of the Round.67 Thissuggests both that WTO members are aware of theneed to understand better what regional tradeagreements are about and that they continue toprivilege a cautionary approach (Low, 2008). Othersgo even further and consider that the TransparencyMechanism advantageously substitutes the “old”reviewprocess(Mavroidis,2010).Withtradediversionreduced as a result of multilateral tariff reductions,along with empirical evidence suggesting that PTAscan be welfare improving, and with PTAs covering anumber of issues not covered by the WTO, existingrules are considered to be of limited relevance.Mavroidis (2010) argues that the TransparencyMechanism should become the de jure new forum todiscussPTAswithinthemultilateraltradingsystem.68

(c) Possiblewaystoimprovecoherence

Thisreporthasdiscussedtheideathattheremaybeacaseformaintainingseparateregimesforregionalandmultilateralcooperation.Thiswouldbethecasewhereparticulartypesofcooperationaremoreappropriatelymanaged at the regional rather than the multilaterallevel.Bythesametoken,thereareissuesthatcannotbe addressed adequately at the regional level. Inbetween these two polar realities, the coherencequestionarises.Essentially,thechallengeistoidentifywheretherearegainsfromensuringgreatercoherenceamong PTAs and between PTAs and the multilateraltradingsystem.

Anumberofdifferentapproacheshavebeenproposedfor improving coherence between PTAs and themultilateral trading system (Davey, 2011; Low, 2008;

Sutherland Report, 2004; The Warwick Commission,2007; World Trade Organization (WTO), 2003). Thissubsection reviews theseproposals andgroups themunder four headings: i) accelerating multilateral tradeopening; ii) fixing the deficiencies in the WTO legalframework; iii) adopting a softer approach as acomplement to the existing legal framework; andiv)multilateralizingregionalism.Theseapproachesarenot necessarily mutually exclusive. They all aim atreinforcing compatibility and coherence, whichessentiallymeansmakingsurethatPTAscontributetotrade cooperation and opening in a fundamentallynon-discriminatorymanner.Theydiffermainlyintermsof what they see as a politically feasible strategy toreachthisobjective.

LoweringMFNtariffswouldreducediscriminationandthereby blunt the adverse effects of PTAs. TheSutherlandReport,forinstance,recommendedthatalldeveloped country tariffs should be bound at zero inWTO members' schedules of commitments at someagreed upon time in the future. While a reduction tozero of all developed country tariffs on industrialproductsmaynotseemimpossibletoachieveinanottoo distant future, the Doha Round negotiationssuggestthatthismaynothappenwithoutameasureofreciprocity from emerging economies. As for theelimination of all tariffs on agricultural products, thisdoesnotseemtobepolitically feasible in thecurrentcontext.Also,bindingall tariffsatzeromaytakecareof tariff-induced trade diversion but it would noteliminate all potentially adverse effects of deeperintegrationmeasures.

As for the idea of filling gaps in the WTO legalframework, the Doha Round includes a mandate tonegotiate with a view to “clarifying and improvingdisciplines and procedures under the existing WTOprovisionsapplyingtoregionaltradeagreements”.Thenegotiationshavebeenpursuedalongtwotracks.Onthe one hand, members addressed procedural issuesrelating to the transparency of PTAs. On the otherhand, they tried to identify issues for negotiation,including “substantive” issues, such as systemic andlegal issues.69Asalreadymentioned,negotiationsonthe procedural issues resulted in the adoption on aprovisionalbasisofanewtransparencymechanismforregional trade agreements (WT/L/671). Thenegotiations on the “substantive” issues have so fargeneratedproposalsbyvariousmembersmainlyaimedatclarifyingtheprovisionsofGATTArticleXXIV.Whiletheseproposalscontributeusefullytothedebate,theydo not seem to have converged towards any form ofconsensusonpossiblereformstotherules.70

This should not come as a complete surprise aspreviousdiscussionshavenotledtomuchprogressonsubstantiveissues.71Onepossibleexplanationforthelack of progress is that members who have enteredPTAs in the past may be reluctant to sign off onclarifications in the rules that might suggest that the


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PTAstheybelongtodidnotcomplywithArticleXXIV(Davey, 2011). Considering that efforts to clarifyconcepts such as “substantially all trade”, “otherrestrictive regulations of commerce”, etc. have hadlimited success so far, it seems unlikely that thesecond option referred to above – that of clarifyingandstrengtheningexistingrules–wouldbeviable.

Moreover, WTO members have been reluctant to usetheWTOdisputesettlementsysteminordertoclarifyexistingrulesanditdoesnotseemlikelythattheywillchange thisposture in thenear future.Thisdoesnotmeanthatrevisedandimprovedruleswillnotonedaybe part of any significant progress towards morecoherence, only that this does not seem to be apromising starting point. In that context, economicanalysiscouldhelpstrengthentheexistingprovisions.It shows, for example, that the condition in GATTArticle XXIV that the protection applicable to non-members should not increase with the creation orextension of a PTA will not necessarily protect thelatterfromawelfareloss.72

Thethirdoptionnotedabovewouldbetoadopta“softlaw” approach to complement the “hard law” and thedisputesettlementmechanism.Thereisnoagreementintheliteratureregardingthedefinitionoftheconceptof “soft law”, although legal scholars often seem todefinehardlawasbindingandsoftlawasnon-binding(ShafferandPollack,2010).Oneexampleofsoft lawwould be the Code of Good Practice for thePreparation, Adoption and Application of StandardsannexedtotheWTOAgreementonTechnicalBarriersto Trade. Following the Code is optional for WTOmembers and WTO dispute settlement is unavailableasa remedyunder theCode.AnotherexamplewouldbeAPEC'sBestPracticesforFreeTradeAgreementsandRegionalTradingAgreements.73Therationaleforusing a soft law approach would be to allow WTOmembers to better understand their respectivepriorities and interests, with a view eventually tounblocking progress towards legal interpretations ofparticularprovisionsthatwouldensurecoherence.

Thesoft lawapproach isnotwithout risk.Aspointedout by Shaffer and Pollack (2010), soft law and hardlaw could become antagonistic to one another if theunderlyingconditionsforcooperationareabsent.Low(2008)argues thatasharedperceptionofobjectivesand the nature of the transition to hard law wouldincrease thechances that soft lawcouldhelp rebuildhardlaw.Inviewoftheseconsiderations,heproposesa three-stageapproach.Thefirststagewould involveincreasedtransparencyandinformationsharingunderthe new Transparency Mechanism. This reinforcedexchange of views would pave the way for theprogressive development of soft law in the form of acodeofgoodpracticesinthesecondstage.Finally,ina third and last stage, when governments becomecomfortable with the soft law, negotiations aimed atimprovingthehardlawprovisionscouldbeundertaken.

The fourth and last proposal is to multilateralizeregionalism (Baldwin, 2006; Baldwin and Thornton,2008). Baldwin (2009) defines a process ofmultilateralization as the extension of existingpreferential arrangements in a non-discriminatorymanner to additional parties, or a fusion of distinctPTAs.Theideaisthat,asaresultofglobalproductionsharing,politicaleconomyforcesthatwerebehindtheproliferationofPTAsandthecreationoftheso-calledspaghetti bowl have weakened and are beingprogressivelyreplacedbynewforcesfavourabletothemultilateralizationofpreferences.Thistranslatesintoanumber of multilateralization initiatives both at theregionalandatthemultilaterallevel.

Examples of initiatives taken at the regional level toreduce the tangle of PTAs include APEC's BestPractices for PTAs or the Pan European CumulationSystem, which reduced the distortions of internationaleconomic production within the zone through theharmonizationofrulesoforiginanddiagonalcumulation.An interesting example of multilateralization at themultilateral level is the Information TechnologyAgreement, which established a mechanism for theelimination of MFN tariffs on information technologyproducts and thus made rules of origin and rules ofcumulationnon-operative.

Recent researchhashighlighted thepotentialcostofoverlapping PTAs and complicated rules of origin totoday'sworldofgeographicallyfragmentedproductionchains(Baldwinetal.,2009).TheremaybearolefortheWTOtoreducethesetransactioncostsbyservingas a forum for the coordination/standardization/harmonizationofpreferentialrulesoforigin.74Anotherway that greater coherence can be established hasalready been discussed and consists of identifying“bestpractices” inPTAs.75AsnotedinSectionD,theextent to which deep integration measures in PTAshavethepotentialtogeneratethesamesortofcostlyspaghetti/noodle bowl as tariff preferences is stillbeing debated. Baldwin et al. (2009) explore sixdifferent areas, discussing for each of them whetherPTAs have created a spaghetti bowl and how PTAprovisionshavebeenorcouldbemultilateralized.

A final thought with respect to moves towards themultilateralization of PTAs concerns decision-makingprocedures. Several authors (Lawrence, 2006;VanGrasstek and Sauvé, 2006; Cottier, 2009; Elsig,2009; Low, 2011) have considered the possibility ofdeveloping a multilateral approach to a modifiedconsensus rule, often referred to as critical massdecision-making. The approach proposed by Low(2011)isverysimilartotheso-called“code”approachthatemergedintheTokyoRoundagreementsonnon-tariff measures, but which was subsequentlyeliminated by the “Single Undertaking” (wherebynothing is agreed until everything is agreed) thataccompanied the creation of the WTO in 1995. Arevivalofthecriticalmassapproachoccurredwiththe


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post-Uruguay Round agreements on basictelecommunicationsandfinancial services,aswellastheInformationTechnologyAgreement.

Theadoptionofacriticalmassapproachwouldmakeit possible to multilateralize trade rules withoutimplicatingtheentireWTOmembership–apropositionthatmaylookattractivewherethereisacaseformorebroadlysharedregulatoryapproachestotradebutnotnecessarily onaglobal basis.Acriticalmassmaybesaid to exist when a sufficiently large subset of theentire membership agrees to cooperate under theauspices of the WTO. An important characteristic ofthe approach is that agreements do not involve anydiscriminationvis-à-visnon-signatorycountries.

Appropriately chosen institutional and proceduralsafeguards could protect the system against the riskof fragmentationanddilutionof themultilateralbasisfor trade cooperation. Regarding the definition ofcritical mass, for example, a simple but effectiveapproachcouldbetoletthecriticalmassdefineitself.Criticalmasswouldbe reachedwhen thoseprepared

togoaheadwithanagreementconsider thatsupportandcommitmentfortheagreementinthemembershipis sufficient. Those left outside would then beconsideredtoosmalltounderminetheagreementandtherewouldnotbeanyreasonforrefusingtoapplytheMFN rule in respect of all the benefits to all non-signatories.

Another important question is whether and whenconsensusdecision-makingwouldneedtobeappliedtocriticalmassinitiatives.Intheabsenceofmultilateralparticipation through a consensus-based process, arisk exists that a sub-set of the membership couldshape rules from which they benefitted, but at theexpenseofmembersthatwerenotpartofthecriticalmass. The suggestion here is that critical massagreementswouldneedtobeapprovedbyconsensusbeforetheyenterintoforce.Notonlywouldtheriskofdamagingtheinterestsofnon-membersofthecriticalmassbeguardedagainst,butcriticalmassagreementswouldalso remainwithin theambitof themultilateralsystem.


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1 “Systemiceffects”aredefinedforthepurposeofthisreportasthestaticanddynamiceffectsofPTAsonthemultilateraltradingsystem.Anexampleofstaticeffectisthepossibilityofconflictingrules,forinstanceontraderemedies.AnexampleofadynamiceffectistheimpactofaPTAontheprobabilityofengaginginfurthermultilateralnegotiations.

2 ThereissometheoreticalandempiricalworkstudyingtheinversequestionofwhethermultilateralismdrivestheproliferationofPTAs.Ethier(1998)andFreund(2000)buildtheoreticalmodelswherePTAformationisanendogenousresponsetothemultilateraltradingsystem.Usingdataonmultilateraltariffcutsandduty-freeaccessconcessionsgrantedbytheUnitedStatesatthetariff-linelevel,FugazzaandRobert-Nicoud(2010)findempiricalevidenceinsupportoftheclaimthatpastMFNopeningsowstheseedsoffuturepreferentialopening.

3 Therearepracticalproblemswiththisargument.First,assumingtheavailabilityofinternationallump-sumtransfersmaynotberealistic,andintheirabsence,itmayverywellbethat,atsomepoint,someblocmemberswillvetofurtherenlargements.Secondly,nothingforcesPTAmemberstosettheirexternaltariffsasassumedbyKempandWanandtheymayindeedhavereasonstosetthemdifferently(seeSectionC.1).

4 “Preferenceerosion”referstodeclinesinthepreferencemarginthatsomeexportersenjoyinforeignmarketsasaresultofpreferentialtradetreatment.Itcanoccurwhenexportpartnerseliminatepreferences,expandthenumberofpreferencebeneficiaries,orlowertheirMFNtariffwithoutloweringpreferentialtariffsproportionately(AlexandrakiandLankes,2004).

5 ExcludedcountriessufferfromthePTAbecausetheborderpricefacedbytheirexportersfalls.Fromtheperspectiveofmembercountries,thegainsofmovingtoglobalfreetradearebetteraccesstothird-countrymarketsandmoreliberalizationintheirimportmarkets.However,thesegainsaresmallforlowinitialtariffs,givingnoincentivetoPTAmembercountriestomovetomultilateraltariffreductions.

6 However,AmitiandRomalis(2007)arguethatformanydevelopingcountries,actualpreferentialaccessislessgenerousthanitappearsbecauseoflowproductcoverageorcomplexrulesoforigin.Therefore,loweringtariffsatthemultilaterallevel(DohaRound),especiallyonagriculturalgoods,islikelytoleadtoanetincreaseinmarketaccessformanydevelopingcountries.

7 Thisistheso-called“juggernaut”logic(BaldwinandRobert-Nicoud,2008).

8 NotethattheeffectcouldbereversedifthePTAresultedinahigherlevelofprotectionforthehomeimportcompetingsector.Inthiscase,asarguedbelow,thePTAwouldinhibitmultilateralism.

9 Enhancedprotectionisobtainedwhenproducersfromthelow-(external)tariffmembercanexportalltheiroutputtothehigh-tariffmemberwithoutaffectingpricesthere.Inthatcase,producersinthehigh-tariffcountryarenothurtwhileproducersfromthelow-tariffcountryenjoyhigherprotectionrents(FreundandOrnelas,2010).

10 AsdiscussedinSectionC,Ornelas(2005b),(2005a)qualifiestheargumentinmodelswheretheexternaltariffisendogenous.Thepossibilitythattrade-divertingPTAsareformedismorelimited,butcannotberuledout.

11 SchiffandWinters(1998)argue,however,thatPTAsbasedonsuchfactorsarelikelytobetransitory,sinceoptimumtradepreferencestendtodeclineovertime.Intheirmodel,thePTA’sexternaltradepolicybecomesincreasinglyopenovertime.

12 Noticethatthisresultisindependentoftheexistenceofpoliticaleconomymotivationsinexcludedcountries.If,however,thegovernmentsofnon-membercountriesputadisproportionatelyhighvalueontheprofitsofproducers,theyareevenmorelikelytoopposeglobaltradeopening.

13 SinceitisnotpossibletoobservethedegreeofmultilateralliberalizationtowhichacountrythatisamemberofaPTAwouldhavecommittedtoinitsabsence,theseempiricalstudieshavetorelyondifferencesinliberalizationpatternsovertime,acrosscountriesoracrosssectors,makingithardertoidentifythecausaleffectofPTAs.

14 Unilateraltariffreductionshaveaccountedfortwo-thirdsofthe21percentagepointcutsinaverageweightedtariffsofalldevelopingcountriesbetween1983and2003,accordingtotheWorldBank(2005).TariffreductionsassociatedwiththemultilateralcommitmentsintheUruguayRoundaccountedforabout25percent,andtheproliferationofregionalagreementsamountedtoabout10percentofthereduction.

15 BothstudiesfindthatUruguayRoundliberalizationwassmallerinproductswherepreferencesweregranted.

16 Thisinterpretationisstronglycriticizedbyanumberofscholars(Baldwin,2009).AccordingtoBaldwin(2009),itisCanadaandMexico’schangeofmindthattriggeredtheriseofregionalisminNorthAmerica.

17 ThisandthefollowingparagraphdrawonWorldTradeOrganization(WTO)(2007).

18 Asexplainedinmoredetailbelow,thePECSarrangementscameintobeingbecauseindustrialtradewasalmostduty-freeinEurope,buttradeflowswerebesetbycomplexandintertwiningoriginandcumulationrules.Tradeininformationtechnologyproductswasvirtuallydutyfree,buttheimpedimentstoefficiencyarisingfrommultiplepreferentialarrangementsbuiltpressureongovernmentstosimplifyarrangements–hencetheITA.

19 Thepointismoregeneralthanserviceliberalization.Itapplies,forinstance,topoliciesthatreduceoreliminatetechnicalbarrierstotrade(TBTs)acrosstheboard,bywayofregulatoryharmonizationormutualrecognition.EmpiricalevidencesuggeststhattheEU’ssinglemarketprogramme(alargepartofwhichisbasedonnon-discriminatoryregulation)increasedaccessatleastasmuchforthird-partyfirmsasforEUmembers(MayerandZignago,2005).

20 First-moveradvantagedefinescasesinwhichthesupplierthatfirstgetsintothemarketcanbenefitfromalong-lastingadvantage,evenifothersuppliersarenotsubsequentlyprohibitedfromentering.SeeMattooandFink(2004)andManger(2008).

21 GATSArticleV:6mandatestheestablishmentofliberalRoOsforPTAsinvolvingdevelopedcountries.TheArticleestablishesthat“A service supplier of any other Member that is a juridical person constituted under the laws of a party […] shall be entitled to treatment granted under such agreement, provided that it engages in substantive business operations in the territory of the parties to such agreement”.GATSArticleV:3(b)providesthatPTAsinvolvingonlydevelopingcountriesmay“limittradepreferencestoservicesuppliersownedorcontrolledbypersonsoftheparties”.YetmostPTAsamongdevelopingcountrieshavenottakenadvantageofthisoption.Amongthe

Endnotes


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reasonswhycountrieshaveagreedtoincludeliberalRoOsintheGATSandnottousethespecialanddifferentialtreatmentprovisionspecifiedabove,FinkandJansen(2009)mention:i)thefactthatestablishednon-partyservicesuppliersareseenaspartofthedomesticeconomy;ii)inthepresenceofnetworkeconomies,itismoreefficientforservicesproviderstosimultaneouslyserveseveralmarkets,whichismadeeasierbyflexiblerulesoforigin;iii)participationinglobalproductionsharingcreatesanincentivetoabandonidiosyncraticservicestandardsasawayofboostingthecompetitivenessofownexportersandimprovingtheattractivenessofnationstoFDI.

22 Forinstance,theCloserEconomicPartnershipArrangements(CEPA)betweenChinaandHongKong,ChinaandMacao,China,respectively,followthewordingofGATSArticleV:6veryclosely.However,Emch(2006)arguesthatthenecessitytoaccumulativelycomplywithsixrequirements(natureandscopeofbusiness;yearsofoperations;paymentoftaxes;businesspremises;employmentofstaff;exclusionofintra-groupservices)toqualifyforthe“substantialbusinessoperations”requirementmayde factograntaccessonlytoafewservicesuppliers,onaselectivebasis.

