ABSTRACT: The growth of preferential trade agreements and temporary trade obstacles like antidumping, safeguards, and countervailing duties are two of the most significant changes in trade policy since the 1980s. Even while temporary trade barriers and preferential trade agreements are both empirically significant and share the common trait of having quite discriminatory aspects on their own, surprisingly little is known about the nature of any interactions between them. This paper surveys the literature on some of the political-economic problems that can occur when preferential trade agreements and temporary trade restrictions collide, and it uses four case studies to show how different nations implement the global safeguards policy instrument of the World Trade Organisation. The origins and consequences of preferential trade agreements, and in particular how border controls like tariffs affect trade flows among nations inside and outside of such accords, are the subject of a huge literature in economics and political science. The “standard analysis of preferential trade agreements” is frequently used. However, a lot of recent regional accords have expanded beyond border controls to incorporate deeper kinds of laws and institutions that the usual study of preferential trade can only partially comprehend an analysis of the economic drivers, as well as the major concerns, of these agreements for further integration.
INTRODUCTION: International trading has become increasingly complicated in the 21st century. International value chains interconnect trade. commerce agreements increase commerce and lower costs, which bind countries and regions together. There are currently roughly 420 PTAs (preferential trade agreements) in effect. The world’s nations are now more entangled and connected than they were when the WTO was first established. Not all of the PTAs that were written, though, have been adopted. The new generation of Europeans has learned that trade agreements should not be taken for granted as a result of the failure of the TTIP discussions and the ongoing ratification of CETA. The most recent occurrence involves the EU-Mercosur accord, which was suspended in 2019 as a result of public outcry over Brazil’s burning Amazon rainforest. Given that both the EU and Mercosur, which comprise of four (Mercosur) and 27 (EU) countries, are essentially free trade regions among themselves, the EU-Mercosur agreement is particularly intriguing. Together, they make up the largest trading zone in the world, with a combined population of approximately 800 million.
Recent negotiation failures raise broad concerns about the necessity of global trade. What are the benefits and drawbacks of liberalising preferential trade? And in a globalised society, how helpful are preferential trade agreements? This essay will highlight the various components that PTAs are made up of and what impact they have on various parties. The causes of each effect and their interactions within a typical trade liberalisation diagram will not be covered in detail. Instead, this article seeks to demonstrate various and applicable benefits and drawbacks of the EU-Mercosur agreement through real-world examples.[1]
A unique status granted in trade by multiple nations is known as a preferential trade agreement (PTA) or generalised system of preferences (GSP). Up to 4,800 products from 129 selected beneficiary countries and territories can enter the United States duty-free thanks to an agreement that is intended to support economic growth in developing nations. By the previously mentioned US government’s Trade Act of 1974, GSP was implemented on January 1, 1976. But according to the Indian government, since the World Trade Organisation (WTO) was founded in 1994, the plan has been spreading.[2]
ADVANTAGES OF PREFERENTIAL TRADE AGREEMENTS: Following are the advantages:[3]
1. Tariff Reduction: Reduced tariffs for the supplied product list are a well-known benefit of FTAs and PTAs. For instance, under the India-MERCOSUR PTA, MERCOSUR granted preferential tariff reductions ranging from 10% to 100% on 450 listed products. It gives exporters of a partner country access to the market at a cheaper tariff, resulting in competitive final prices.
2. Access to new markets: Following the FTA, trade with MERCOSUR significantly increased. Both importers and exporters in the partner nations have more straightforward and competitive access thanks to FTAs. For instance, once the India-ASEAN Free Trade Agreement was signed in 2010, imports of copper wires from Malaysia suddenly increased. As with the import of bituminous coal from Indonesia, it not only results in new trade but also trade divergence from one country to another.
3. Trade risk diversification: Increasing product and country diversification helps mitigate the negative effects of geopolitical unrest, such as the oil crisis following the Iran impasse, the rift in the GCC, and other incidental problems that are becoming more prevalent in the twenty-first century, on both international and domestic trade.
4. Innovation and competition: In general, improved market integration tends to increase competition, which pushes the sector towards innovation that eventually benefits consumers.
5. Technology transfer and better market integration: Better market integration results from more trade, which also makes it easier to transfer skills and technology.
DISADVANTAGES OF PREFERENTIAL TRADE AGREEMENTS: The rise of PTAs is beneficial in a lot of ways. PTAs today have such broad trade coverage that, regardless of how multilateral trade rules develop in the future, they will be essential to maintaining the security of significant portions of global trade. PTAs now frequently involve more parties, cover more ground (such as market access for services and investment), and call for more extensive reforms (known as “behind the border” changes) than did the WTO. They are becoming more and more enforceable. Third parties can gain from “deep PTAs” by lowering worries about trade divergence brought on by tariffs and complicated rules of origin.
