B5 - Preferential trade agreements: imagining a world with less discrimination

Summary

Reducing the discrimination inherent in preferential trade agreements (PTAs) to make them compatible with the multilateral system is likely to be one of the main challenges facing the world trading system in the next ten years. PTAs are a now common feature of the world trading system. The number of reciprocal preferential agreements – free trade agreements and customs unions that involve reciprocal tariff reductions – has jumped to 251. These now cover some 34 per cent of international trade (Figure B5.1). Over the next decade, it is safe to bet that PTAs will go from becoming a common feature to becoming a dominant trait of the world trading system.

To be sure, these coverage ratios exaggerate the impact on actual trade flows. They include trade that takes place with zero most-­favoured nation (MFN) tariffs and so is unaffected by preferences. Moreover, another portion of PTA trade does not take advantage of preferential access because costs of provisioning compliance is greater than the tariff. Cadot and de Melo, for example, estimate that the utilization rate for the EU's Generalized System of Preferences (GSP) was only 52% of eligible goods; for Cotonou, utilization was 50%, and for NAFTA, it was 80%. Taking into account both the zero tariffs and proxies for utilization would reduce coverage with actual trade effects to roughly about half of all PTA-covered trade.