23 ItshouldbenotedthatGATSArticleV:6onlyrecognizestheinterestsofjuridical,butnotofnaturalpersonsofthirdcountrieswhosupplyservicesundermode4intheterritoryofoneofthePTAmembers.Forinstance,aJapanesenationalwithadegreefromaFrenchuniversityandalicencetopracticeinFrancewhowantstoworkinGermanywouldnotbeentitledtothetreatmentgrantedtoEUnationals.

24 AccordingtoUNCTAD(2009),2,676BITswereinplaceattheendof2008.Eighty-twoBITsweresignedin2009,andsixduringthefirstfivemonthsof2010(UnitedNationsConferenceonTradeandDevelopment,2010).

25 Inthecontextofinvestment,MFNrequiresthatallinvestorsfromPTA-membercountriesareaccordedthebesttreatmentaccordedtoanyotherforeigninvestor.NTrequiresthatinvestorsfromPTA-membercountriesaretreatedaswellasdomesticinvestors.

26 NAFTA-basedagreementsaccordthebetterofMFNandNT.SeeKotschwar(2009)andthediscussionofinvestmentprovisionsinSectionD.

27 ThebilateralagreementsthatflourishedinEuropefromthemid-nineteenthcenturyuntilWorldWarIincludedsuchunconditionalnon-discriminationclauses.Theendresultwasde factomultilateralnon-discriminatoryliberalization(Lampe,2009).

28 Thereare,however,anumberofcaveatsthatlimittheroleofsuchMFNclausesasautomaticmultilateralizersofpreferentialtreatment.ThesecaveatsarediscussedinSectionE.2(e)below.

29 SeeBaldwinetal.(2009)fordetails.

30 ThetradeeffectsofPECSarediscussedinBoxC.4ofSectionC.Foradiscussionoftheeffectsofthe“multilateralization”ofrulesoforiginonthemultilateraltradingsystem,seeBoxE.2.

31 AradicalsolutionwouldbetheeliminationofMFNtariffsonindustrialgoods,whichwouldrenderrulesoforiginunnecessary.Thisisobviouslypoliticallyunpalatable.

32 Article23.2oftheDSU“prohibitscertainunilateralactionbyaWTOmember”.Morespecifically,underArticle23.2,aWTOmember“cannotunilaterally:(i)determinethataviolationhasoccurred,benefitshavebeennullifiedorimpaired,orthattheattainmentofanyobjectiveofthecoveredagreementshasbeenimpeded;(ii)determinethedurationofthereasonableperiodoftimeforimplementation;or(iii)decidetosuspend

concessionsanddeterminethelevelthereof”.(AppellateBodyReport, US / Canada – Continued Suspension,para.371).

33 SeetheGATTrulinginUnited States – Margins of preference,BISDII/11.

34 Foradetaileddiscussionofjurisdictionofinternationaladjudicativebodiesandofthesedoctrines,seeShany(2005).

35 Thiscanhappen,forexample,wherethecomplainantinoneforumisagovernment,whilethecomplainantintheotherforumisaprivateparty.

36 Foracontraryview,seeKuijper(2010).

37 ItshouldbeclarifiedthattheexistenceofconflictingdecisionswasnotthebasisforthereversaloftheWTOpanelbytheAppellateBody.

38 Noticethatthewelfareeffectsofthisincreaseddiscriminationare,however,unclear,becausethereispotentiallybothtradecreationwithinthePTAandtradediversionawayfromcheapersourcesofimportsfromnon-members.

39 Tehetal.(2009)andPrusaandTeh(2010)maptheanti-dumpingprovisionsofabout80PTAs,coveringalmost50percentofworldwideexports.Becauseanti-dumpinguseisgovernedbytheWTOAnti-dumpingAgreement,theyexpectthatifPTAruleshaveanyimpact,theywillservetomakeADdutiesmoredifficulttoimposeonPTAmembers.Thiscantakeanumberofforms.SomePTAsincreasethethresholdrequiredtoapplyanti-dumpingduties,orintheeventthatadutyisapplied,eitherreducesitbelowthedumpingmarginorshortenstheapplicableduration.OtherPTAsgivearoletoregionalbodiestoconductinvestigationsand/orreviewthefinaldeterminationsofnationalauthorities.

40 Toexplainthemethod,imagineobservinganti-dumpingactivityagainsttwogroupsofcountries(PTAmembersandnon-PTAmembers)fortwotimeperiods(pre-andpost-PTAestablishment).ThePTAcountriesare“treated”tosomeadditionalanti-dumpingrulesthatpossiblyaffectactivityinthepost-PTAperiodbutnotinthepre-PTAperiod.Thenon-PTAcountriesarenotexposedtothetreatmentduringeitherperiod.Thus,anyobserveddifferenceinanti-dumpingactivitybetweenthetwogroupsofcountriescanbecausallyattributedtothetreatment–theanti-dumpingrules.

41 ThediscussioninthissubsectioncloselyfollowsPrusaandTeh(2010).

42 PTAswhichexcludePTApartnersfromglobalactionsincludeAustralia-Thailand,Australia-US,Canada-Chile,Canada-Israel,EU-Chile,GroupofThree,Mexico-Chile,Mexico-Israel,Mexico-Nicaragua,Mexico-NorthernTriangle,Mexico-Uruguay,NAFTA,US-CAFTA-DR,US-JordanandUS-Singapore.

43 MostofthePTAsdescribeverypreciselywhat“substantialshare”oftotalimportsand“contributeimportantlytoseriousinjury”mean.InsomePTAs,“notsubstantialshareoftotalimports”meansifthepartnerisnotamongthetopfivesuppliersduringthemostrecentthree-yearperiod.Thephrase“notcontributeimportantlytoseriousinjuryorthreatthereof”meansthatthegrowthrateofimportsfromthePTApartnerisappreciablylowerthanthegrowthrateoftotalimportsfromallsources.

44 InArgentina–Footwear,ArgentinaincludedMERCOSURimportsintheanalysisoffactorscontributingtoinjurytoitsdomesticindustry.ButitexcludedMERCOSURcountriesfrom


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theapplicationofthesafeguardmeasure.InUnited States–Wheat Gluten,theUnitedStatesexcludedCanadafromtheapplicationofitssafeguardactionalthoughimportsofwheatglutenfromCanadawereincludedintheinvestigationphase.IntheUnited States–Line Pipecase,theUnitedStatesexcludedimportsfromitsNAFTApartnersfromthesafeguardmeasurewhileincludingthemintheanalysisoffactorscontributingtoinjury.AndinUnited States–Steel,theUnitedStatesincludedallsourcesofimportsinitsanalysisofincreasingimports,seriousinjuryandthecausalnexus.However,itexcludeditsNAFTApartners,IsraelandJordanfromtheapplicationofitssafeguardaction.

45 WhilethewordparallelismisnotfoundinthetextoftheAgreementonSafeguards,theAppellateBodyconsideredthattherequirementofparallelismisfoundinthelanguageusedinthefirstandsecondparagraphsofArticle2oftheAgreementonSafeguards.SeeAppellateBodyReport,US –Steel,para.439.

46 SeePauwelyn(2004)foracritiqueoftheAppellateBody’suseofthisprinciple.

47 Onedispute(betweentheUnitedStatesandtheRepublicofKorea)inwhichthisissuewasgivensomeconsiderationwastheUnited States.–Line Pipecase.TheretheUnitedStatesarguedthatGATTArticleXXIVgaveittherighttoexcludeitsNAFTApartnersfromthescopeofthesafeguardmeasure.ThepanelacceptedtheUSargumentthattheexclusionofitsPTApartnersfromsafeguardactionsformspartoftherequiredeliminationof“restrictiveregulationsofcommerce”on“substantiallyallthetrade”amongthefreetradeareamembers,whichisaconditionrequiredbyGATTArticleXXIV.ThepaneldecisionwassubsequentlyappealedbytheRepublicofKorea.Onappeal,theAppellateBodydeclaredtherulingbythepanelonArticleXXIVasmootandhavingnolegaleffect.ThequestionwhetherArticleXXIVoftheGATT1994permitsimportsoriginatingfromaPTApartnertobeexemptedfromasafeguardmeasurebecomesrelevantonlyintwocircumstances.ThefirstwaswhentheimportsfromPTAmemberswerenotincludedinthesafeguardinvestigation.ThesecondwaswhenimportsfromPTAmemberswereincludedinthesafeguardinvestigationitneverthelesswasestablishedexplicitlythatimportsfromsourcesoutsidethefree-tradearea,alone,satisfiedtheconditionsfortheapplicationofasafeguardmeasure.SinceneitheroftheseappliedtothecircumstancessurroundingtheUnited States–Line Pipecase,theissuewasnotrelevanttothecase.TheAppellateBodywascarefultopointoutthoughthat,intakingthisdecision,itwasnotrulingonthequestionwhetherArticleXXIVoftheGATT1994permitsexemptingimportsoriginatinginamemberofafree-tradeareafromasafeguardmeasure.ThisdecisionthusleavesthequestionofanappealtoGATTArticleXXIVstillverymuchopen.

48 However,Baldwinetal.(2009)arguethatproductionunbundlingislikelytosoftenpoliticaloppositiontonon-discriminatorydeepprovisions.SeeSectionE.2(e).

49 TwominoramendmentsweremadetoArticleXXIVoftheGATTin1955-1957.Theterm“constituentterritories”wasreplacedwith“parties”,andtheterm“included”wasreplacedwith“providedfor”(Jackson,1969).

50 CertainmeasuresthatwerelinkedtotheformationoftheEuropeanEconomicCommunityoritsexpansionwerechallengedinGATTdisputesettlement.(See,forexample,USActionUnderArticleXXIII(ChickenWar)andEECCitrusPreferences(andAssociationAgreements)).Atthesametime,asHudec(1990)notes,theformationoftheEuropeanEconomicCommunitymeantthatdisputesbetweenEECmemberswerenolongerbroughttoWTOdisputesettlement.HefurtherobservedthatforsometimetheEEC

wasreluctanttoinitiatedisputesagainstothercontractingpartiesfearingthatitwouldinvitechallengestoEECmeasures.

51 Hudec(1971)suggeststhatArticleXXIVmaynothavebeen“draftedwiththedevelopingcountriesinmind”.HeexplainsthatwhiletheGATTrecognizestherighttoraisetradebarriersforthepurposesofindustrialdevelopment-thatis,topromoteinfantindustries-therequirementsofArticleXXIVmaylimitthispossibility,astheycallforeliminationofinternalbarriersandastatus quo anteceilingonexternalbarriers.

52 Forahistoryofthisprovision,seeSystemic Issues related to ‘Substantially all the Trade’ ,BackgroundNotebytheSecretariat(Revision),WT/REG/W/21/Rev.1,5February1998.Bycontrast,aprovisiononpreferentialtradeagreementswasnotincludedintheTRIPSAgreement.

53 On14December2010,theGeneralCounciladoptedaDecisiononaTransparencyMechanismforPreferentialTradeArrangements(WT/L/806),whichwasdraftedasaresultofthemandategivenbytheGeneralCounciltotheCommitteeonTradeandDevelopmentin2006.Thismechanismcovers:preferentialtradeagreementsfallingunderparagraph2oftheEnablingClause,withtheexceptionofregionaltradeagreementsunderparagraph2(c);preferentialtradeagreementstakingtheformofpreferentialtreatmentaccordedbyanymembertoproductsofleast-developedcountries;andanyothernon-reciprocalpreferentialtreatmentauthorizedundertheWTOAgreement.Paragraph2(c)oftheEnablingClauserefersto“Regionalorglobalarrangementsenteredintoamongstless-developedcontractingpartiesforthemutualreductionoreliminationoftariffsand,inaccordancewithcriteriaorconditionswhichmaybeprescribedbytheCONTRACTINGPARTIES,forthemutualreductionoreliminationofnon-tariffmeasures,onproductsimportedfromoneanother”.

54 AgreementsnotifiedunderGATTArticleXXIVandGATSArticleVareconsideredbytheCRTA.AgreementsnotifiedundertheEnablingClauseareconsideredintheCommitteeonTradeandDevelopment(CTD).

55 AttherequestoftheNegotiatingGrouponRules,theWTOSecretariathaspreparedacompendiumofissuesrelatedtoPTAsthathavebeengeneratedbyworkwithintheCRTAanddiscussionsinotherWTObodiesupto2002(seeCompendium of Issues related to Regional Trade Agreements ,BackgroundNotebytheSecretariat,TN/RL/W/8/Rev.1,1August2002).

56 Thesefigurescorrespondtonotificationsofnewregionaltradeagreements,aswellasaccessionstoexistingones.

57 Eighty-eightregionaltradeagreementswereconsideredintheCRTAandfourintheCommitteeonTradeandDevelopment.

58 Multilateralismisalsoconsideredsuperiortoregionalismbecauselargecountriescanbehaveinamorehegemonicwaywhentheynegotiatebilaterallywithsmallercountries.

59 SeealsoDavey(2011).

60 AsimilarpointismadebyBrownandStern(2011).

61 Thetraditionaltheoryoftradeagreementsfocusesitsattentiononterms-of-tradeeffects.Interms-of-tradetheory,themotivationforenteringintotradeagreementsdependsonwhetheracountrycaninfluencethepriceofitsimportsthroughitstradepolicy.Iftwolargecountriesenterintoatradeagreementtoescapeaprisoners’dilemma,thisagreementshouldbemultilateralratherthanpreferential.Thisisbecauseiftheydonotextendthebenefitoftheir


195

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bilateralagreementtoanythirdcountrythroughsomeformofMFNtreatment,oneortheotherofthetwolargecountriescouldindulgein“bilateralopportunism”bymakinganagreementwithathirdpartywhichexcludedtheotherlargecountrypartner(WorldTradeOrganization(WTO),2007).

62 SectionCpresentstheOatesdecentralizationtheorem,whichprovidestheeconomicrationaleforthesubsidiarityprinciple.

63 SeethediscussionofTBTcommitmentsinPTAsinBaldwinetal.(2009).

64 SeeDavey(2011),theoverviewofthedebateintheWTO’sWorld Trade Report(2007)andMarceauandReiman(2001).

65 Boththedefinitionofthe“otherregulationsofcommerce”andthequestionofhowtherequirementthatRTAsshouldnotresultinhigherbarriersagainstthirdpartieswereintenselydebated.

66 ProceduralissuesrelatingtotheadministrationofthePTAprovisionsoftheEnablingClausehavebeenaddressedthroughtheTransparencyMechanismforRegionalTradeAgreements.

67 NotethatinDecember2010theWTOGeneralCounciladoptedaTransparencyMechanismforPreferentialTradeAgreements(WTOdocumentWT/L/806),whichextendstheTransparencyMechanismforRTAstonon-reciprocalpreferences.

68 Evenett(2009)emphasizesthattheWTOGeneralCouncilDecisionestablishingtheprovisionalTransparencyMechanism(WT/L/671)mentions“consideration”ratherthan“examining”oran“evaluation”ofRTAs,which,inhisview,suggeststhatthecollectiveWTOmembershipdoesnotwantthisnewmechanismtohave“teeth”.

69 Notethatsomeissues,suchasforinstancethosepertainingtotheinternalcoherenceofWTOprovisionsthatapplytoPTAs,havebothaproceduralandasubstantiveorlegaldimension.

70 SeeDavey(2011).Whiletheredoesnotappeartohavebeenmuchconsiderationoftheseissuesinrecentyears,thereisnowanewproposalonthetableanddiscussionshaverestarted.Itremainstobeseenwhethertheywillbesubstantive.

71 SeethesummaryofdiscussionspreparedbytheWTOSecretariat(TN/RL/W/8/Rev.1).

72 Foramoredetailedeconomicdiscussionoftheproposals,seeWorld Trade Report 2007(WorldTradeOrganization(WTO),2007).

73 SeeMarceau(2007).

74 Onthemultilateralizationofrulesoforigin,seealsoBoxE.2.

75 A“bestpractice”hasalternativelybeendefinedasarulethatallowsconvergencetosomemultilateralbenchmark.SeePlummer(2006)forapossibleapproach.


196

F. Conclusions

An over-arching conclusion of this report is that regional and multilateral approaches to trade cooperation need not be incompatible, but neither can they be seen simply as substitutes (i.e. arrangements that serve the same purposes or satisfy the same needs). Support for an increasingly outward-looking and inclusive global trading order has been strong in the period since the end of the Second World War, and this growing trend towards openness has manifested itself through unilateral, bilateral, regional and multilateral approaches.

197


It is perhaps not surprising that the creation of themultilateral trading system has not diminished theallureofbilateralandregionaltradeagreements.Afterall, bilateral trade agreements long pre-dated themultilateral tradingsystem.Theappealofpreferentialtradeagreements(PTAs)hasgrowninrecentdecades.This trend has not only been apparent amongtraditionally active PTA participants but also newplayers who have eschewed preferential tradeagreements in the past. The recent wave of regionalagreements has been remarkable for the sheernumberofPTAs,theirgeographicalspread,themixofdevelopedanddevelopingcountriesinvolved,andtheirsectoralcoverage.

Many of these agreements go beyond tariffcommitmentsand includeprovisionsonawide rangeof behind-the-border or regulatory policy areas.Increasingly, PTAs involve deep rather than shallowintegration.Manyfactorsexplaintheinterestindeeperintegration, and perhaps why the demand for it hasfrequently found expression in PTAs. Trade andinvestment links among countries have been growingtoadegreewhereexistingmultilateralrulesdonotgofarenoughtomanagethosetighterbonds.Thesteadyreductionoftariffbarriershasgeneratedpressureoncountriestoaligndivergentnationalnon-tariffpolicies.

Countries in close geographical proximity to oneanotheraremorelikelytobeaffectedbyoneanother’strade policy actions, calling for rules tailored to theirregional circumstances. Small developing countriesmay want to import best-practice rules and aninstitutional framework that has been pre-tested.Large developed countries may want to export theirregulatory regimes through PTAs. Countries may usetradecooperationaspartofabroaderpoliticalagendaof shared interests going beyond purely economicconsiderations.

This report has focused particularly on internationalproduction networks as a core explanation for deepintegration. This is not to downplay the possibleimportance of the other, often more complexexplanationsthateludepreciseanalysisintheabsenceof adequate data. International production networksfunction by parcelling out various stages ofmanufacturing processes to different countries, eachofwhomhasacostadvantagethatcontributestothesuccess of the whole. In a world where tariffs arealready low, the success of such networks requiresthat participating countries have the necessaryinfrastructure, institutional framework and enablingregulations.

MarketaccesscanstillbeareasonforsigningPTAs.Even if preferential tariffs are very low, other bordermeasures can be used for protection. Whileacknowledging thispoint, the reportprovidessupportforthehypothesisthatdeepPTAsrespondinnosmallmeasure to theexigenciesof internationalproduction

networks.Thisanalysis isbasedon themagnitudeofpreferential tariff rates, thecoverageandcontentsofthe agreements themselves, econometric estimation,andcasestudiesofspecificPTAs.