However, due to failed or stalled negotiations, the world’s three most significant bilateral trade relationships—those involving China, the EU, and the US—remain unaffected by PTAs or even partial agreements. There will be a rules vacuum among the trade oligopolies (and among the 27,000 bilateral trade partnerships not covered by PTAs at all) if WTO rules continue to deteriorate. Although the three major bilateral trade relations—China-EU, China-US, and EU-US—account for only 3–4% of global exports (or 11% overall), it is in this area that the future of the global trading system will likely be decided.
Each of the giants is a member of a PTA or mega-regional in its own territory. As international norms deteriorate, there is a significant temptation for the giants to encourage “friend-shoring” or “near-shoring” because they play dominant positions in these. Firms will be prone to follow and divide their supply chains geographically when faced with this uncertainty, which implies duplication and inefficiency but does not always mean withdrawal from international markets.
Numerous politicians, as well as the growing number of analysts who cater to them, are at ease with or support this course of action, but regional markets can only go so far because economies cannot and should not be solely dependent on their own regions. In 2021, Africa and Latin America depended on exports from other regions for 85% of their exports, while 41% of exports from Asia, 31% from Europe, and 70% of exports from North America travelled outside of their respective regions. Global trade has existed since at least the great explorers of the fifteenth and sixteenth centuries, but today’s links are far more profound. There is a greater reliance on coordinated global manufacturing, trade in intermediate inputs, and cross-border technology exchange due to the prominence of global value chains (GVCs), which the World Bank estimates now account for more than half of all commerce.
These factors ensure that regionalization and trade fragmentation will cause disruption, redundancy, and significantly decreased efficiency. For instance, a WTO research showed how “technological decoupling” might seriously harm the prospects of all countries, particularly emerging ones. According to a World Bank research, “moves towards establishing a more ‘hostile’ environment for Global Value Chains, with a shift towards global re-shoring to high-income countries and China, might push an additional 52 million people into severe poverty. By 2030, though, steps to lower trade barriers might help approximately 22 million more people escape poverty.
The lack of cohesion among the regional blocs also reflects the divergent economic and security interests of the members as well as those between them and the regional hegemon. The middle powers and the smaller members will be compelled to make asymmetric agreements with the hegemon, attempt to pit the hegemons against one another, or both. As a result, even within areas, trade interactions are likely to become more politicised and weaponized.[4]
PREFERENTIAL TRADE AGREEMENTS, A TREND: The spread of PTAs 2 has halted after a tremendous rise from the 1950s to 2010, when they had accounted for roughly 60% of global commerce. Nevertheless, their function has been strengthened as a result of a notable shift in the content of agreements in favour of PTAs that are reciprocal, deeper, broader, and more enforceable. For instance, the export coverage of reciprocal trade agreements expanded from 50% of global commerce in 2010 to 55% in 2020 (excluding unilateral preference systems as the Generalised System of Preferences).
To be clear, this does not imply that the majority of global goods trade benefits from preferences, as approximately half of all Most Favoured Nation (MFN) applied tariffs are set at zero anyway, and PTAs only cover a portion of trade among the parties to the agreement, and even then, the preferences they provide are not always utilised. This highlights the significance of the WTO acquis. The average trade-weighted preference margin was estimated to be close to 1% in 2008. The counterfactual in typical analyses of the impact of a bilateral trade agreement, WTO MFN treatment, however, can no longer be regarded as certain. As a result, the benefit that nations can anticipate from a PTA will be much greater if they can no longer rely on WTO treatment to continue.
Mega-regional PTAs are the most prominent and systemically important PTAs. The oldest and most developed is the European Union. Since the signing of NAFTA in 1994, there has been no new mega-regional agreements until recently. In the last five years, three new agreements have been made: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the African Continental Free Trade Area (AFCFTA), and the Regional Comprehensive Economic Partnership (RCEP). NAFTA was revised and replaced by the USMCA. Currently, a mega-regional agreement includes nations with a combined GDP of around 78% of the global average.
Since the global financial crisis, the additional commerce covered by PTAs has primarily been between Asian countries or with an Asian partner. Ninety three percent of the enhanced export coverage globally is explained by ten agreements. Surprisingly, eight of these agreements involved or were between Asian nations. The only two agreements in the top eight rated by extra export coverage that do not have an Asian nation as a partner are the EU-Canada and AfCFTA.