Small margins of preference provide evidence thattariffs are no longer the primary motivation of PTAs.Preference margins (i.e. the difference between thepreferentialtariffandthemost-favourednation–MFN– rateapplied toother tradingpartners)measured totake account of the presence of other preferentialsuppliers are no greater than 2 per cent in absolutevalue for more than 87 per cent of all merchandisetrade. This is not surprising in light of the extent towhich MFN tariffs have been reduced worldwide.However,insectorswhereMFNtariffsarehigherthantheaverage,PTAshaveforthemostpartfailedtodoabetterjobofreducingthem.

Moreover, the proliferation of PTAs implies that thebenefit fromentering into anagreementneednot besubstantial given the preferential access enjoyed byother suppliers.Asa result of all of this, the valueoftrade that receives preferential treatment is no morethan16percentofglobalmerchandise trade if tradewithin the EU is excluded from the total, and 30 percent if intra-EU trade is included. This number is anupperlimit,sinceitdoesnottakeaccountoftheextentto which the utilization of those preferential tariffs ishampered by rules of origin and other administrativerequirements.

In addition to policy areas already covered by WTOagreements, many recent PTAs include commitmentsin areas such as competition policy, investment, andmovement of capital. For the most part, PTAcommitments in these sectors are substantive andlegally enforceable. This is certainly true for thosepolicyareas–primarilyservices,investment,technicalbarriers to trade and competition policy – which areessentialforproductionnetworks.Thereportprovidesnew econometric evidence showing that suchprovisions increase the degree of productionnetworking among partner countries. Furthermore, acloser examination of the integration experience ofsome PTAs in Asia and Latin America providesevidence of the role of international productionnetworksintheirestablishment.

The spread of deep PTAs and the weightier role ofnon-tariff commitments have important implicationsfor how to evaluate the role of PTAs and how theyinteract with the multilateral trading system.Viner’s (1950)standardanalysisof the tradecreationand trade diversion effects of preferential tariffsfocusesattentiononthediscriminatorymarketaccesseffectsofPTAs.However,sincepreferentialtariffsarenot the main focus of PTAs today, this frameworkserves less well in identifying the causes andconsequencesofdeepagreements. In thesamevein,the building-block/stumbling-block imagery does not

F. C

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198

adequately characterize the relationship betweenPTAs and the multilateral trading system. Tradespecialistswillneedtofashionanimprovedanalyticalframework to explain better the evolution of deepPTAs.

ThesheernumberofPTAsandcontinuingmomentumtowards establishing more of them suggest that theyareheretostay.Theyrespondtoarangeofeconomicand political motivations. Governments will need tofind a coherent way of fashioning trade policy at theregional and multilateral level. This means that PTAsand the multilateral trading system can complementeachotherwhileensuring thatmultilateral disciplinesminimizeanynegativeeffects fromPTAs. IfPTAsareabout tariffs, a coherent trade policy requiresdisciplines that reduce trade diversion. If, instead,PTAs are primarily about reducing trade costs andremoving regulatory barriers, something different isrequiredtoachievecoherencebetweenPTAsandthemultilateraltradingsystem.ThereporthasidentifiedanumberofideasrelevanttoachievingacoherenttradepolicyinaworldofdeepPTAs.Onesuchideaisthatofsubsidiarity, whereby some policy areas may be bestaddressed at the regional or bilateral level, whereasotherswillrequiremultilateralattention.

Other ideasadvancedforpromotingacoherent tradepolicy are the acceleration of multilateral tradeopening,addressingdeficienciesinWTOagreements,initiativestocomplementtheexistinglegalframework(i.e. soft-law approach), and multilateralizingregionalism (i.e. extension of existing preferentialarrangements in a non-discriminatory manner toadditional parties). One constraint to bear in mind isthepoliticalfeasibilityofvariousoptions.Asthereportmakes clear, GATT contracting parties and WTOmembers have been tolerant of PTAs and markedlynon-litigiouson thissubject.Thissuggests thatsomeoptionsmaybepromotedmorereadilythanothers.

We conclude with a non-exhaustive list of possiblequestions that WTO members may see fit to addressas they deal with the problem of creating greatercoherencebetweenPTAsandtheWTO.

• Ifsomepolicyareasaretobesubjecttomultilateralreviewand rule-makingwhileothersare left to theregional level,what are thecriteria fordeterminingtheboundaries?

• Many non-tariff policy commitments in PTAs arelargely non-discriminatory, at least in intent, andpose no threat to the multilateral trading system.However,arethereotherrisks(e.g.regulatorylock-in) associated with these policy areas that are notreadilyapparentbutdeserveattention?

• Are the various families of deep PTAs which thereporthasbeenabletoidentifycompatible?Orarethey competing systems that make the task ofcreating coherence between PTAs and themultilateraltradingsystemmoredifficult?

• GiventhelargenumberofPTAsbetweendevelopedanddevelopingcountries(North-Southagreements),what role do differences in power between thesepartnersplay inshaping thedesignandcontentofPTAs?IstherearolefortheWTOinconsideringtheimpactofsuchdifferences?

• Will theco-existenceofdifferentdisputesettlementsystems lead to conflicts between PTAs and theWTO? To what extent can potential conflict beaddressedeitheratthelevelofPTAsorattheWTO?

These are not questions that have easy answers, butthe sooner WTO members reflect upon them, thegreater the prospects for achieving coherencebetweenPTAsandtheWTO.

199

Appendix Table 1: merchandise exports and imports of plurilateral preferential trade agreements, 2008 (Billiondollarsandpercentage)

World (billion dollars)

Intra-PtA (billion dollars)

extra-PtA (billion dollars)

Intra-PtA share in total trade

extra-PtA share in total

trade

Intra-PtA share in all

commodities

extra-PtA share in all

commodities

export Import export Import export Import export Import export Import export Import export Import

AnDeAn Community (CAn)

Allcommodities 94.3 93.3 7.0 7.8 87.3 85.5 7 8 93 92 100 100 100 100

Manufactures 17.8 69.5 3.6 3.9 14.2 65.6 20 6 80 94 52 50 16 77

Partsandcomponents 2.2 10.2 0.4 0.4 1.9 9.7 18 4 82 96 6 6 2 11

AseAn Free trade Area (AFtA)

Allcommodities 966.1 929.4 244.3 222.3 721.7 707.1 25 24 75 76 100 100 100 100

Manufactures 603.4 598.1 152.0 125.0 451.4 473.1 25 21 75 79 62 56 63 67


Asia Pacific trade Agreement (APtA)

Allcommodities 2,042.7 1,897.2 234.6 353.9 1,808.1 1,543.2 11 19 89 81 100 100 100 100

Manufactures 1,815.0 1,112.6 192.4 294.3 1,622.6 818.3 11 26 89 74 82 83 90 53


Caribbean Community and Common market (CARICom)

Allcommodities 25.5 28.5 4.2 3.5 21.3 25.0 16 12 84 88 100 100 100 100

Manufactures 5.8 14.2 0.6 0.5 5.2 13.7 10 4 90 96 15 14 25 55


Central American Common market (CACm)

Allcommodities 24.6 44.3 5.8 4.7 18.7 39.6 24 11 76 89 100 100 100 100

Manufactures 14.0 29.2 3.7 2.8 10.3 26.4 27 10 73 90 64 60 55 67


Common market for eastern and southern Africa (ComesA)

Allcommodities 56.7 114.6 5.8 5.2 50.8 109.4 10 5 90 95 100 100 100 100

Manufactures 16.3 70.5 2.9 2.4 13.5 68.1 18 3 82 97 49 46 26 62


Commonwealth of Independent states (CIs)

Allcommodities 692.5 456.1 123.1 123.3 569.4 332.8 18 27 82 73 100 100 100 100

Manufactures 155.5 322.7 52.9 48.4 102.6 274.3 34 15 66 85 43 39 18 82


economic Community of West African states (eCoWAs)a

Allcommodities 70.6 57.5 5.8 5.2 64.7 52.2 8 9 92 91 100 100 100 100

Manufactures 3.7 37.9 1.4 1.3 2.3 36.6 38 3 62 97 24 25 4 70


economic Co-operation organization (eCo)

Allcommodities 273.4 296.4 17.9 19.4 255.5 276.9 7 7 93 93 100 100 100 100

Manufactures 129.6 173.9 9.0 4.5 120.7 169.4 7 3 93 97 50 23 47 61


european Free trade Association (eFtA)

Allcommodities 373.8 278.7 2.9 2.5 370.9 276.2 1 1 99 99 100 100 100 100

Manufactures 208.9 218.6 1.4 1.4 207.5 217.1 1 1 99 99 49 58 56 79


european union (27)

Allcommodities 5,806.4 6,082.8 3,873.9 3,655.2 1,932.5 2,427.7 67 60 33 40 100 100 100 100

Manufactures 4,416.4 4,064.2 2,852.0 2,661.3 1,564.4 1,402.9 65 65 35 35 74 73 81 58


Statistical appendix

stAtIstICAL APPenDIx


200

Appendix Table 1: merchandise exports and imports of plurilateral preferential trade agreements, 2008 (Billiondollarsandpercentage)(continued)

World Intra-PtA extra-PtAIntra-PtA share

in total trade

extra-PtA share in total

trade

Intra-PtA share in all

commodities

extra-PtA share in all

commodities

value (b$) value (b$) value (b$) Percentage Percentage Percentage Percentage

export Import export Import export Import export Import export Import export Import export Import

Global system of trade Preferences (GstP)b

Allcommodities 1,437.4 1,486.2 271.5 330.6 1,166.0 1,155.7 19 22 81 78 100 100 100 100

Manufactures 645.6 958.4 142.0 162.5 503.6 796.0 22 17 78 83 52 49 43 69


Gulf Cooperation Council (GCC)

Allcommodities 703.6 366.3 16.7 25.8 686.9 340.5 2 7 98 93 100 100 100 100

Manufactures 73.3 220.6 10.6 16.2 62.7 204.5 14 7 86 93 63 63 9 60


Latin American Integration Association (LAIA)

Allcommodities 813.9 760.0 131.7 138.2 682.2 621.9 16 18 84 82 100 100 100 100

Manufactures 351.4 561.6 79.4 81.9 272.0 479.6 23 15 77 85 60 59 40 77


north American Free trade Agreement (nAFtA)

Allcommodities 2,046.9 2,882.2 1,012.6 952.8 1,034.3 1,929.4 49 33 51 67 100 100 100 100

Manufactures 1,400.0 1,957.4 667.5 607.0 732.5 1,350.4 48 31 52 69 66 64 71 70


Pan-Arab Free trade Area (PAFtA)

Allcommodities 892.0 607.1 51.0 68.7 840.9 538.5 6 11 94 89 100 100 100 100

Manufactures 123.9 364.7 30.2 32.0 93.7 332.7 24 9 76 91 59 47 11 62


south Asian Free trade Agreement (sAFtA)

Allcommodities 211.0 373.6 11.9 7.6 199.1 366.0 6 2 94 98 100 100 100 100

Manufactures 133.5 168.2 5.6 3.9 128.0 164.3 4 2 96 98 47 51 64 45


southern Common market (meRCosuR)

Allcommodities 278.4 248.8 48.7 44.9 229.7 203.9 17 18 83 82 100 100 100 100

Manufactures 109.9 181.6 32.9 29.8 77.1 151.8 30 16 70 84 67 66 34 74


memo: meRCosuR plus Bolivarian Republic of venezuela

Allcommodities 361.8 296.2 50.5 50.7 311.3 245.5 14 17 86 83 100 100 100 100

Manufactures 113.4 219.1 32.9 33.4 80.5 185.7 29 15 71 85 65 66 26 76


south Pacific Regional trade and economic Cooperation Agreement (sPARteCA)a

Allcommodities 167.1 189.3 16.0 15.7 151.1 173.6 10 8 90 92 100 100 100 100

Manufactures 34.0 141.9 9.3 7.4 24.7 134.5 27 5 73 95 58 47 16 77


trans-Pacific strategic economic Partnership

Allcommodities 435.2 416.1 3.8 3.3 431.4 412.7 1 1 99 99 100 100 100 100

Manufactures 252.8 262.0 1.9 0.8 251.0 261.1 1 0 99 100 49 25 58 63


aFiguresreferto2007forreasonsofdataavailability.

bIncludesMERCOSUR.

Source:AvailablereportingcountriesintheUNComtradedatabase.

201


AppendixTable2.A:merchandise exports of AseAn countries, 1992-2009(Billiondollarsandpercentage)


AseAn Free trade Area (AFtA) (billion dollars)


1992 2000 2008 2009 1992 2000 2008 2009 1992 2000 2008 2009

Cambodia

Agriculturalproducts 0.2 0.1 0.1 0.1 0.2 0.0 0.1 0.1 87 66 84 51

Fuelsandminingproducts

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 97 - 97 -

Manufactures 0.1 1.3 4.1 4.1 0.0 0.1 0.0 0.0 7 5 1 1

Automotiveproducts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 76 29 29 59

Officeandtelecomequipment

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7 - 49 10

Totalmerchandise 0.3 1.4 4.4 4.2 0.2 0.1 0.4 0.5 67 9 9 12

Indonesia



12.7 18.7 50.6 43.5 0.5 2.0 9.0 8.8 4 11 18 20

Manufactures 16.1 35.2 52.7 46.8 2.9 7.5 13.0 11.2 18 21 25 24



0.8 7.3 5.8 6.1 0.2 2.6 2.3 1.9 28 35 39 30


malaysia



0.8 1.1 4.2 2.2 0.0 0.3 1.2 0.6 4 25 30 27

Manufactures 4.0 34.8 40.5 32.8 0.3 5.5 5.3 4.8 6 16 13 15



1.2 25.1 25.7 20.1 0.1 4.7 3.4 3.3 7 19 13 16


singapore



9.3 11.7 67.1 44.4 3.1 4.4 28.8 18.6 34 38 43 42

Manufactures 48.6 117.7 236.9 198.1 10.1 31.4 74.4 58.3 21 27 31 29



25.7 73.8 121.0 96.6 3.0 15.9 28.8 21.8 12 22 24 23


thailand



0.5 3.0 13.6 9.4 0.2 1.4 6.3 4.7 30 45 46 50

Manufactures 21.7 51.7 127.2 109.4 3.3 9.8 27.3 22.9 15 19 21 21



5.7 18.7 32.5 29.4 1.6 4.0 4.6 4.1 29 21 14 14



202

AppendixTable2.A:merchandise exports of AseAn countries, 1992-2009(Billiondollarsandpercentage)(continued)




1992 2000 2008 2009 1992 2000 2008 2009 1992 2000 2008 2009

viet nam



0.9 3.9 13.2 9.2 0.1 1.2 3.1 2.9 9 30 24 32

Manufactures 0.6 6.2 34.1 36.9 0.0 0.6 3.2 2.5 4 9 9 7



0.0 0.7 3.3 4.6 0.0 0.1 0.7 0.6 2 12 20 13


totAL AseAna



30.1 48.9 188.5 134.3 6.2 12.3 61.4 44.1 21 25 33 33

Manufactures 117.3 325.8 603.3 537.4 24.5 75.8 151.2 127.5 21 23 25 24



46.8 177.9 236.1 214.2 8.6 40.9 49.4 43.2 18 23 21 20


aExcludesBruneiDarusalaamandMyanmarduetoinsufficientdata.

Source:UNComtradedatabaseandSecretariatestimates.

203

AppendixTable2.B:merchandise imports of AseAn countries, 1992-2009(Billiondollarsandpercentage)




1992 2000 2008 2009 1992 2000 2008 2009 1992 2000 2008 2009

Cambodia



0.0 0.2 0.9 0.4 0.0 0.2 0.9 0.4 93 98 97 93

Manufactures 0.4 1.0 3.1 3.2 0.1 0.3 1.3 1.1 38 33 43 34



0.0 0.0 0.2 0.2 0.0 0.0 0.1 0.1 70 43 38 31


Indonesia



3.2 7.3 35.9 22.2 0.9 2.5 19.1 10.2 29 35 53 46

Manufactures 20.7 20.5 80.0 63.2 1.2 3.5 20.0 16.0 6 17 25 25



1.2 0.7 11.5 8.4 0.1 0.2 3.2 2.0 11 28 27 24


malaysia



3.0 6.4 25.1 15.6 1.5 2.8 10.5 7.2 52 43 42 46

Manufactures 8.6 28.8 39.0 30.8 0.6 4.5 8.7 7.2 7 16 22 23



1.4 15.1 20.2 15.1 0.1 2.2 4.3 3.0 7 15 21 20


singapore



10.8 18.3 94.0 64.6 1.7 2.7 19.7 14.1 16 15 21 22

Manufactures 55.0 109.8 204.8 162.4 10.2 28.8 45.7 36.6 19 26 22 23



17.2 54.1 87.3 67.5 5.6 20.1 26.7 21.1 32 37 31 31


thailand



4.5 9.4 46.3 30.3 1.8 1.8 9.2 7.9 40 19 20 26

Manufactures 30.7 47.0 114.4 90.1 2.7 8.2 20.8 17.1 9 17 18 19



4.8 14.1 22.3 20.3 1.2 4.0 6.1 5.5 26 28 28 27




204

AppendixTable2.B:merchandise imports of AseAn countries, 1992-2009(Billiondollarsandpercentage)(continued)




1992 2000 2008 2009 1992 2000 2008 2009 1992 2000 2008 2009

viet nam



0.2 2.5 15.5 9.2 0.1 1.3 6.9 3.6 60 54 44 40

Manufactures 2.1 11.4 54.2 50.5 0.4 2.5 10.5 9.7 17 22 19 19



0.3 1.0 5.6 6.0 0.0 0.4 1.4 1.4 7 36 26 23


totAL AseAna



24.5 49.1 231.9 151.5 6.6 12.2 70.1 46.0 21 25 33 33

Manufactures 150.4 286.6 597.6 493.1 21.0 62.9 125.7 106.1 21 23 25 24



33.5 117.5 181.5 153.8 9.2 35.1 46.9 39.3 18 23 21 20


aExcludesBruneiDarusalaamandMyanmarduetoinsufficientdata.


205

AppendixTable3.A:merchandise exports of CIs countries, 2000-2009 (Billiondollarsandpercentage)


Commonwealth of Independent states (CIs) (billion dollars)


2000 2007 2008 2009 2000 2007 2008 2009 2000 2007 2008 2009

Armenia



0.1 0.3 0.3 0.3 0.0 0.0 0.0 0.0 14 4 2 1

Manufactures 0.2 0.6 0.6 0.3 0.0 0.2 0.1 0.1 15 25 24 28


Azerbaijan



1.5 5.1 46.6 13.7 0.1 0.4 0.6 0.7 9 7 1 5

Manufactures 0.1 0.4 0.6 0.4 0.1 0.2 0.5 0.3 61 63 71 76


Belarus



1.5 8.7 12.5 8.1 0.5 0.6 1.6 1.2 32 7 13 15

Manufactures 4.8 12.9 17.2 10.1 3.3 8.5 10.1 5.6 69 66 59 56


Georgia



0.1 0.3 0.3 0.7 0.0 0.0 0.0 0.0 10 5 6 3

Manufactures 0.1 0.5 0.8 0.4 0.1 0.3 0.3 0.1 53 50 44 22


kazakhstan



0.1 0.3 0.1 0.1 0.1 0.1 0.1 0.1 73 37 68 85

Manufactures 0.1 0.4 0.4 0.2 0.1 0.3 0.3 0.2 69 85 88 85


Rep. of moldova



0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 23 42 51 7

Manufactures 0.2 0.7 0.9 0.7 0.1 0.2 0.2 0.2 33 33 28 25


Russian Federation



61.6 245.2 332.9 206.0 1.9 12.0 18.1 8.4 3 5 5 4

Manufactures 24.4 60.3 78.6 49.3 3.5 17.7 21.0 12.8 14 29 27 26




206

AppendixTable3.A:merchandise exports of CIs countries, 2000-2009 (Billiondollarsandpercentage)(continued)




2000 2007 2008 2009 2000 2007 2008 2009 2000 2007 2008 2009

ukraine



2.9 5.8 8.7 4.9 0.6 1.4 2.4 1.5 21 24 28 30

Manufactures 9.8 36.2 46.6 24.6 3.1 14.3 17.6 9.6 32 39 38 39


totAL CIsa



76.6 304.4 459.1 268.9 6.2 19.3 29.8 16.3 8 6 6 6

Manufactures 41.3 118.4 155.5 91.8 10.5 43.8 52.9 30.4 25 37 34 33


aExcludesTajikistanandTurkmenistanduetoinsufficientdata.


207

AppendixTable3.B:merchandise imports of CIs countries, 2000-2009(Billiondollarsandpercentage)




2000 2007 2008 2009 2000 2007 2008 2009 2000 2007 2008 2009

Armenia



0.2 0.6 0.7 0.6 0.1 0.4 0.4 0.4 55 64 54 65

Manufactures 0.4 1.8 2.4 1.9 0.0 0.4 0.5 0.3 9 22 21 19


Azerbaijan



0.1 0.3 0.3 0.1 0.0 0.1 0.1 0.1 34 46 32 44

Manufactures 0.8 4.4 5.6 4.8 0.2 1.1 1.5 1.2 25 26 26 24


Belarus



2.9 11.1 15.4 12.1 2.8 10.9 15.2 11.9 98 98 98 99

Manufactures 4.1 13.9 19.2 12.9 2.4 6.3 8.6 4.8 59 45 45 37


Georgia



0.1 1.0 1.2 0.8 0.1 0.7 0.8 0.4 86 72 68 52

Manufactures 0.4 3.1 3.8 2.3 0.1 0.6 0.6 0.3 19 18 17 14


kazakhstan



0.1 0.8 0.3 0.1 0.1 0.8 0.3 0.1 97 98 96 96

Manufactures 0.3 1.2 1.8 1.5 0.1 0.4 0.5 0.4 37 35 27 29


Rep. of moldova



0.3 0.8 1.1 0.7 0.2 0.6 0.8 0.5 65 68 68 67

Manufactures 0.4 2.4 3.0 2.0 0.1 0.5 0.6 0.4 19 22 20 19


Russian Federation



3.5 7.5 10.9 6.0 2.1 4.2 6.3 3.6 58 57 58 60

Manufactures 18.9 154.2 208.3 122.0 3.3 13.1 15.5 8.1 17 9 7 7




208

AppendixTable3.B:merchandise imports of CIs countries, 2000-2009(Billiondollarsandpercentage)(continued)




2000 2007 2008 2009 2000 2007 2008 2009 2000 2007 2008 2009

ukraine



6.7 18.1 26.4 16.0 6.0 15.6 21.2 14.1 88 86 80 88

Manufactures 5.7 37.4 50.6 23.7 1.8 8.7 10.9 4.7 31 23 22 20


totAL CIsa



15.0 44.3 62.4 39.7 12.3 37.1 50.6 33.9 82 84 81 86

Manufactures 36.5 244.3 322.7 193.8 10.6 40.3 48.4 27.9 29 16 15 14


aExcludesTajikistanandTurkmenistanduetoinsufficientdata.


209

AppendixTable4.A:merchandise exports of european union (15) countries, 1990-2009 (Billiondollarsandpercentage)


european union (15) (billion dollars)


1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Austria



1.8 2.4 11.6 8.6 1.4 1.6 4.8 3.6 80 65 42 43

Manufactures 36.8 50.5 139.5 105.4 24.8 30.6 72.8 55.5 68 61 52 53


Belgiuma



9.1 13.3 59.6 36.1 7.0 10.0 46.1 26.5 77 76 77 73

Manufactures 91.2 144.1 358.6 284.0 71.2 105.0 254.7 199.6 78 73 71 70


Denmark



1.6 3.9 13.1 8.4 1.4 3.4 11.1 6.8 87 87 84 80

Manufactures 20.9 31.5 73.2 59.6 13.6 19.1 39.7 31.6 65 61 54 53


Finland



1.3 3.0 10.8 6.2 1.1 2.1 6.2 3.5 83 69 57 56

Manufactures 22.0 38.5 78.5 48.4 13.0 20.1 34.1 21.6 59 52 43 45


France



10.8 13.9 45.6 25.5 7.8 9.6 31.1 16.7 73 69 68 65

Manufactures 161.3 238.9 460.3 364.4 101.8 145.0 254.9 197.7 63 61 55 54


Germany



15.1 21.3 82.8 50.8 10.7 11.6 44.5 27.4 71 54 54 54

Manufactures 354.4 459.4 1,201.0 917.5 224.4 243.5 581.1 454.2 63 53 48 50

Totalmerchandise 398.4 549.6 1,466.1 1,127.8 255.1 311.1 761.5 584.8 64 57 52 52

Greece



1.2 2.4 5.2 3.4 0.7 0.7 2.0 1.3 57 27 38 37

Manufactures 4.3 5.4 13.7 10.7 3.0 2.4 5.1 3.9 70 44 37 37


Ireland



0.6 0.9 2.6 1.8 0.5 0.6 2.2 1.3 83 69 83 71

Manufactures 16.4 65.5 107.5 99.9 13.0 39.5 61.9 56.9 79 60 58 57




210

AppendixTable4.A:merchandise exports of european union (15) countries, 1990-2009(Billiondollarsandpercentage)(continued)




1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Italy



6.3 8.2 35.6 21.4 3.4 3.9 15.1 9.1 54 47 43 42

Manufactures 148.1 212.0 449.3 333.9 92.9 117.2 218.3 158.7 63 55 49 48


Luxembourg

Agriculturalproducts - 0.6 1.2 1.2 - 0.6 1.2 1.2 - 98 98 98


- 0.4 1.2 0.8 - 0.3 1.0 0.6 - 76 85 83

Manufactures - 6.5 14.5 10.6 - 5.4 11.6 8.1 - 83 80 76

Totalmerchandise - 7.9 17.7 12.8 - 6.5 14.2 10.1 - 83 80 79

netherlands



16.5 21.8 71.3 43.8 14.1 19.2 48.3 26.2 86 88 68 60

Manufactures 77.8 124.9 301.1 242.3 58.7 83.1 201.0 160.8 75 66 67 66


Portugal



1.1 1.1 5.1 3.3 0.6 0.7 2.9 1.6 60 61 57 48

Manufactures 13.1 20.6 39.9 30.8 10.9 16.9 28.5 22.6 83 82 72 73


spain



4.0 6.7 26.2 16.4 2.2 3.2 10.6 6.2 55 48 40 38

Manufactures 41.4 87.8 203.5 162.2 30.3 62.0 132.9 106.1 73 71 65 65


sweden



3.7 4.9 20.9 12.9 2.8 3.4 14.2 8.4 75 70 68 65

Manufactures 47.3 71.1 137.4 98.9 28.6 37.3 70.1 49.3 61 53 51 50


united kingdom



19.8 30.4 81.5 50.1 13.3 19.0 51.3 31.7 67 63 63 63

Manufactures 146.7 218.0 321.2 253.1 80.4 124.0 161.3 123.2 55 57 50 49


totAL eu (15)



92.9 134.6 473.2 289.4 67.1 89.3 291.3 170.8 72 66 62 59

Manufactures 1,181.7 1,774.7 3,899.1 3,021.7 766.6 1,051.1 2,127.8 1,649.8 65 59 55 55

Totalmerchandise 1,476.8 2,243.8 5,157.3 3,983.9 974.0 1,387.9 2,968.7 2,273.8 66 62 58 57

aBelgiumreferstoBelgium-Luxembourgin1990.


211

AppendixTable4.B:merchandise imports of european union (15) countries, 1990-2009 (Billiondollarsandpercentage)




1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Austria



5.0 5.6 29.4 19.1 1.8 2.6 11.6 8.1 35 46 39 42

Manufactures 40.7 55.6 127.0 100.4 31.3 38.2 83.4 65.2 77 69 66 65


Belgiuma



16.2 21.2 91.2 52.4 8.3 15.2 65.1 36.4 51 72 71 69

Manufactures 81.7 130.3 329.2 257.6 65.5 88.3 218.6 174.3 80 68 66 68


Denmark



2.9 3.3 10.3 6.5 1.4 1.5 4.3 3.0 49 47 42 46

Manufactures 23.1 33.8 81.5 60.9 16.8 24.9 55.8 39.9 73 74 68 66


Finland



4.4 5.9 23.0 12.2 1.2 1.6 4.4 2.3 28 27 19 19

Manufactures 20.5 24.6 58.8 38.9 14.1 14.6 32.6 21.9 69 59 55 56


France



31.3 39.0 138.6 83.5 10.2 12.1 44.6 29.1 33 31 32 35

Manufactures 172.1 234.6 490.8 399.1 118.7 148.4 297.2 228.9 69 63 61 57


Germany



43.8 60.9 220.3 137.4 19.2 19.7 63.6 38.4 44 32 29 28

Manufactures 245.0 337.5 777.2 628.5 153.1 156.4 348.1 274.0 62 46 45 44

Totalmerchandise 342.5 500.8 1'204.2 938.4 205.1 259.6 565.6 433.6 60 52 47 46

Greece



2.1 4.8 21.1 11.5 0.4 0.3 1.3 0.7 18 7 6 6

Manufactures 13.9 20.7 57.5 46.4 10.4 13.3 35.2 27.1 75 64 61 58


Ireland



1.8 2.7 11.1 7.0 1.4 1.7 8.6 5.0 75 64 77 72

Manufactures 15.7 41.4 59.1 42.8 10.7 22.1 33.2 21.7 68 53 56 51




212

AppendixTable4.B:merchandise imports of european union (15) countries, 1990-2009 (Billiondollarsandpercentage)(continued)




1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Italy



27.3 33.5 106.6 86.8 6.3 7.0 15.2 13.1 23 21 14 15

Manufactures 113.1 161.9 347.6 263.6 82.6 107.0 203.2 153.3 73 66 58 58


Luxembourg

Agriculturalproducts - 1.2 2.6 2.5 - 1.1 2.6 2.4 - 93 96 95


- 1.3 5.0 3.3 - 1.2 4.9 2.5 - 98 98 75

Manufactures - 7.6 16.2 12.5 - 6.2 14.2 11.3 - 81 87 90

Totalmerchandise - 10.6 25.4 18.6 - 8.8 22.0 16.5 - 83 87 88

netherlands



17.1 25.1 90.9 58.9 5.7 8.0 32.5 21.6 33 32 36 37

Manufactures 89.0 128.8 282.8 220.3 66.8 66.0 143.8 108.2 75 51 51 49


Portugal



3.3 5.1 17.9 10.6 0.9 2.0 5.8 3.4 28 40 32 32

Manufactures 18.1 29.1 55.2 43.2 15.5 24.1 45.9 36.3 86 83 83 84


spain



13.5 23.4 97.6 56.1 3.0 4.9 18.0 9.7 23 21 18 17

Manufactures 61.6 111.4 275.2 194.4 45.8 81.7 175.4 123.1 74 73 64 63


sweden



6.8 8.8 30.3 17.6 2.9 4.1 13.3 7.2 42 47 44 41

Manufactures 42.8 54.0 117.0 83.5 29.1 36.0 76.8 53.0 68 67 66 63


united kingdom



22.6 23.9 104.2 64.1 6.9 6.3 26.2 14.8 31 26 25 23

Manufactures 169.5 264.3 432.6 334.3 100.8 140.7 232.4 176.5 59 53 54 53


totAL eu (15)



198.2 264.2 997.7 627.0 69.6 88.4 319.2 195.3 35 33 32 31

Manufactures 1'106.7 1'635.5 3'507.7 2'726.4 761.4 967.9 1'995.8 1'514.7 69 59 57 56

Totalmerchandise 1'543.2 2'255.4 5'314.8 4'013.2 976.3 1'293.1 2'817.0 2'132.0 63 57 53 53

aBelgiumreferstoBelgium-Luxembourgin1990.


213

AppendixTable5.A:merchandise exports of meRCosuR countries, 1990-2009(Billiondollarsandpercentage)


meRCosuR (billion dollars)


1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Argentina



2.5 5.4 8.8 7.8 1.0 1.9 2.4 2.1 40 36 28 27

Manufactures 7.1 8.5 21.6 17.8 3.4 4.2 10.7 9.4 47 49 50 53


Brazil



5.2 6.5 44.0 32.7 0.4 0.5 2.6 2.4 7 7 6 7

Manufactures 24.6 31.7 86.4 58.1 5.3 7.1 20.9 14.6 22 22 24 25


Paraguay



0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 96 66 76 65

Manufactures 0.2 0.2 0.4 0.3 0.1 0.1 0.3 0.2 48 54 62 65


uruguay



0.0 0.0 0.2 0.1 0.0 0.0 0.1 0.0 87 92 43 40

Manufactures 0.8 1.0 1.5 1.3 0.5 0.6 0.9 0.8 58 59 61 64


totAL meRCosuR



7.7 12.0 53.1 40.6 1.4 2.4 5.1 4.5 18 20 10 11

Manufactures 32.7 41.3 109.9 77.5 9.2 12.0 32.9 25.0 28 29 30 32


memo: Bolivarian Republic of venezuela



15.8 27.7 79.8 54.9 1.6 1.2 1.7 0.0 10 4 2 0

Manufactures 2.6 2.7 3.4 1.6 0.1 0.1 0.1 0.1 3 4 2 6


memo: meRCosuR including Bolivarian Republic of venezuela



23.6 39.6 132.8 95.5 3.1 3.6 6.9 4.5 13 9 5 5

Manufactures 35.3 44.0 113.4 79.1 9.3 12.1 32.9 25.1 26 27 29 32




214

AppendixTable5.B:merchandise imports of meRCosuR countries, 1990-2009(Billiondollarsandpercentage)


meRCosuR (billion dollars)


1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Argentina



1.4 1.6 6.3 3.4 0.4 0.7 2.0 1.1 31 44 32 33

Manufactures 17.2 21.9 47.6 34.6 3.7 5.9 16.2 10.8 21 27 34 31


Brazil



8.3 10.0 41.8 22.5 1.6 2.8 2.5 1.9 20 28 6 9

Manufactures 38.2 41.0 121.7 96.9 3.1 3.7 8.8 8.1 8 9 7 8


Paraguay



0.2 0.4 1.5 1.1 0.2 0.3 1.1 0.9 86 79 74 88

Manufactures 2.3 1.5 6.9 5.3 0.7 0.6 2.6 1.8 30 40 38 34


uruguay



0.3 0.6 2.9 1.7 0.2 0.3 1.8 1.3 56 54 63 75

Manufactures 2.1 2.4 5.3 4.3 0.9 1.0 2.2 1.8 42 43 41 41


totAL meRCosuR



10.3 12.5 52.4 28.7 2.5 4.1 7.5 5.3 24 33 14 18

Manufactures 59.8 66.8 181.6 141.0 8.4 11.3 29.8 22.4 14 17 16 16


memo: Bolivarian Republic of venezuela



0.5 0.8 1.3 2.0 0.0 0.0 0.1 0.1 3 2 8 3

Manufactures 8.2 11.8 37.5 29.6 0.4 0.8 3.6 2.7 5 6 10 9


memo: meRCosuR including Bolivarian Republic of venezuela



10.8 13.3 53.7 30.7 2.5 4.1 7.6 5.3 23 31 14 17

Manufactures 68.1 78.6 219.1 170.7 8.8 12.0 33.4 25.2 13 15 15 15



215

AppendixTable6.A:merchandise exports of nAFtA countries, 1990-2009(Billiondollarsandpercentage)


nAFtA (billion dollars)


1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Canada



23.4 48.3 161.5 93.0 16.3 43.6 136.9 77.7 69 90 85 84

Manufactures 73.3 175.6 214.4 157.2 63.1 159.5 173.3 124.8 86 91 81 79


mexico



11.4 18.3 57.8 36.2 6.8 14.3 46.5 29.6 60 78 80 82

Manufactures 11.4 138.8 212.3 171.6 8.9 128.5 178.3 146.5 78 93 84 85


united states



24.0 27.8 126.0 88.1 6.3 13.2 41.7 25.7 26 48 33 29

Manufactures 290.5 646.4 973.4 724.9 89.9 245.7 315.9 254.5 31 38 32 35

Totalmerchandise 392.9 780.3 1,299.9 1,056.7 111.3 288.1 412.4 333.7 28 37 32 32

totAL nAFtA



58.8 94.4 345.3 217.4 29.4 71.1 225.0 133.1 50 75 65 61

Manufactures 375.2 960.9 1,400.0 1,053.7 161.8 533.7 667.5 525.7 43 56 48 50

Totalmerchandise 546.1 1,223.7 2,046.9 1,601.8 225.8 681.3 1,012.6 768.1 41 56 49 48




216

AppendixTable6.B:merchandise imports of nAFtA countries, 1990-2009(Billiondollarsandpercentage)


nAFtA (billion dollars)


1990 2000 2008 2009 1990 2000 2008 2009 1990 2000 2008 2009

Canada



10.9 18.6 63.4 38.3 4.6 7.0 25.1 14.5 42 37 40 38

Manufactures 92.9 200.7 301.4 242.4 64.1 142.3 181.9 142.4 69 71 60 59


mexico



2.0 8.8 38.3 21.1 1.7 6.5 23.5 14.4 83 74 61 68

Manufactures 18.9 149.7 239.3 188.4 12.7 114.1 115.7 88.1 67 76 48 47


united states



84.5 167.6 558.3 311.4 22.5 54.9 179.1 104.7 27 33 32 34

Manufactures 375.7 968.2 1,416.7 1,121.5 81.2 263.8 309.5 241.8 22 27 22 22

Totalmerchandise 517.5 1,258.1 2,164.8 1,601.9 124.5 370.1 557.1 405.9 24 29 26 25

totAL nAFtA



97.4 194.9 660.0 370.8 28.8 68.4 227.7 133.6 30 35 34 36

Manufactures 487.5 1,318.6 1,957.4 1,552.3 158.0 520.3 607.0 472.3 32 39 31 30

Totalmerchandise 663.6 1,677.6 2,882.2 2,157.4 221.4 664.5 952.8 707.7 33 40 33 33


217

AppendixTable7:World merchandise exports by product and region, 1990-2009(Billiondollarsandpercentage)

Destination World Intra-regional

value value share in exports to world

origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009

World

Agriculturalproducts

414.7 589.4 551.3 1,340.1 1,168.8 225.8 334.8 323.6 774.1 679.7 55 57 59 58 58


488.3 545.3 854.0 3,521.7 2,262.9 193.3 257.9 368.9 1,432.9 939.9 40 47 43 41 42

Manufactures 2,391.2 3,718.8 4,702.3 10,468.2 8,354.7 1,340.7 2,170.5 2,765.0 5,999.4 4,816.6 56 58 59 57 58