The trade powers have taken different paths in the meantime, with China being particularly active in new PTA negotiations and the EU pursuing an ongoing and active agenda, while the US has completely refrained from new deals outside of the renegotiation of NAFTA into USCMA.[5]
WAYS TO AVOID A DEADLY SCENARIO: The world is currently going in the direction of the worst-case scenario, when the WTO regulations are being gradually undermined and regional hegemons avoid making deals with one another. PTA dynamics are concerning, as emphasised by some who initially viewed them as “stumbling blocks” to multilateralism (Bhagwati, 2008). Numerous PTAs covering 80% or more of national trade have already been signed by some small and middle-sized nations, such as Chile, Mexico, and Morocco, as well as large economies, such as Germany and France. These countries have effectively hedged their geopolitical bets, which is positive. But are WTO discussions still necessary for nations that rely so heavily on PTAs? Is there a systemic tipping point after which relying on PTAs renders multilateral agreements, which demand consensus and sacrifice, impossible?
The trade relations of the eighteenth and nineteenth centuries, when empires and colonial systems competed for markets and natural resources and imposed trade regulations and navigation laws in their spheres of influence, are reminiscent of this worst-case fragmentation scenario and frequently resulted in armed conflict. It is noteworthy that while wars among the great powers have occurred almost continuously over the last six centuries, there have been no wars directly involving the world powers since the 1950–1953 Korean War, which is often dismissed as simplistic by citing numerous counterexamples.
The ideal scenario, which is now unlikely but to which policy must aim, is a revived WTO with enforceable rules and agreements among the world’s largest trading nations that clearly address the crucial disagreements between them. In fact, it is challenging to imagine an alternative to a strong system of international trade regulations that everyone abides by, starting with the trade giants.
A compromise between China and the United States is probably certainly the starting point for the trade system’s best case scenario. China has made it clear that it is open to considering trade reforms that address some of the partners’ concerns in the Comprehensive Agreement on Investment (CAI) discussions, its application to the CPTPP, and other methods. Legal professionals generally concur that China is upholding the letter of its WTO responsibilities. However, there are no indications that China’s leadership is poised to abandon its socialist model, and the country’s administration looks to be increasing its reliance on state-owned businesses and expanding Communist Party control over both the public and private sectors. According to the US, it views its relationship with China as one of competition rather than hostility. If that is the case, the US leadership will soon realise that defying trade agreements, WTO regulations, or detaching from China—a strategy that even its closest friends oppose—would not help it win that competition.[6]
IS IT A YES OR NO TO PREFERENTIAL TRADE AGREEMENTS IN INDIA?: A review of India’s FTAs is needed given the proliferation of FTAs and the rise of mega-regionalism. Any decrease in tariffs should increase commerce between partners by giving businesses more access to the market and promoting specialisation within particular industrial subsectors. Uncertainty surrounds how an FTA will affect the trade balance because it can favour one region over another. Similarly, as Jacob Viner’s groundbreaking work shown, the effect on welfare might be unpredictable. This is due to the fact that FTAs, as opposed to unilateral trade liberalisation, result in both beneficial trade creation and trade diversion. Trading diversion happens when tariff preferences provided under an FTA cause imports from businesses in non-FTA member nations to transfer to less effective businesses inside the trading bloc, which now become competitive thanks to tariff relief. The majority of studies on Indian FTAs are based on a straightforward analysis known as a before-after study, which analyses outcomes based on the pre- and post-effects of an FTA. This is another reason to review India’s PTAs. Such an approach has the flaw of failing to distinguish between trends that would have occurred even in the absence of a policy change and their effects. For instance, even without the FTA and other factors like demand and supply conditions in the two nations, commerce between India and Korea may have increased after 2010.[7]
PREFERENTIAL TRADE AGREEMENT AS A TOOL FOR GLOBAL ECONOMIC INTEGRATION: There is intense rivalry for the finest bargains in talks in a world with few trading partners. Trade agreements may have a discriminatory impact on a nation or region’s adversaries. For instance, the EU can protect trading partners who would otherwise do more business with China. A trade war by proxy could result from the EU-Mercosur agreement’s exclusionary effect as tensions between China and the West rise. China has surpassed the EU as Mercosur’s top export market in 2015, overtaking it. In trying to strike a balance between China and the USA, Europe cannot ignore the geo-economic goal, or at least profit, of this pact.
The benefits and drawbacks of preferential trade extend much beyond only short-term gains in welfare; they can even serve as active instruments of deliberate economic exclusion.
However, an increase in PTAs also adds to the complexity of global trade for everyone. Different rules and regulations for each trade zone eventually operate like a confusing world of various tariffs, where restrictions are put in place to bar adversarial goods, industries, or entire nations from free commerce. In other words, they may promote protectionism in opposition to their intended purpose. The lack of a clear structure for all of the world’s trade agreements is referred to as the “spaghetti bowl” phenomenon in this situation.