•Ironandsteel 105.8 154.9 143.4 590.0 326.3 69.8 106.0 95.3 357.1 200.2 66 68 67 61 61

•Chemicals 296.1 485.5 585.2 1,676.1 1,447.1 179.5 303.3 359.4 1,025.6 882.3 61 63 61 61 61

•Officeandtelecomequipment

298.6 604.7 968.7 1,572.0 1,322.8 131.6 301.1 532.1 891.3 767.7 44 50 55 57 58

Electronicdataprocessingandofficeequipment

... ... 372.1 550.9 462.8 ... ... 194.4 286.1 238.9 ... ... 52 52 52

Telecom.equipment

... ... 288.2 602.4 506.4 ... ... 163.1 326.6 282.7 ... ... 57 54 56

Integratedcircuitsandelectroniccomponents

... ... 308.4 418.8 353.6 ... ... 174.7 278.7 246.1 ... ... 57 67 70

•Automotiveproducts

319.0 459.2 577.8 1,245.8 846.7 207.5 309.3 402.5 780.7 562.6 65 67 70 63 67

•Electrical,non-electricalandpower-generat-ingmachinery

... ... 837.4 1,956.7 1,506.7 ... ... 484.3 1,081.5 816.9 ... ... 58 55 54

•Textiles 104.4 152.3 157.4 253.4 211.1 70.0 104.7 103.7 145.0 121.0 67 69 66 58 58

•Clothing 108.1 158.4 197.6 364.9 315.6 50.8 77.9 95.0 163.8 143.2 47 50 48 45 45

•Scientificandcontrollinginstruments

... ... 118.1 309.6 270.9 ... ... 57.0 162.2 141.2 ... ... 48 52 52

Totalmerchandise 3,395.4 5,017.7 6,277.2 15,763.3 12,177.6 1,792.8 2,855.2 3,542.4 8,389.5 6,593.1 53 57 56 53 54

north America


85.2 119.7 115.3 211.2 178.8 23.8 36.8 49.1 83.1 70.5 28 31 43 39 39


58.8 65.6 94.3 345.5 217.5 29.4 39.1 71.2 225.3 133.3 50 60 75 65 61

Manufactures 375.2 631.5 963.2 1,389.3 1,129.8 162.0 303.2 535.0 669.8 534.9 43 48 56 48 47

•Ironandsteel 6.3 11.4 11.3 35.5 21.0 4.1 7.0 8.9 23.8 13.6 66 62 79 67 65

•Chemicals 47.9 76.8 102.7 228.9 197.8 13.9 25.5 40.1 80.0 67.3 29 33 39 35 34


57.9 121.2 208.1 208.0 173.7 16.0 41.9 92.2 96.4 87.1 28 35 44 46 50


... ... 74.9 61.6 53.3 ... ... 29.3 28.0 26.2 ... ... 38 46 49

Telecom.equipment

... ... 63.9 91.1 78.7 ... ... 41.0 57.3 50.7 ... ... 64 63 64


... ... 69.3 55.4 41.7 ... ... 21.9 11.1 10.2 ... ... 32 20 24


65.4 110.7 158.5 209.3 143.1 55.0 89.5 140.4 151.3 108.1 84 81 89 72 76

•Electrical,non-electricalandpowergeneratingmachinery

... ... 190.6 273.9 220.8 ... ... 99.4 129.7 103.5 ... ... 52 47 47

•Textiles 6.1 10.0 15.7 16.5 13.2 2.4 5.0 10.8 9.2 7.6 39 50 69 56 57



218

AppendixTable7:World merchandise exports by product and region, 1990-2009(Billiondollarsandpercentage)(continued)



origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009

•Clothing 3.0 10.4 19.3 10.6 9.4 1.0 5.6 13.5 8.1 7.0 33 53 70 76 75


... ... 38.7 62.2 56.4 ... ... 12.8 20.5 18.7 ... ... 33 33 33

Totalmerchandise 547.7 856.5 1,225.0 2,035.2 1,602.4 226.1 394.8 682.8 1,013.4 768.7 41 46 56 50 48

south and Central America


36.2 51.4 52.8 156.3 139.7 3.9 9.5 9.8 27.3 22.6 11 18 19 18 16


37.5 42.1 67.7 258.3 178.3 5.4 10.5 15.9 60.2 41.2 14 15 24 23 23

Manufactures 44.3 50.9 73.0 172.9 125.6 7.5 20.2 24.7 73.4 55.6 17 40 34 42 44

•Ironandsteel 5.5 6.3 6.5 22.0 12.4 0.8 1.5 1.5 6.1 3.8 15 23 23 28 31

•Chemicals 5.1 9.2 11.5 37.1 28.7 1.9 4.5 6.1 16.9 13.8 37 49 53 46 48


4.7 1.0 4.3 6.0 4.9 0.1 0.3 1.2 2.7 1.9 2 29 28 45 38


... ... 2.3 1.6 1.5 ... ... 0.3 0.3 0.3 ... ... 14 20 21

Telecom.equipment

... ... 1.7 3.1 2.3 ... ... 0.8 2.3 1.5 ... ... 48 73 65


... ... 0.3 1.2 1.1 ... ... 0.0 0.0 0.1 ... ... 11 4 6


2.9 5.2 7.7 23.1 15.1 0.7 3.8 4.4 15.1 11.1 25 73 57 66 73

•Electrical,non-electricalandpowergeneratingmachinery

... ... 6.7 20.8 15.3 ... ... 2.6 9.5 7.0 ... ... 39 45 46

•Textiles 1.9 2.2 2.1 4.0 3.2 0.4 1.2 1.3 2.9 2.4 20 55 61 72 75

•Clothing 3.4 5.6 11.7 12.7 9.9 0.4 0.6 0.6 2.1 1.2 12 10 5 17 13


... ... 1.1 2.3 2.2 ... ... 0.2 0.6 0.5 ... ... 18 25 24

Totalmerchandise 120.3 149.0 197.8 603.4 458.9 17.3 40.3 50.6 161.4 120.0 14 27 26 27 26

europe


194.3 264.9 244.4 603.2 528.3 154.1 207.3 193.1 486.0 425.7 79 78 79 81 81


124.6 144.1 204.3 767.4 482.6 100.4 117.8 163.3 611.7 380.2 81 82 80 80 79

Manufactures 1,328.7 1,842.0 2,125.5 4,946.1 3,879.2 954.9 1,307.2 1,532.8 3,532.4 2,748.1 72 71 72 71 71

•Ironandsteel 68.2 85.0 71.2 265.6 146.7 51.3 65.6 57.0 203.5 106.4 75 77 80 77 73

•Chemicals 197.1 297.9 341.4 972.9 860.9 141.7 215.4 241.6 704.3 605.6 72 72 71 72 70


96.9 169.3 287.6 421.3 334.9 74.6 124.3 214.9 319.1 260.5 77 73 75 76 78


... ... 115.2 160.3 131.2 ... ... 94.2 131.6 107.4 ... ... 82 82 82

Telecom.equipment

... ... 112.9 191.8 154.5 ... ... 82.5 144.0 121.0 ... ... 73 75 78


... ... 59.5 69.2 49.2 ... ... 38.2 43.5 32.1 ... ... 64 63 65


176.7 243.0 290.1 682.7 470.5 138.7 189.0 232.0 523.4 369.3 79 78 80 77 79

219




origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009

•Electrical,non-electricalandpower-generatingmachinery

... ... 401.6 1018.7 763.4 ... ... 258.7 618.1 442.1 ... ... 64 61 58

•Textiles 56.7 70.3 62.3 92.9 71.8 45.6 55.0 48.2 69.8 53.8 80 78 77 75 75

•Clothing 48.8 62.7 64.5 132.4 112.2 40.5 51.1 53.4 109.9 95.0 83 82 83 83 85


... ... 49.9 124.0 105.7 ... ... 30.5 73.5 61.7 ... ... 61 59 58


Commonwealth of Independent states (CIs)*


6.0 16.5 12.9 46.6 39.2 - 5.8 3.9 15.4 13.1 - 35 30 33 33


32.9 53.0 84.6 465.8 284.0 - 13.9 10.1 55.7 32.1 - 26 12 12 11

Manufactures 17.1 45.0 43.8 172.7 108.8 - 18.4 15.2 64.3 40.5 - 41 35 37 37

•Ironandsteel 2.7 13.3 14.3 66.4 36.4 - 3.3 2.7 15.3 8.7 - 25 19 23 24

•Chemicals 3.6 10.4 9.7 39.7 26.9 - 3.2 2.3 8.3 6.4 - 31 23 21 24


0.4 0.9 0.6 1.9 1.6 - 0.6 0.3 0.5 0.4 - 61 44 24 27


... ... 0.1 0.3 0.3 - ... 0.1 0.1 0.1 - ... 66 36 29

Telecom.equipment

... ... 0.3 1.3 1.0 - ... 0.1 0.2 0.2 - ... 42 19 23


... ... 0.2 0.3 0.3 - ... 0.0 0.1 0.1 - ... 31 35 37


1.7 2.5 2.2 8.1 3.5 - 1.8 1.7 6.9 2.6 - 70 79 85 73


... ... 5.2 19.8 14.3 - ... 3.3 13.6 9.0 - ... 63 69 63

•Textiles 0.4 1.7 1.3 2.3 1.8 - 0.9 0.7 1.1 0.9 - 51 50 49 47

•Clothing 1.3 1.3 1.3 2.0 1.5 - 0.3 0.2 0.6 0.5 - 22 15 30 36


... ... 0.5 1.6 1.3 - ... 0.3 0.7 0.6 - ... 53 45 42

Totalmerchandise 58.1 118.4 145.7 702.8 451.6 - 38.2 29.3 136.9 86.9 - 32 20 20 19

Africa


16.6 22.0 18.5 42.1 39.1 2.0 2.4 3.2 8.4 8.2 12 11 18 20 21


56.2 49.8 87.4 393.7 245.7 1.8 2.9 4.5 21.8 14.5 3 6 5 6 6

Manufactures 21.1 30.9 35.8 98.2 73.8 2.4 5.6 5.6 21.2 18.6 12 18 16 22 25

•Ironandsteel 2.4 3.6 3.3 11.8 6.7 0.3 0.8 0.4 2.0 1.6 15 21 12 17 24

•Chemicals 3.4 5.0 5.1 20.9 14.2 0.5 1.2 1.5 5.4 4.5 14 23 29 26 32


0.3 0.7 1.0 2.7 2.4 0.0 0.1 0.2 0.5 0.5 11 15 20 20 23


... ... 0.1 0.5 0.5 ... ... 0.1 0.2 0.3 ... ... 51 49 55

*Duetoinsufficientdatain1990,the1990columnforCISrefersto1995.



220




origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009

Telecom.equipment

... ... 0.4 1.3 1.1 ... ... 0.1 0.3 0.2 ... ... 36 23 22


... ... 0.5 0.9 0.8 ... ... 0.0 0.0 0.0 ... ... 2 3 4


0.5 0.9 1.7 7.6 5.3 0.2 0.4 0.4 1.8 1.5 33 48 24 24 27


... ... 3.3 13.1 10.4 ... ... 0.8 3.3 3.0 ... ... 23 25 29

•Textiles 1.5 1.6 1.4 2.4 2.2 0.2 0.4 0.3 0.6 0.6 17 22 21 26 26

•Clothing 3.5 6.1 7.1 11.0 9.5 0.1 0.2 0.2 0.5 0.4 2 3 2 4 4


... ... 0.3 0.8 0.8 ... ... 0.1 0.3 0.2 ... ... 19 37 31

Totalmerchandise 106.0 111.9 148.6 557.4 383.9 6.2 11.0 13.7 55.0 44.9 6 10 9 10 12

middle east


4.4 6.4 6.1 18.8 18.2 1.1 2.4 2.9 9.9 10.5 26 38 48 53 58


112.5 108.5 195.4 751.3 469.1 3.9 4.1 3.8 25.6 20.1 3 4 2 3 4

Manufactures 20.2 34.2 64.7 235.5 188.0 3.6 4.9 16.2 85.6 74.9 18 14 25 36 40

•Ironandsteel 0.2 1.0 1.1 6.5 4.9 0.1 0.5 0.6 4.7 3.6 40 48 59 73 75

•Chemicals 5.2 10.0 13.8 54.6 43.3 0.6 1.3 2.0 7.6 8.1 11 13 14 14 19


1.1 2.7 9.3 22.8 19.8 0.1 0.1 1.5 10.6 8.3 8 3 16 47 42


... ... 1.8 7.1 5.1 ... ... 0.5 3.6 3.2 ... ... 30 51 62

Telecom.equipment

... ... 5.8 14.1 10.7 ... ... 0.9 6.6 4.9 ... ... 16 46 45


... ... 1.8 1.5 4.0 ... ... 0.0 0.4 0.2 ... ... 1 28 6


0.4 1.0 3.2 25.8 18.4 0.2 0.4 1.6 13.3 10.9 53 41 51 52 59


... ... 7.1 28.4 22.0 ... ... 2.6 16.1 11.8 ... ... 37 57 53

•Textiles 1.0 1.6 5.6 11.2 7.7 0.1 0.2 3.1 6.5 4.5 6 11 56 58 58

•Clothing 1.0 1.9 2.5 6.9 5.5 0.1 0.1 0.5 2.8 2.6 7 6 18 41 49


... ... 1.1 3.1 2.3 ... ... 0.1 0.7 0.4 ... ... 7 24 18

Totalmerchandise 138.4 150.4 268.0 1,023.1 689.7 8.6 11.6 23.3 124.8 106.8 6 8 9 12 16

Asia


72.0 108.5 101.2 261.9 225.5 40.9 70.6 61.6 144.0 129.1 57 65 61 55 57


65.9 82.1 120.2 539.7 385.6 52.4 69.6 100.1 432.7 318.4 80 85 83 80 83

Manufactures 584.6 1,084.3 1,396.3 3,453.5 2,849.5 210.3 510.9 635.5 1,552.7 1,344.0 36 47 46 45 47

•Ironandsteel 20.7 34.2 35.8 182.1 98.1 13.2 27.4 24.3 101.7 62.4 64 80 68 56 64

•Chemicals 33.7 76.1 100.9 321.9 275.3 20.9 52.3 65.7 203.1 176.5 62 69 65 63 64

221




origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009


137.2 309.0 457.8 909.4 785.6 40.9 133.8 221.9 461.6 409.0 30 43 49 51 52


... ... 177.7 319.5 270.9 ... ... 69.9 122.2 101.5 ... ... 39 38 38

Telecom.equipment

... ... 103.4 299.8 258.2 ... ... 37.6 115.9 104.1 ... ... 36 39 40


... ... 176.7 290.2 256.5 ... ... 114.5 223.5 203.4 ... ... 65 77 79


71.4 95.8 114.5 289.2 190.8 12.7 24.4 21.9 68.8 59.2 18 25 19 24 31


... ... 222.8 582.0 460.4 ... ... 116.9 291.4 240.5 ... ... 53 50 52

•Textiles 36.8 64.8 69.0 124.0 111.1 21.3 42.1 39.3 54.8 51.3 58 65 57 44 46

•Clothing 47.1 70.4 91.1 189.2 167.8 8.8 20.1 26.8 39.8 36.4 19 29 29 21 22


... ... 26.6 115.6 102.3 ... ... 13.2 65.8 59.1 ... ... 50 57 58

Totalmerchandise 739.0 1,303.1 1,658.1 4,372.4 3,575.2 311.1 666.6 814.7 2,186.8 1846.4 42 51 49 50 52

Developing Asia


51.1 80.9 73.2 209.8 178.7 16.1 30.8 25.8 83.5 73.9 31 38 35 40 41


45.1 55.3 85.8 387.3 269.9 17.2 28.0 44.8 221.1 163.9 38 51 52 57 61

Manufactures 300.4 644.4 927.6 2,721.3 2,311.6 75.4 222.3 314.3 919.8 816.6 25 35 34 34 35

•Ironandsteel 7.3 15.2 20.1 136.0 66.0 2.8 8.7 9.8 53.0 31.2 38 58 49 39 47

•Chemicals 16.6 42.8 62.1 244.1 206.2 8.7 26.6 35.4 123.0 108.3 53 62 57 50 53


69.3 200.3 347.7 803.6 704.8 16.2 65.6 129.8 329.0 294.3 23 33 37 41 42


... ... 141.6 293.7 251.5 ... ... 38.6 85.3 70.5 ... ... 27 29 28

Telecom.equipment

... ... 72.1 264.6 233.5 ... ... 19.6 78.4 69.3 ... ... 27 30 30


... ... 134.1 245.3 219.8 ... ... 71.6 165.3 154.4 ... ... 53 67 70


4.5 14.1 24.1 113.2 84.9 0.9 3.2 3.6 21.3 19.5 20 23 15 19 23


... ... 112.6 408.8 338.7 ... ... 46.2 144.8 126.8 ... ... 41 35 37

•Textiles 30.7 57.1 61.5 116.0 104.6 14.6 31.5 28.5 40.6 38.2 48 55 46 35 37

•Clothing 46.4 69.5 90.2 188.2 166.9 1.6 4.4 9.7 14.0 11.5 3 6 11 8 7


... ... 10.9 91.9 82.1 ... ... 3.4 47.1 43.0 ... ... 32 51 52

Totalmerchandise 402.3 793.2 1,101.7 3,372.5 2,815.3 109.9 286.6 389.5 1,241.5 1,071.1 27 36 35 37 38



222




origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009

Developing Asia excluding China


41.1 66.0 56.8 167.5 137.8 10.7 20.5 16.7 53.6 45.4 26 31 29 32 33


38.7 46.7 73.3 332.1 235.6 14.4 20.8 31.7 156.9 113.1 37 44 43 47 48

Manufactures 256.0 519.1 707.7 1,389.9 1,186.9 54.3 165.1 205.6 407.8 362.7 21 32 29 29 31

•Ironandsteel 6.0 10.9 15.7 65.0 42.4 1.7 4.9 4.7 23.2 16.1 28 45 30 36 38

•Chemicals 12.8 34.2 50.0 164.8 144.2 5.6 16.9 20.0 54.7 46.3 44 49 40 33 32


66.5 186.0 304.2 421.3 358.3 14.3 59.8 101.4 152.5 136.2 22 32 33 36 38


... ... 122.9 116.9 94.2 ... ... 29.4 33.2 27.7 ... ... 24 28 29

Telecom.equipment

... ... 52.6 102.6 84.7 ... ... 12.7 23.8 18.9 ... ... 24 23 22


... ... 128.7 201.8 179.4 ... ... 59.3 95.6 89.6 ... ... 46 47 50


4.0 13.4 22.5 84.5 65.0 0.6 2.8 3.0 14.2 12.4 14 21 13 17 19


... ... 83.1 193.3 158.8 ... ... 29.6 60.5 51.5 ... ... 36 31 32

•Textiles 23.5 43.2 45.4 50.7 44.7 8.9 18.1 14.9 15.0 14.0 38 42 33 30 31

•Clothing 36.5 44.4 54.1 67.8 59.7 0.9 2.2 1.9 2.6 2.4 3 5 4 4 4


... ... 8.3 56.3 50.7 ... ... 2.1 6.2 5.9 ... ... 25 11 12

Totalmerchandise 340.2 644.4 852.5 1,941.8 1,613.7 80.3 211.4 258.0 631.5 534.7 24 33 30 33 33

Developed economies


290.3 394.1 373.3 833.0 722.5 224.2 293.0 285.6 615.0 533.1 77 74 77 74 74


186.4 217.4 312.5 1,190.2 768.7 157.1 175.5 260.6 916.4 557.7 84 81 83 77 73

Manufactures 1,943.7 2,793.6 3,390.6 6,727.8 5,280.1 1,495.0 1,993.3 2,532.0 4,765.0 3,702.7 77 71 75 71 70

•Ironandsteel 83.4 106.6 94.1 320.8 186.7 60.9 74.4 70.6 226.5 120.2 73 70 75 71 64

•Chemicals 256.0 396.2 475.7 1,259.8 1,110.9 191.9 288.9 361.5 950.1 833.6 75 73 76 75 75


220.6 385.9 570.5 675.7 536.8 166.8 263.1 387.6 432.7 343.4 76 68 68 64 64


... ... 214.4 236.9 192.9 ... ... 170.0 177.7 142.1 ... ... 79 75 74

Telecom.equipment

... ... 187.8 271.4 218.2 ... ... 138.2 187.6 152.9 ... ... 74 69 70


... ... 168.4 167.5 125.7 ... ... 79.3 67.4 48.5 ... ... 47 40 39


301.5 416.7 506.7 1,003.6 670.8 263.3 343.4 435.8 764.2 519.8 87 82 86 76 78

223




origin 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009 1990 1995 2000 2008 2009


... ... 668.9 1,402.7 1,056.6 ... ... 454.6 867.8 626.0 ... ... 68 62 59

•Textiles 67.4 84.2 79.1 105.7 81.9 52.9 59.8 56.7 73.3 56.2 79 71 72 69 69

•Clothing 50.9 65.5 68.5 123.1 104.5 45.4 53.0 55.8 104.0 89.5 89 81 82 85 86


... ... 100.9 201.2 174.3 ... ... 71.4 135.6 115.8 ... ... 71 67 66


Developing economies


111.8 167.8 165.1 460.5 407.1 34.1 65.5 65.6 231.7 210.3 31 39 40 50 52


262.7 266.2 456.9 1,865.7 1,210.1 65.8 95.9 183.4 908.0 625.4 25 36 40 49 52

Manufactures 397.4 822.0 1,268.0 3,567.6 2,965.8 117.6 317.2 467.7 1,633.8 1,404.1 30 39 37 46 47

•Ironandsteel 16.0 28.6 35.0 202.7 103.2 7.6 16.1 17.5 119.3 71.9 48 56 50 59 70

•Chemicals 32.1 71.0 99.8 376.6 309.3 16.3 43.9 62.1 231.6 198.6 61 62 62 62 64


76.2 216.3 397.6 894.4 784.4 19.0 74.7 148.0 403.2 358.3 25 35 37 45 46


... ... 157.6 313.7 269.6 ... ... 43.8 105.6 89.6 ... ... 28 34 33

Telecom.equipment

... ... 100.2 329.8 287.2 ... ... 29.0 126.5 108.5 ... ... 29 38 38


... ... 139.8 251.0 227.6 ... ... 75.1 171.0 160.1 ... ... 54 68 70


12.6 35.4 69.0 234.0 172.3 2.9 12.6 17.9 103.6 80.7 23 36 26 44 47


... ... 163.3 534.3 435.8 ... ... 65.5 254.3 216.9 ... ... 40 48 50

•Textiles 35.4 63.8 77.0 145.4 127.3 19.3 41.8 46.7 84.3 74.5 55 66 61 58 59

•Clothing 54.4 85.8 127.8 239.8 209.6 4.2 9.2 17.7 41.6 35.3 8 11 14 17 17


... ... 16.8 106.8 95.3 ... ... 4.8 59.4 54.2 ... ... 29 56 57

Totalmerchandise 793.4 1,284.0 1,919.1 6,015.9 4,706.7 220.1 487.3 725.7 2,828.2 2,286.5 28 38 38 47 49

Source: Network of world merchandise trade tables from WTO International Trade Statistics 2010, supplemented with older networktablesandSecretariatestimatespriorto2000.



224

AppendixTable8:Preferential trade by importer, preferential margin and mFn rate

Importer

share of imports from

countries receiving

preferences (in per cent

of total trade)


total trade

(billion dollars)

trade- weighted

pref. margin

(% points)

Preferential imports non-preferential imports mFn zero n/a

totalPm

above 20%

Pm 10.1%

to 20%

Pm 5.1%

to 10%

Pm 2.6%

to 5%

Pm 0.1%

to 2.5%

totalmFn

above 20%

mFn 10.1%

to 20%

mFn 5.1%

to 10%

mFn 2.6%

to 5%

mFn 0.1%

to 2.5%

total with pref.

no pref.

totAL with eu-intra 64.0 29.6 1.5 2.5 7.5 8.4 9.8 21.7 0.6 2.2 5.4 7.3 6.2 47.3 27.9 19.4 1.4 13,552 2.1

totAL without eu-intra

50.0 16.3 0.5 1.3 3.9 4.0 6.5 30.2 0.8 3.0 7.5 10.2 8.7 52.3 25.3 27.0 1.2 9,745 1.0

EU-intra 100.0 63.7 3.9 5.5 16.7 19.6 18.0 0.0 0.0 0.0 0.0 0.0 0.0 34.4 34.4 0.0 1.8 3,807 4.9

EU-extra 69.8 16.9 0.3 2.2 3.0 5.3 26.1 0.6 2.6 4.4 6.9 11.5 56.5 41.9 14.6 0.5 2,287 0.9

UnitedStates

48.1 23.1 0.7 0.7 1.9 3.9 15.9 33.7 0.5 2.5 4.5 6.1 20.1 42.8 16.5 26.3 0.4 2,098 0.7

China 28.4 5.8 0.1 0.2 1.6 1.0 2.8 41.7 0.5 2.4 19.2 14.0 5.6 48.4 15.4 32.9 4.2 1,034 0.3

Japan 50.0 6.0 0.0 0.1 0.6 3.6 1.7 12.5 1.0 1.9 4.3 4.8 0.5 80.4 38.5 41.9 1.1 748 0.2

Korea,Rep.of

36.7 9.5 0.0 0.1 1.1 2.4 5.9 59.2 1.9 1.2 20.6 32.4 3.1 30.2 13.7 16.4 1.2 434 0.3

Canada 80.3 35.4 0.1 1.6 25.9 4.7 3.0 9.1 0.1 2.3 5.5 0.5 0.7 55.4 42.1 13.3 0.1 371 2.2

HongKong,China

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 100.0 0.0 369 0.0

Mexico 75.8 48.2 5.9 9.9 31.2 0.7 0.5 10.3 1.1 3.3 5.9 0.0 0.0 38.1 22.7 15.4 3.4 303 9.3

Singapore 62.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 62.6 37.4 0.0 243 0.1

Taipei,Chinese

2.1 0.0 0.0 0.0 0.0 0.0 0.0 26.0 1.0 1.5 4.3 12.5 6.7 73.9 2.1 71.9 0.0 232 0.0

India 41.1 5.0 0.1 0.0 0.9 1.0 3.0 79.9 1.2 0.3 35.3 41.1 2.0 10.2 4.4 5.8 4.9 215 0.2

RussianFederation

38.8 14.1 0.6 3.3 2.3 5.9 2.1 71.2 0.9 20.2 15.5 28.4 6.2 13.3 4.9 8.4 1.4 188 1.3

Australia 64.3 13.5 0.0 0.1 1.2 9.8 2.4 33.8 0.0 2.2 7.3 24.2 0.0 52.5 36.7 15.8 0.3 187 0.6

Turkey 86.3 39.7 0.3 1.5 10.7 20.1 7.1 21.6 3.1 1.2 6.0 8.6 2.6 36.9 31.2 5.7 1.8 186 1.9

Switzerland 89.4 53.9 1.3 3.5 8.7 9.8 30.6 7.7 0.6 0.3 0.9 0.7 5.2 38.2 33.4 4.8 0.2 182 2.2

Brazil 16.0 12.3 2.9 4.1 3.8 0.4 1.0 50.4 2.0 35.2 6.6 1.2 5.4 36.9 3.5 33.4 0.5 172 2.0

UnitedArabEmirates

5.9 5.1 0.0 0.0 0.0 5.1 0.0 72.2 0.1 0.0 0.0 70.7 1.4 22.5 0.8 21.6 0.2 153 0.2

Malaysia 38.4 4.5 0.8 1.6 0.8 1.0 0.1 10.2 4.2 1.6 0.8 3.6 0.0 78.0 28.8 49.1 7.4 143 0.7

Thailand 18.6 7.2 0.8 0.7 1.3 2.3 2.0 53.6 3.9 4.5 14.3 15.6 15.3 39.2 8.8 30.4 0.0 126 0.6

Indonesia 47.9 24.3 0.9 0.6 2.8 4.0 16.0 33.3 1.1 2.7 4.5 16.0 9.0 37.7 12.9 24.9 4.6 74 0.9


225

AppendixTable9:Preferential trade by importer, duties and average preference margin

Importer

trade and duties (billion dollars) Indicators (in per cent)

total imports

mFn dutiesDuties with

pref.Duties “saved"

Pref. duties over mFn

duties

mFn duties over

imports

Pref. duties over

imports

trade-weighted

preferential margin

(percentage points)

totAL with eu-intra

13,552 491.8 210.8 281.0 42.9 3.6 1.6 2.1

totAL without eu-intra

9,745 306.4 210.8 95.7 68.8 3.1 2.2 1.0

EU-intra 3,807 185.4 0.0 185.4 0.0 4.9 0.0 4.9

EU-extra 2,287 57.2 36.3 20.9 63.4 2.5 1.6 0.9

UnitedStates 2,098 42.7 27.8 14.9 65.1 2.0 1.3 0.7

China 1,034 32.4 29.8 2.6 92.0 3.1 2.9 0.3

Japan 748 11.2 9.4 1.7 84.3 1.5 1.3 0.2

Korea,Rep.of 434 32.0 30.9 1.2 96.4 7.4 7.1 0.3

Canada 371 11.5 3.5 8.0 30.7 3.1 1.0 2.2

HongKong,China

369 0.0 0.0 0.0 ... 0.0 0.0 0.0

Mexico 303 33.5 5.2 28.3 15.6 11.1 1.7 9.3

Singapore 243 0.5 0.1 0.3 30.3 0.2 0.1 0.1

Taipei,Chinese

232 3.7 3.7 0.0 99.9 1.6 1.6 0.0

India 215 13.6 13.3 0.3 97.4 6.3 6.2 0.2

RussianFederation

188 14.8 12.4 2.4 83.9 7.9 6.6 1.3

Australia 187 5.8 4.6 1.2 79.1 3.1 2.5 0.6

Turkey 186 7.6 4.1 3.5 53.5 4.1 2.2 1.9

Switzerland 182 5.6 1.5 4.1 26.5 3.1 0.8 2.2

Brazil 172 15.1 11.7 3.4 77.7 8.8 6.8 2.0

UnitedArabEmirates

153 5.9 5.5 0.4 93.5 3.9 3.6 0.2

Malaysia 143 4.2 3.2 1.0 77.0 2.9 2.3 0.7

Thailand 126 6.5 5.8 0.8 88.3 5.2 4.6 0.6

Indonesia 74 2.7 2.0 0.7 73.8 3.6 2.7 0.9




226

AppendixTable10:Preferential trade by exporter, 30 largest exporters

exporter

share of exports

to countries granting preferences (in per cent of total

trade)


total trade

(billion dollars)

trade- weighted

pref. margin

(% points)

Coverage (share of

total exports covered

by dataset in per cent)

Preferential exports non-preferential exports mFn zero n/a

totalPm

above 20%

Pm 10.1%

to 20%

Pm 5.1%

to 10%

Pm 2.6%

to 5%

Pm 0.1%

to 2.5%

totalmFn

above 20%

mFn 10.1%

to 20%

mFn 5.1%

to 10%

mFn 2.6%

to 5%

mFn 0.1%

to 2.5%

total with pref.

no pref.

totAL 50.0 16.3 0.5 1.3 3.9 4.0 6.5 30.2 0.8 3.0 7.5 10.2 8.7 52.3 25.3 27.0 1.2 9,744.5 1.0 89

China 54.6 5.5 0.0 0.1 0.5 2.4 2.4 38.4 0.6 8.5 9.9 13.2 6.1 55.4 25.6 29.7 0.7 1,406.0 0.2 90

EU-extra 20.7 13.1 0.4 1.1 3.7 3.2 4.8 42.1 0.7 4.9 12.8 13.3 10.4 43.1 6.9 36.1 1.7 1,231.9 0.8 92

UnitedStates

39.0 21.7 1.2 2.5 15.8 1.8 0.4 30.2 0.9 2.1 7.4 9.0 10.8 46.5 16.8 29.7 1.6 1,011.0 2.8 86

Japan 4.8 0.5 0.2 0.0 0.1 0.1 0.1 57.7 1.2 2.7 20.8 16.4 16.5 39.6 3.6 36.0 2.3 703.9 0.1 91

Canada 80.1 45.7 1.1 0.6 5.3 5.7 33.0 7.5 0.3 0.5 2.0 1.9 2.8 46.4 34.1 12.4 0.3 419.0 1.4 96

Korea,Rep.of

43.6 7.7 0.0 0.0 0.1 0.5 7.2 39.5 0.7 2.2 10.0 14.6 11.9 51.0 17.5 33.5 1.8 358.6 0.1 90

RussianFederation

81.2 5.7 0.0 0.0 0.1 3.4 2.2 16.5 0.9 0.1 3.1 4.0 8.4 77.6 65.4 12.2 0.2 325.3 0.2 80

Taipei,Chinese

1.1 0.1 0.0 0.0 0.0 0.0 0.1 39.7 0.5 2.7 13.5 16.2 6.7 58.3 0.5 57.8 1.9 284.3 0.0 93

KingdomofSaudiArabia

33.7 4.3 0.0 0.0 0.0 3.6 0.6 41.1 0.0 0.0 2.0 17.9 21.2 54.5 29.4 25.1 0.1 273.1 0.2 88

Mexico 97.8 63.9 3.6 2.2 7.4 17.5 33.2 1.8 0.1 0.1 0.6 0.9 0.1 34.0 32.4 1.6 0.3 263.1 3.0 94

Malaysia 73.9 14.0 0.2 0.4 2.1 5.0 6.3 14.1 0.3 0.9 4.1 7.0 1.9 70.2 49.3 20.9 1.6 211.3 0.6 93

Switzerland 67.0 34.1 0.4 1.1 5.1 9.8 17.8 14.9 0.1 1.5 8.1 4.0 1.3 48.9 31.8 17.2 2.0 191.7 1.2 90

Australia 9.4 2.9 0.0 0.0 0.1 0.3 2.4 21.1 3.0 0.8 4.2 9.1 4.0 75.4 5.9 69.5 0.6 167.3 0.1 90

Singapore 63.9 18.9 0.3 0.8 5.1 5.7 6.9 13.3 0.3 0.4 2.1 3.3 7.2 66.4 39.1 27.3 1.4 161.8 0.9 86

Thailand 88.5 26.8 0.8 1.0 5.1 12.9 7.1 15.1 1.8 2.7 3.9 4.1 2.6 54.1 46.5 7.6 4.0 152.9 1.5 87

India 76.8 25.9 0.0 0.1 2.5 11.1 12.2 24.7 0.8 3.2 5.9 12.6 2.2 48.3 35.8 12.5 1.1 151.6 0.8 81

Brazil 74.8 15.3 1.2 1.3 1.8 6.5 4.5 26.4 2.0 2.4 4.1 8.3 9.6 56.9 40.6 16.2 1.4 150.5 1.2 73

Norway 85.0 18.1 0.1 0.7 7.4 5.2 4.7 8.7 0.2 0.5 2.3 1.5 4.3 72.9 64.9 8.0 0.3 140.0 0.8 97

Indonesia 90.7 20.6 0.6 0.7 3.0 8.4 7.8 15.6 1.2 3.1 3.7 5.8 1.9 61.3 54.8 6.6 2.4 139.1 1.0 92

UnitedArabEmirates

9.5 3.8 0.0 0.0 0.1 2.3 1.4 27.9 0.1 0.1 4.3 22.5 0.9 68.0 4.8 63.3 0.3 115.7 0.1 81

Turkey 84.8 64.8 0.4 20.5 17.7 15.3 10.9 16.9 0.3 2.5 2.3 10.8 1.0 17.6 13.3 4.3 0.8 91.6 5.0 81

Iran,IslamicRep.