In terms of multilateral trade, are PTAs “building blocks” or “stumbling blocks” In light of the worldwide ramifications of discriminatory PTAs generally and the EU-Mercosur pact particularly, trade conflicts appear to be more likely when China and the West are at odds. But they might at least be able to propose the next steps towards a world economy based on rules and establish high standards for consumer and production welfare.[8]
CONCLUSION: The study’s findings demonstrate that PTA standards are more than just platitudes for businesses; they actually have an impact on the economy. While some investors are put off by standards, others are not. This suggests that there is a trade-off between high requirements that encourage foreign direct investment (FDI) from clean or high-skilled labor-endowed sectors and low criteria that speak to polluting or low-skilled labor-abundant businesses. This adds extra complexity to the debate over whether we are witnessing a race to the bottom or the top. Sector heterogeneity should be taken seriously in future academic research on the impact of standards on FDI. Despite the call for sector-disaggregation, generalisation seems valuable across issue areas given the ever-denser PTA network, the rising number of investor-to-state disputes, and the growing public discussion on investment and environmental as well as labour standards.[9]
ANALYSIS: To expand the analysis to services and further it, further work is required. Without so, it is challenging to draw any firm conclusions regarding the overall impact of India’s free trade agreements. The findings have the following consequences with that qualification. The FTAs with India have performed as predicted. Trade with FTA nations has expanded more than it otherwise would have. Trade has grown more on the import side than the export side, perhaps as a result of India maintaining relatively high barriers and experiencing more tariff reductions than its FTA partners. In comparison to previous FTAs, the ASEAN has seen far bigger growth in trade, which have also been more pronounced in some industries, such as metal imports. FTAs have improved the dynamism of the garment export sector, particularly in ASEAN markets. This holds true whether one examines effects at the aggregated partner level or effects at the disaggregated partner-product level. The key question for India moving ahead is whether to pursue FTA negotiations and, if so, with whom. How India should position itself in relation to the new mega-regional agreements is a related and possibly even more important matter.
The optimum course of action is still, of course, multilateral trade liberalisation. But preferential trade agreements appear to have surpassed the WTO process. India must decide whether to participate in the PTA game like everyone else or be left out of this process in light of this. Our preliminary analysis’s findings imply that Indian PTAs do stimulate trade, though not necessarily in an inefficient way. Progress on FTAs must be linked with enhancing India’s power to retaliate with WTO-consistent measures such as anti-dumping and conventional duties and safeguard measures if it is to be pursued in the current environment of declining demand, surplus capacity, and threats of circumvention of trade rules.[10]
[1] Nikolas Kockelmann, ‘Pros And Cons Of Preferential Trade Liberalisation And The EU Mercosur Agreement’ (Academia, 17 June, 2020), < https://www.academia.edu/43665075/Pros_and_cons_of_preferential_trade_liberalization_and_the_EU_Mercosur_agreement >, accessed 19 May, 2023.
[2] India Today Web Desk, ‘What Is Preferential Trade Agreements? List Of Indian Trade Agreements.’, (India Today, 5 March, 2019), < https://www.indiatoday.in/education-today/gk-current-affairs/story/what-is-preferential-trade-agreements-list-of-indian-trade-agreements-1470857-2019-03-05> accessed 24 May, 2023.
[3] Admin, ‘Trade Agreements- The Indian Perspectives’ (Trade Promotion Council Of India),< https://www.tpci.in/research_report/indias-concerns-on-trade-agreements/ >, accessed 25 May, 2023.
[4] Uri Dadush, ‘The Problem With Preferential Trade Agreements’, (Breugel, 9 May, 2023), <https://www.bruegel.org/analysis/problem-preferential-trade-agreements >, accessed 20 May, 2023.
[5] Uri Dadush, ‘The Problem With Preferential Trade Agreements’, (Bruegel, 9 May, 2023), <https://www.bruegel.org/analysis/problem-preferential-trade-agreements >, accessed 21 May, 2023.
[6] Uri Dadush, ‘The Problem With Preferential Trade Agreements’, (Breugel, 9 May, 2023), <https://www.bruegel.org/analysis/problem-preferential-trade-agreements >, accessed 23 May, 2023.
[7] Admin, ‘Preferential Trade Agreements’, (Economic Survey), < https://www.indiabudget.gov.in/budget2016-2017/es2015-16/echapvol1-08.pdf>, accessed 25 may, 2023.
[8] Nikolas Kockelmann, ‘Pros And Cons Of Preferential Trade Liberalisation And The EU Mercosur Agreement’ (Academia, 17 June, 2020), accessed 20 May, 2023.
[9] Lisa Lechner, ‘Good For Some, Bad For Others: US Investors And Non Trade Issues In Preferential Trade Agreements’ (Springer, 21 February, 2018), < https://link.springer.com/article/10.1007/s11558-018-9299-2> accessed 25 May, 2023.
[10] Admin, ‘Preferential Trade Agreements’, (Economic Survey), < https://www.indiabudget.gov.in/budget2016-2017/es2015-16/echapvol1-08.pdf>, accessed 25 may, 2023.
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