69.3 2.0 0.0 0.0 0.0 1.1 0.7 22.6 0.1 0.0 1.4 19.4 1.8 75.4 48.1 27.3 0.1 91.5 0.1 91

Nigeria 88.5 48.4 0.0 0.0 0.1 0.3 48.1 9.0 0.0 0.0 0.1 8.8 0.0 42.0 30.7 11.3 0.6 80.9 0.1 93

SouthAfrica

70.4 21.5 0.1 0.2 3.1 7.8 10.2 15.1 0.2 0.8 4.8 7.0 2.3 62.4 46.0 16.4 1.0 76.5 0.8 80

Venezuela,BolivarianRep.of

88.2 2.9 0.0 0.1 0.9 1.4 0.6 71.5 0.0 0.0 1.1 1.2 69.2 25.5 16.8 8.7 0.0 74.1 0.1 90

Kuwait 11.6 5.6 0.0 0.0 0.0 5.5 0.1 39.1 0.1 0.0 1.5 25.4 12.2 55.2 6.0 49.2 0.1 72.0 0.3 90

Philippines 84.9 11.6 0.9 0.3 1.7 5.5 3.3 7.6 0.9 2.2 1.1 2.5 0.9 78.9 64.7 14.2 1.9 69.3 0.7 97

Algeria 93.7 4.1 0.0 0.0 0.6 1.3 2.2 31.8 0.0 0.0 1.0 1.9 28.8 61.6 55.3 6.2 2.5 66.0 0.1 97

Chile 95.4 27.3 0.5 2.5 8.5 4.6 11.3 7.0 0.4 1.3 0.3 0.6 4.5 63.5 59.5 4.0 2.2 62.3 1.7 90

Qatar 11.8 2.0 0.0 0.0 0.0 1.5 0.5 28.9 0.0 0.0 1.0 27.3 0.5 69.1 6.4 62.7 0.0 60.4 0.1 95


227

AppendixTable11:shares of preferential trade and duty reductions from reciprocal preference schemes by importer

ImporterPreferential imports under reciprocal regimes /

all preferential imports (per cent)Duty reduction under reciprocal regimes /

overall duty reduction (per cent)

total 77.1 87.7

EU-extra 59.5 68.1

UnitedStates 74.0 87.2

China 99.5 99.2

Japan 27.4 25.4

Korea,Rep.of 99.1 98.6

Canada 86.8 91.6

Mexico 100.0 100.0

Singapore 100.0 100.0

Taipei,Chinese 70.2 87.7

India 94.3 97.7

RussianFederation

100.0 100.0

Australia 80.1 92.1

Turkey 75.5 80.4

Switzerland 91.8 90.5

Brazil 100.0 100.0

UnitedArabEmirates

100.0 100.0

Malaysia 100.0 100.0

Thailand 100.0 100.0

Indonesia 100.0 100.0




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Technical notesComposition of regions and other economic groupingsRegionsnorth America Bermuda Canada* Mexico* UnitedStatesof

America*

Otherterritoriesintheregionnotelsewherespecified(n.e.s.)

south and Central America and the Caribbean AntiguaandBarbuda* Chile* ElSalvador* NetherlandsAntilles SaintVincentandthe

Grenadines*

Argentina* Colombia* Grenada* Nicaragua* Suriname*

Bahamas** CostaRica* Guatemala* Panama* TrinidadandTobago*

Barbados* Cuba* Guyana* Paraguay* Uruguay*

Belize* Dominica* Haiti* Peru* BolivarianRep.ofVenezuela*

Bolivia,PlurinationalStateof*

DominicanRepublic* Honduras* SaintKittsandNevis*

Brazil* Ecuador* Jamaica* SaintLucia*

Otherterritoriesintheregionn.e.s.

europe Andorra** Denmark* Iceland* Montenegro** Slovenia*

Austria* Estonia* Ireland* Netherlands* Spain*

Belgium* Finland* Italy* Norway* Sweden*

BosniaandHerzegovina**

France* Latvia* Poland* Switzerland*

Bulgaria* FYRMacedonia* Liechtenstein* Portugal* Turkey*

Croatia* Germany* Lithuania* Romania* UnitedKingdom*

Cyprus* Greece* Luxembourg* Serbia**

CzechRepublic* Hungary* Malta* SlovakRepublic*


Commonwealth of Independent states (CIs) a Armenia* Georgiaa Moldova* Turkmenistan

Azerbaijan** Kazakhstan** RussianFederation** Ukraine*

Belarus** KyrgyzRepublic* Tajikistan** Uzbekistan**


Africa Algeria** Congo* Guinea* Morocco* SouthAfrica*

Angola* Côted’Ivoire* Guinea-Bissau* Mozambique* Sudan**

Benin* Dem.Rep.oftheCongo*

Kenya* Namibia* Swaziland*

Botswana* Djibouti* Lesotho* Niger* Tanzania*

BurkinaFaso* Egypt* Liberia** Nigeria* Togo*

Burundi* EquatorialGuinea** LibyanArabJamahiriya** Rwanda* Tunisia*

Cameroon* Eritrea Madagascar* SãoToméandPríncipe** Uganda*

CapeVerde* Ethiopia** Malawi* Senegal* Zambia*

CentralAfricanRepublic* Gabon* Mali* Seychelles** Zimbabwe*

Chad* Gambia* Mauritania* SierraLeone*

Comoros** Ghana* Mauritius* Somalia


middle east Bahrain* Israel* LebaneseRepublic** SaudiArabia,Kingdomof* Yemen**

Iran,IslamicRep.of** Jordan* Oman* SyrianArabRepublic

Iraq** Kuwait* Qatar* UnitedArabEmirates*


Asia Afghanistan** HongKong,China* Malaysia* PapuaNewGuinea* TimorLeste

Australia* India* Maldives* Philippines* Tonga*

Bangladesh* Indonesia* Mongolia* Samoa** Tuvalu

* WTOmembers** Observergovernmentsa GeorgiaisnotamemberoftheCommonwealthofIndependentStatesbutisincludedinthisgroupforreasonsofgeographyandsimilarities

ineconomicstructure.239

teCHnICAL notes


240

Composition of regions and other economic groupingsRegionsBhutan** Japan* Myanmar* Singapore* Vanuatu**

BruneiDarussalam* Kiribati Nepal* SolomonIslands* VietNam*

Cambodia* Korea,Republicof* NewZealand* SriLanka*

China* LaoPeople'sDem.Rep.**

Pakistan* Taipei,Chinese*

Fiji* Macao,China* Palau Thailand*


OtherGroupsACP (African, Caribbean and Pacific countries)Angola Cuba Haiti Niger SouthAfrica

AntiguaandBarbuda Dem.Rep.oftheCongo

Jamaica Nigeria Sudan

Bahamas Djibouti Kenya Niue Suriname

Barbados Dominica Kiribati Palau Swaziland

Belize DominicanRepublic Lesotho PapuaNewGuinea TimorLeste

Benin EquatorialGuinea Liberia Rwanda Togo

Botswana Eritrea Madagascar SaintKittsandNevis Tonga

BurkinaFaso Ethiopia Malawi SaintLucia TrinidadandTobago

Burundi Fiji Mali SaintVincentandtheGrenadines

Tuvalu

Cameroon Gabon MarshallIslands Samoa Uganda

CentralAfricanRepublic

Gambia Mauritania SãoToméandPríncipe UnitedRepublicofTanzania

Chad Ghana Mauritius Senegal Vanuatu

Comoros Grenada Micronesia Seychelles Zambia

Congo Guinea Mozambique SierraLeone Zimbabwe

CookIslands Guinea-Bissau Namibia SolomonIslands

Côted’Ivoire Guyana Nauru Somalia

AfricaNorth Africa

Algeria Egypt LibyanArabJamahiriya Morocco Tunisia

Sub-Saharan Africa

Western Africa Benin Gambia Guinea-Bissau Mauritania Senegal

BurkinaFaso Ghana Liberia Niger SierraLeone

CapeVerde Guinea Mali Nigeria Togo

Côted’Ivoire

Central Africa

Burundi CentralAfricanRepublic

Congo EquatorialGuinea Rwanda

Cameroon Chad Dem.Rep.oftheCongo Gabon SãoToméandPríncipe

Eastern Africa

Comoros Ethiopia Mauritius Somalia UnitedRepublicofTanzania

Djibouti Kenya Seychelles Sudan Uganda

Eritrea Madagascar

Southern Africa

Angola Lesotho Mozambique SouthAfrica Zambia

Botswana Malawi Namibia Swaziland Zimbabwe

TerritoriesinAfricanotelsewherespecified

AsiaEast Asia (including Oceania)

Australia Indonesia Mongolia Samoa Tuvalu

BruneiDarussalam Japan Myanmar Singapore Vanuatu

Cambodia Kiribati NewZealand SolomonIslands VietNam

China LaoPeople’sDem.Rep. PapuaNewGuinea Taipei,Chinese

Fiji Macao,China Philippines Thailand

HongKong,China Malaysia Korea,Republicof Tonga

West Asia

Afghanistan Bhutan Maldives Pakistan SriLanka

Bangladesh India Nepal

OthercountriesandterritoriesinAsiaandthePacificnotelsewherespecified

241

teCHnICAL notes

Composition of regions and other economic groupingsOtherGroupsLDCs (Least-developed countries) Afghanistan Comoros Kiribati Myanmar Sudan

Angola Congo,Dem.Rep.of LaoPeople’sDem.Rep. Nepal TimorLeste

Bangladesh Djibouti Lesotho Niger Togo

Benin EquatorialGuinea Liberia Rwanda Tuvalu

Bhutan Eritrea Madagascar Samoa Uganda

BurkinaFaso Ethiopia Malawi SãoToméandPríncipe UnitedRepublicofTanzania

Burundi Gambia Maldives Senegal Vanuatu

Cambodia Guinea Mali SierraLeone Yemen


Guinea-Bissau Mauritania SolomonIslands Zambia

Chad Haiti Mozambique Somalia

six east Asian tradersHongKong,China Korea,Republicof Singapore Taipei,Chinese Thailand

Malaysia

RegionalIntegrationAgreementsAndean Community (CAn) Bolivia,PlurinationalStateof

Colombia Ecuador Peru

AseAn (Association of south east Asian nations) / AFtA (AseAn Free trade Area) BruneiDarussalam Indonesia Malaysia Philippines Thailand

Cambodia LaoPeople'sDem.Rep. Myanmar Singapore VietNam

CACm (Central American Common market) CostaRica ElSalvador Guatemala Honduras Nicaragua

CARICom (Caribbean Community and Common market) AntiguaandBarbuda Belize Guyana Montserrat SaintVincentandthe

Grenadines

Bahamas Dominica Haiti SaintKittsandNevis Suriname

Barbados Grenada Jamaica SaintLucia TrinidadandTobago

CemAC (economic and monetary Community of Central Africa) Cameroon Chad Congo EquatorialGuinea Gabon


ComesA (Common market for eastern and southern Africa) Burundi Egypt LibyanArabJamahiriya Rwanda Uganda

Comoros Eritrea Madagascar Seychelles Zambia

Congo,Dem.Rep.of Ethiopia Malawi Sudan Zimbabwe

Djibouti Kenya Mauritius Swaziland

eCCAs (economic Community of Central African states) Angola CentralAfrican

RepublicDem.Rep.oftheCongo

Gabon SãoToméandPríncipe

Burundi Chad EquatorialGuinea Rwanda

Cameroon Congo

eCoWAs (economic Community of West African states) Benin Côted'Ivoire Guinea Mali Senegal

BurkinaFaso Gambia Guinea-Bissau Niger SierraLeone

CapeVerde Ghana Liberia Nigeria Togo

eFtA (european Free trade Association) Iceland Liechtenstein Norway Switzerland

european union (27) Austria Estonia Ireland Netherlands Spain

Belgium Finland Italy Poland Sweden

Bulgaria France Latvia Portugal UnitedKingdom

Cyprus Germany Lithuania Romania

CzechRepublic Greece Luxembourg SlovakRepublic

Denmark Hungary Malta Slovenia


242

Composition of regions and other economic groupingsRegionalIntegrationAgreementsGCC (Gulf Cooperation Council) Bahrain,Kingdomof Oman Qatar SaudiArabia,Kingdomof UnitedArabEmirates

Kuwait

meRCosuR (southern Common market) Argentina Brazil Paraguay Uruguay

nAFtA (north American Free trade Agreement) Canada Mexico UnitedStates

sAPtA (south Asian Preferential trade Arrangement) Bangladesh India Nepal Pakistan SriLanka

Bhutan Maldives

sADC (southern African Development Community) Angola Lesotho Mauritius SouthAfrica Zambia

Botswana Madagascar Mozambique Swaziland Zimbabwe

Congo,Dem.Rep.of Malawi Namibia UnitedRepublicofTanzania

WAemu (West African economic and monetary union) Benin Côted'Ivoire Mali Senegal Togo

BurkinaFaso Guinea-Bissau Niger

WTOmembersarefrequentlyreferredtoas“countries”,althoughsomemembersarenotcountriesintheusualsenseofthewordbut are officially “customs territories”. The definition ofgeographical and other groupings in this report does not implyan expression of opinion by the Secretariat concerning thestatusofanycountryorterritory,thedelimitationofitsfrontiers,northerightsandobligationsofanyWTOmemberinrespectofWTO agreements. The colours, boundaries, denominations andclassificationsinthemapsofthepublicationdonotimply,onthepartof theWTO,any judgementon the legalorotherstatusofanyterritory,oranyendorsementoracceptanceofanyboundary.

Throughout this report, South and Central America and theCaribbean is referred to as South and Central America. TheBolivarian Republic of Venezuela; Hong Kong SpecialAdministrativeRegionofChina; theRepublicofKorea; and theSeparate Customs Territory of Taiwan, Penghu, Kinmen andMatsu are referenced as Bolivarian Rep. of Venezuela; HongKong,China;Korea,Republicof;andTaipei,Chineserespectively.

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abbreviations and symbolsACP African,CaribbeanandPacificGroupofStatesADB AsianDevelopmentBankAFAS ASEANFrameworkAgreementonServicesAFTA ASEANFreeTradeAreaAGOA AfricanGrowthandOpportunityActALADI LatinAmericanIntegrationAssociationALALC LatinAmericanAssociationofFreeCommerceAMU ArabMaghrebUnionAPEC AsiaPacificEconomicCooperationAPTA AsiaPacificTradeAgreementASEAN AssociationofSoutheastAsianNationsATC AgreementonTextilesandClothingAVE ad valoremequivalentBEC broadeconomiccategoriesBITs bilateralinvestmenttreatiesBOP balanceofpaymentCACM CentralAmericanCommonMarketCAFTA CentralAmericanFreeTradeAreaCAN ANDEANCommunityCARICOM CaribbeanCommunityandCommonMarketCBTPA CaribbeanBasinTradePartnershipActCBERA CaribbeanBasinEconomicRecoveryActCEFTA CentralEuropeanFreeTradeAreaCEPA CloserEconomicPartnershipArrangementsCER CloserEconomicRelationsCGE computablegeneralequilibriumCIS CommonwealthofIndependentStatesCOMECON CouncilforMutualEconomicAssistanceCOMESA CommonMarketforEasternandSouthernAfricaCRTA CommitteeonRegionalTradeAgreementsCTC changeintariffclassificationCUs customsunionsCUSFTA Canada-UnitedStatesFreeTradeAgreementDDA DohaDevelopmentAgendaDR-CAFTA DominicanRepublic-CentralAmericanFreeTradeAgreementDSU DisputeSettlementUnderstandingEAC EastAfricanCommunityECA EconomicCommissionforAfricaECCAS EconomicCommunityofCentralAfricanStatesECO EconomicCo-operationOrganizationECOWAS EconomicCommunityofWestAfricanStatesECSC EuropeanCoalandSteelCommunityEEA EuropeanEconomicAreaEEC EuropeanEconomicCommunityEFTA EuropeanFreeTradeAgreementEIA EconomicIntegrationAgreementEPA EconomicPartnershipAgreementEU EuropeanUnionFDI foreigndirectinvestmentf.o.b. freeonboardFTAA FreeTradeAreaoftheAmericasFTAs freetradeagreementsGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGCC GulfCooperationCouncilGDP grossdomesticproductGPA GovernmentProcurementAgreementGSP GeneralizedSystemofPreferencesGSTP GlobalSystemofTradePreferencesHS HarmonizedSystemIDB Inter-AmericanDevelopmentBankIMF InternationalMonetaryFundIPRs intellectualpropertyrightsITA InformationTechnologyAgreementITC InternationalTradeCentreITO InternationalTradeOrganizationJETRO JapanExternalTradeOrganization

ABBRevIAtIons AnD symBoLs


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LAIA LatinAmericanIntegrationAgreementLDCs least-developedcountriesLPA LagosPlanofActionMERCOSUR SouthernCommonMarketMFN most-favourednationMNC multi-nationalcorporationMTS multilateraltradingsystemNAFTA NorthAmericanFreeTradeAgreementNT nationaltreatmentOAU OrganizationofAfricanUnityPAFTA Pan-ArabFreeTradeAreaPECS Pan-EuropeanCumulationSystemPM preferencemarginPSA partialscopeagreementPTAs preferentialtradeagreementsPUR preferenceutilizationrateRCA revealedcomparativeadvantageREC regionaleconomiccommunityRIA regionalintegrationarrangementRoOs rulesoforiginRoW restoftheworldRPM relativepreferencemarginRTAA ReciprocalTradeAgreementActSACU SouthernAfricaCustomsUnionSADC SouthernAfricanDevelopmentCommunitySAFTA SouthAsianFreeTradeAreaSAPP SouthernAfricanPowerPoolSITC StandardInternationalTradeClassificationSMEs smallandmedium-sizedenterprisesSPS sanitaryandphytosanitaryTBTs technicalbarrierstotradeTPP Trans-PacificStrategicEconomicPartnershipTRIMs trade-relatedinvestmentmeasuresTRIPS trade-relatedaspectsofintellectualpropertyrightsUNCTAD UnitedNationsConferenceonTradeandDevelopmentUS UnitedStatesVC valuecontentVCLT ViennaConventionontheLawoftheTreatiesWITS WorldIntegratedTradeSystem

Thefollowingsymbolsareusedinthispublication:… notavailable0 figureiszeroorbecamezeroduetorounding- notapplicableUS$ UnitedStatesdollars€ euro£ UKpound

245

LIst oF FIGuRes, tABLes, Boxes AnD mAPs

list of figures, tables, boxes and mapsI Worldtradein2010

Figures

Figure1 GrowthinvolumeofworldmerchandisetradeandGDP,2000-10 20

Figure2 Volumeofworldmerchandisetrade,1990-2010 21

Figure3 RatioofworldexportsofgoodsandcommercialservicestoGDP,1980-2010 25

Figure4 Worldexportsofmanufacturedgoodsbyproduct,2007-10 27

Figure5 Nominaldollarexchangerates,January2000-February2011 29

Tables

Table1 GDPandmerchandisetradebyregion,2007-10 22

Table2 Exportpricesofselectedprimaryproducts,2000-10 23

Table3 Worldexportsofmerchandiseandcommercialservices,2005-10 24

Table4 Exportsofautomotiveproductsbymajorexportingregions,2008-10 27

Appendix figure

App.Fig.1 Monthlymerchandiseexportsandimportsofselectedeconomies,January2006-January2011 37

Appendix tables

App.Table1 Worldmerchandisetradebyregionandselectedeconomies,2010 31

App.Table2 Worldexportsofcommercialservicesbyregionandselectedcountry,2010 32

App.Table3 Merchandisetrade:leadingexportersandimporters,2010 33

App.Table4 Merchandisetrade:leadingexportersandimporters(excludingintra-EU(27)trade),2010 34

App.Table5 Leadingexportersandimportersinworldtradeincommercialservices,2010 35

App.Table6 Leadingexportersandimportersofcommercialservicesexcludingintra-EU(27)trade,2010 36

II TheWTOandPreferentialTradeAgreements:Fromco-existencetocoherence

B. Historicalbackgroundandcurrenttrends

Figures

FigureB.1 CumulativenumberofPTAsinforce,1950-2010,notifiedandnon-notifiedPTAs, bycountrygroup 55

FigureB.1a AveragenumberofPTAsinforcepercountry,1950-2010,notifiedandnon-notifiedPTAs, bycountrygroup 55

FigureB1b AveragenumberofPTAparticipantsperWTOmember,1950-2010,notifiedPTAs 56

FigureB.2 Cumulativenumberofintra-andcross-regionalPTAsinforce,1950-2010, notifiedandnon-notifiedPTAs 58

FigureB.3 CumulativenumberofbilateralPTAsandtypesofplurilateralPTAsinforce,1950-2010, notifiedandnon-notifiedPTAs 60

FigureB.4 TypeofPTAsinforce,2010,notifiedandnon-notifiedPTAs 62

FigureB.5 CumulativenumberofPTAs,1950-2010,notifiedandnon-notifiedPTAs,byscopeofcoverage 62

FigureB.6 Shareofintra-PTAtradeinworldmerchandiseexports,1990-2008 64

FigureB.7 SharesofselectedPTAsintotalworldexportsbetweenPTAmembers,2008 68

FigureB.8 Intra-regionaltradesharesinworldbymanufacturingsector,1990-2009 71

FigureB.9 Sharesofintra-regionaltradeintotalimportsbyregion,1965-2005 72

FigureB.10 Preferentialtradebyimporter,2008,sharesbypreferencemarginsandMFNrates 74


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FigureB.11 Preferentialtradebyexporter(30largestexporters),2008, sharesbypreferencemarginsandMFNrates 75

FigureB.12 Preferentialtradebyexporter(25exporterswithhighesttrade-weighted preferentialmargin),2008,preferencemargins 76

FigureB.13 Preferenceutilizationrate(PUR)ofUSpreferentialregimes (sortedbyeligibleexports),2008 80

FigureB.14 Preferenceutilizationrate(PUR)ofEUpreferentialregimes (sortedbyeligibleexports),2008 81

Tables

TableB.1 TotalandaveragenumberofPTAsinforce,2010,notifiedandnon-notifiedPTAs, byregion,regionaltypeandcountrygroup 57

TableB.2 “Network”ofPTAsinforce,2010,notifiedandnon-notifiedPTAs,byregion 59

TableB.3 Intra-andcross-regionalPTAsinforce,2010,notifiedandnon-notifiedPTAs, byregionandtimeperiod 59

TableB.4 NumberofbilateralPTAsandtypesofplurilateralPTAsinforce,2010, notifiedandnon-notifiedPTAs,bycountrygroupandregionaltype 61

TableB.5 NumberofgoodsandservicesPTAsinforce,2010,notifiedandnon-notifiedPTAs, bycountrygroup,levelofparticipationandregionaltype 63

TableB.6 WorldmerchandisetradebetweenPTAs,1990 65

TableB.7 WorldmerchandisetradebetweenPTAs,2008 66

TableB.8 Preferentialtradebyagreement/typeofregime,2008,selectedregimes 77

TableB.9 Preferentialtradebycountrygroup,2008 78

TableB.10 Preferentialtradebyproductgroup,2008 79

TableB.11 Preferenceutilizationrate(PUR)byproductgroup,2008 82

TableB.12 Firms’utilizationofPTApreferences 83

Box

BoxB.1 RulesoforigininPTAs:transactioncostsandthespaghetti-bowlphenomenon 84

Maps

MapB.1 MembershipinPTAsinforce,2010,notifiedandnon-notifiedPTAs,bycountry 58

MapB.2 Intra-regionalandextra-regionalmerchandiseexportsofWTOregions,1990-2009 69

C. CausesandeffectsofPTAs:isitallaboutpreferences?

Figures

FigureC.1 ThePTAdiagram’stradepattern 100

FigureC.2 HomePTAwithPartner1:tradecreation 101

FigureC.3 HomePTAwithPartner2:tradediversion 102

FigureC.4 EffectsofPTAsinservices 104

Table

TableC.1 Shallowversusdeepintegration 110

Boxes

BoxC.1 PTAcasestudies 98

BoxC.2 Tradecreationandtradediversioneffects 101

BoxC.3 TheeffectsofPTAsinservices 103

BoxC.4 LessonsfromtheEUexperienceinrelaxingrulesoforigin(RoOs) 109

BoxC.5 Determinantsoftheregionalizationofproductionnetworks 112

247

Appendix figures

App.Fig.C.1 OpentradeandMFNtariffs 118

App.Fig.C.2 PTApriceandquantityeffects 118

App.Fig.C.3 Welfareeffectsofpreferentialliberalization 119

Appendix table

AppTableC.1 Empiricalfindingsontradecreationandtradediversion 120

D. Anatomyofpreferentialtradeagreements

Figures

FigureD.1 MFNtarifftrendsindevelopingcountriesbyregion 124

FigureD.2 WorldMFNappliedtarifftrends 125

FigureD.3 Preferentialreductionsoftariffratesabove15percent,2007 125

FigureD.4 Relativepreferencemarginsbyregion,2000and2007 128

FigureD.5 CoveredandenforceableWTO+provisionsovertime 131

FigureD.6 CoveredandenforceableWTO-Xprovisionsovertime 131

FigureD.7 NumberofagreementscoveringWTO+provisions 132

FigureD.8 NumberofagreementscoveringWTO-Xprovisions 132

FigureD.9 NumberofWTO+andWTO-Xprovisions 133

FigureD.10 SectorcoverageinPTAsincomparisonwithGATScommitmentsandDDAoffers 134

FigureD.11 ProportionofservicessubsectorssubjecttoneworimprovedcommitmentsinPTAs, comparedtoGATS(bymember) 135

FigureD.12 GATS+commitmentsinPTAsbysector,modes1and3 137

FigureD.13 ProportionofPTAswithselectedprovisionsininvestmentchapter 139

FigureD.14 Totalnumberofprovisionsininvestmentchapterovertime 139

FigureD.15 PercentageofPTAsbyTBTprovision 141

FigureD.16 AveragedegreeofTBTintegrationbylevelofdevelopment 141

FigureD.17 Sector-specificcompetitionprovisionsinPTAs 143

FigureD.18 CompetitiondisciplinesinPTAsovertime 144

FigureD.19 Shareofpartsandcomponentsinintra-regionaltrade 147

FigureD.20 FDIflowstoASEAN-5andasshareofFDItodevelopingcountries,1970-92 148

FigureD.21 CostaRica’sshareofUSFDIflowstoCentralAmerica,1982-2008 150

Tables

TableD.1 Shareoftarifflinesandtradebylevelofcompetition-adjustedpreferencemargin, 2000and2007 127

TableD.2 WTO+andWTO-XpolicyareasinPTAs 129

TableD.3 PatternsofTBTintegrationacrossregions(percentageofPTAsbyprovisionandregion) 142

TableD.4 ASEAN-5exports,1967-92 147

TableD.5 CostaRica’spreferentialtradeagreements 149

TableD.6 CostaRica’stwo-waytradewiththeUnitedStates,1995-2008 150

TableD.7 CostaRica’stwo-waytradewithChina,1995-2008 150

Boxes

BoxD.1 Measurementofthevalueofpreferences 126

BoxD.2 Legalenforceability 129

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248

Appendix figure

App.Fig.D.1 VariationsinthelevelofcommitmentsofferedindifferentPTAs:Australia,Chile, RepublicofKorea,SingaporeandUnitedStates 163

Appendix tables

App.TableD.1 ListofPTAsandresultsofHMSmapping 157

App.TableD.2 Acronymsandmembers 160

App.TableD.3 Listofservicesagreementsinthedatabaseusedforthisreport 161

App.TableD.4 Theeffectsofdeepintegrationonproductionnetworks 162

App.TableD.5 Theeffectsoftradeinpartsandcomponentsondeepintegration 162

E. ThemultilateraltradingsystemandPTAs

Figures

FigureE.1 PTAsinforceatthetimeoftherequestforconsultations,1995-2010 176

FigureE.2 Intra-PTAanti-dumpinginitiations 180

Tables

TableE.1 Frequencyofrequestsforconsultations,bydevelopmentlevelandexistenceofPTAs inforcebetweentheparties,1995-2010 176

TableE.2 Requestsforconsultations,byyearandsubsequentprocedures,1995-2010 177

TableE.3 WTOAgreementscitedintherequestsforconsultations,1995-2010 178

TableE.4 Anti-dumpinginitiationsbyPTAstatus 180

Boxes

BoxE.1 Investmentprovisionsininternationalagreements:isthereapotentialforthird-party discrimination? 170

BoxE.2 Makingrulesoforiginmorecompatiblewiththemultilateraltradingsystem 172

BoxE.3 Methodology 179

Statisticalappendix

App.Table1 Merchandiseexportsandimportsofplurilateralpreferentialtradeagreements,2008 199

App.Table2.A MerchandiseexportsofASEANcountries,1992-2009 201

App.Table2.B MerchandiseimportsofASEANcountries,1992-2009 203

App.Table3.A MerchandiseexportsofCIScountries,2000-2009 205

App.Table3.B MerchandiseimportsofCIScountries,2000-2009 207

App.Table4.A MerchandiseexportsofEuropeanUnion(15)countries,1990-2009 209

App.Table4.B MerchandiseimportsofEuropeanUnion(15)countries,1990-2009 211

App.Table5.A MerchandiseexportsofMERCOSURcountries,1990-2009 213

App.Table5.B MerchandiseimportsofMERCOSURcountries,1990-2009 214

App.Table6.A MerchandiseexportsofNAFTAcountries,1990-2009 215

App.Table6.B MerchandiseimportsofNAFTAcountries,1990-2009 216

App.Table7 Worldmerchandiseexportsbyproductandregion,1990-2009 217

App.Table8 Preferentialtradebyimporter,preferentialmarginandMFNrate 224

App.Table9 Preferentialtradebyimporter,dutiesandaveragepreferencemargin 225

App.Table10 Preferentialtradebyexporter,30largestexporters 226

App.Table11 Sharesofpreferentialtradeanddutyreductionsfromreciprocalpreferenceschemesbyimporter 227

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Wto memBeRs

WTO members (AsofendMay2011)

AlbaniaAngolaAntiguaandBarbudaArgentinaArmeniaAustraliaAustriaBahrain,KingdomofBangladeshBarbadosBelgiumBelizeBeninBolivia,PlurinationalStateofBotswanaBrazilBruneiDarussalamBulgariaBurkinaFasoBurundiCambodiaCameroonCanadaCapeVerdeCentralAfricanRepublicChadChileChinaColombiaCongoCostaRicaCôted’IvoireCroatiaCubaCyprusCzechRepublicDemocraticRepublicoftheCongoDenmarkDjiboutiDominicaDominicanRepublicEcuadorEgyptElSalvadorEstoniaEuropeanUnionFijiFinlandFormerYugoslavRepublicofMacedonia (FYROM)FranceGabonTheGambiaGeorgiaGermanyGhanaGreeceGrenadaGuatemalaGuineaGuineaBissauGuyanaHaitiHondurasHongKong,China

HungaryIcelandIndiaIndonesiaIrelandIsraelItalyJamaicaJapanJordanKenyaKorea,RepublicofKuwaitKyrgyzRepublicLatviaLesothoLiechtensteinLithuaniaLuxembourgMacao,ChinaMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoldovaMongoliaMoroccoMozambiqueMyanmarNamibiaNepalNetherlandsNewZealandNicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapuaNewGuineaParaguayPeruPhilippinesPolandPortugalQatarRomaniaRwandaSaintKittsandNevisSaintLuciaSaintVincentandtheGrenadinesSaudiArabia,KingdomofSenegalSierraLeoneSingaporeSlovakRepublicSloveniaSolomonIslandsSouthAfrica

SpainSriLankaSurinameSwazilandSwedenSwitzerlandChineseTaipeiTanzaniaThailandTogoTongaTrinidadandTobagoTunisiaTurkeyUgandaUkraineUnitedArabEmiratesUnitedKingdomUnitedStatesofAmericaUruguayVenezuela,BolivarianRepublicofVietNamZambiaZimbabwe


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previous World Trade reportstrade in natural resources

2010

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World Trade Report

The World Trade Report 2010 focuses on trade in natural resources, such as fuels, forestry, mining and fisheries. The Report examines the characteristics of trade in natural resources, the policy choices available to governments and the role of international cooperation, particularly of the WTO, in the proper management of trade in this sector.

A key question is to what extent countries gain from open trade in natural resources. Some of the issues examined in the Report include the role of trade in providing access to natural resources, the effects of international trade on the sustainability of natural resources, the environmental impact of resources trade, the so-called natural resources curse, and resource price volatility.

The Report examines a range of key measures employed in natural resource sectors, such as export taxes, tariffs and subsidies, and provides information on their current use. It analyses in detail the effects of these policy tools on an economy and on its trading partners.

Finally, the Report provides an overview of how natural resources fit within the legal framework of the WTO and discusses other international agreements that regulate trade in natural resources. A number of challenges are addressed, including the regulation of export policy, the treatment of subsidies, trade facilitation, and the relationship between WTO rules and other international agreements.

“I believe not only that there is room for mutually beneficial negotiating trade-offs that encompass

natural resources trade, but also that a failure to address these issues could be a recipe for

growing tension in international trade relations. Well designed trade rules are key to ensuring

that trade is advantageous, but they are also necessary for the attainment of objectives such as

environmental protection and the proper management of natural resources in a domestic setting.”

Pascal Lamy, WTO Director-General

World

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World Trade Report 2010Trade in natural resources

TheWorldTradeReport2010focusesontradeinnaturalresources,suchasfuels,forestry,miningand fisheries. The Report examines the characteristics of trade in natural resources, the policychoicesavailabletogovernmentsandtheroleofinternationalcooperation,particularlyoftheWTO,inthepropermanagementoftradeinthissector

trade Policy Commitments and Contingency measures

2009

WORLD TRADE REPORT 2009

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system. The theme of this year’s Report is “Trade policy commitments and contingency measures”. The Report examines the range of contingency measures available in trade agreements and the role that these measures play. Also referred to as escape clauses or safety valves, these measures allow governments a certain degree of flexibility within their trade commitments and can be used to address circumstances that could not have been foreseen when a trade commitment was made. Contingency measures seek to strike a balance between commitments and flexibility. Too much flexibility may undermine the value of commitments, but too little may render the rules unsustainable. The tension between credible commitments and flexibility is often close to the surface during trade negotiations. For example, in the July 2008 mini-ministerial meeting, which sought to agree negotiating modalities – or a final blueprint – for agriculture and non-agricultural market access (NAMA), the question of a “special safeguard mechanism” (the extent to which developing countries would be allowed to protect farmers from import surges) was crucial to the discussions. One of the main objectives of this Report is to analyze whether WTO provisions provide a balance between supplying governments with necessary flexibility to face difficult economic situations and adequately defining them in a way that limits their use for protectionist purposes. In analyzing this question, the Report focuses primarily on contingency measures available to WTO members when importing and exporting goods. These measures include the use of safeguards, such as tariffs and quotas, in specified circumstances, anti-dumping duties on goods that are deemed to be “dumped”, and countervailing duties imposed to offset subsidies. The Report also discusses alternative policy options, including the renegotiation of tariff commitments, the use of export taxes, and increases in tariffs up to their legal maximum ceiling or binding. The analysis includes consideration of legal, economic and political economy factors that influence the use of these measures and their associated benefits and costs.

9 789287 035134

ISBN 978-92-870-3513-4

WORLD TRADE REPORT 2009 - Trade Policy Com

mitm

ents and Contingency Measures

Trade Policy Commitments and Contingency Measures

Cover photos (from left to right): Image copyright Quayside, 2009; Image copyright Christian Lagerek, 2009; Image copyright Guido Vrola, 2009;

The 2009 Report examines the range and role of contingency measures available in tradeagreements.Oneof theReport’smainobjectives is toanalysewhetherWTOprovisionsprovideabalance between supplying governments with the necessary flexibility to face difficult economicsituationsandadequatelydefiningtheseinawaythatlimitstheiruseforprotectionistpurposes.

trade in a Globalizing World

2008

Trade in a Globalizing World

WORLD TRADE REPORT 2008

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

International trade is integral to the process of globalization. Over many years, governments in most countries have increasingly opened their economies to inter-national trade, whether through the multilateral trading system, increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and to produce more efficiently. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved to be popular, nor have the benefits of trade and globalization necessarily reached all sections of society. As a result, trade scepticism is on the rise in certain quarters.

The purpose of this year’s Report, whose main theme is “Trade in a Globalizing World”, is to remind ourselves of what we know about the gains from international trade and the challenges arising from higher levels of integration. The Report addresses a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, what benefits does it bring, what challenges does it pose and what role does trade play in this world of ever-growing inter-dependency. The Report asks why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. It also considers who the winners and losers are from trade and what complementary action is needed from policy-makers to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical gains from trade and empirical evidence that can help to answer these questions.

ISBN 978-92-870-3454-0

WORLD TRADE REPORT 2008 - Trade in a Globalizing W

orld

The2008Reportprovidesareminderofwhatweknowaboutthegainsfrominternationaltradeandhighlightsthechallengesarisingfromhigherlevelsofintegration.Itaddressesthequestionofwhatconstitutesglobalization,whatdrivesit,whatbenefits itbrings,whatchallengesitposesandwhatroletradeplaysinthisworldofever-growinginter-dependency.

sixty years of the multilateral trading system : Achievements and Challenges

2007

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2007WORLD TRADE REPORT

On1January2008themultilateraltradingsystemcelebratedits60thanniversary.TheWorldTradeReport2007celebratesthislandmarkanniversarywithanin-depthlookattheGeneralAgreementon Tariffs and Trade (GATT) and its successor the World Trade Organization — their origins,achievements,thechallengestheyhavefacedandwhatthefutureholds.

exploring the Links between subsidies, trade and the Wto

2006


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TheWorldTradeReport2006focusesonhowsubsidiesaredefined,whateconomictheorycantellusaboutsubsidies,whygovernmentsusesubsidies,themostprominentsectorsinwhichsubsidiesareappliedand theroleof theWTOAgreement in regulatingsubsidies in international trade.TheReportalsoprovidesbriefanalyticalcommentariesoncertaintopicaltradeissues.

trade, standards and the Wto

2005


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TheWorldTradeReport2005seeks toshed lighton thevarious functionsandconsequencesofstandards,focusingontheeconomicsofstandardsininternationaltrade,theinstitutionalsettingforstandard-setting and conformity assessment, and the role of WTO agreements in reconciling thelegitimatepolicyusesofstandardswithanopen,non-discriminatorytradingsystem.

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PRevIous WoRLD tRADe RePoRts

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TheWorldTradeReport2004focusesonthenotionofcoherenceintheanalysisofinterdependentpolicies:theinteractionbetweentradeandmacroeconomicpolicy,theroleofinfrastructureintradeandeconomicdevelopment,domesticmarketstructures,governanceandinstitutions,andtheroleofinternationalcooperationinpromotingpolicycoherence.

trade and Development

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TheWorldTradeReport2003focusesondevelopment.Itexplainstheoriginofthisissueandoffersaframeworkwithinwhichtoaddressthequestionoftherelationshipbetweentradeanddevelopment,therebycontributingtomoreinformeddiscussion.

This report is also available inFrench and Spanish.

To order, please contact:WTO Publications

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The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2011 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2010. The second part focuses on the special theme of preferential trade agreements.

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World Trade Report 2011

The WTO and preferential trade agreements: From co-existence to coherence

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World Trade Report

The ever-growing number of preferential trade agreements (PTAs) is a prominent feature of international trade. The World Trade Report 2011 describes the historical development of PTAs and the current landscape of agreements. It examines why PTAs are established, their economic effects, and the contents of the agreements themselves. Finally it considers the interaction between PTAs and the multilateral trading system.

Accumulated trade opening – at the multilateral, regional and unilateral level – has reduced the scope for offering preferential tariffs under PTAs. As a result, only a small fraction of global merchandise trade receives preferences and preferential tariffs are becoming less important in PTAs.

The report reveals that more and more PTAs are going beyond preferential tariffs, with numerous non-tariff areas of a regulatory nature being included in the agreements.

Global production networks may be prompting the emergence of these “deep” PTAs as good governance on a range of regulatory areas is far more important to these networks than further reductions in already low tariffs. Econometric evidence and case studies support this link between production networks and deep PTAs.

The report ends by examining the challenge that deep PTAs present to the multilateral trading system and proposes a number of options for increasing coherence between these agreements and the trading system regulated by the WTO.

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