Termites in the Trading System

8/8/2019 Termites in the Trading System

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Termites in the trading system -

How preferential agreementsundermine free trade

JAGDISH BHAGWATI

Rahul SehgalRoll No. 38

MIB 1stSem


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What each Chapter is talking about

PTA and trade agreements in 20th Century

GATT article XXIV

Consequences

Prospective Solutions


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PTA (

Preferential Trade Agreements)

A Preferential trade area (also Preferential trade agreement, PTA) isa trading bloc which gives preferential access to certain products from theparticipating countries. This is done by reducing tariffs, but not byabolishing them completely. A PTA can be established through a tradepact. It is the first stage of economic integration.

Why it is known as Preferential Trade?

Discriminate against non participating countries

May not choose lowest cost source

Trade diversion

Switch from low cost foreign suppliers to higher cost foreign suppliers inpartner

Trade creation

Switch from high cost domestic production to lower cost foreign

production


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Contd

The European Union

India and Afghanistan

The Central American Free Trade Agreement (CAFTA)

The North American Free Trade Agreement (NAFTA) The Central European Free Trade Agreement (CEFTA)

Association of Southeast Asian Nations (ASEAN)

More than 350PTAs have been reported to WTOand around 200 are in effect


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Contd...

PTAs during the 20

th

Century Not all trade agreements are created equal. More of a

protectionist approach.

Beggar myNeighbourtrade policy - fragmentationof the global economy into competing trading blocs andpreferential arrangements JOANROBINSON (1937).

The right way to reduce trade barriers is on a multilateralbasis and in a non discriminatory way (MFN mostfavoured nation).


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GATT Article XXIV

After World War II, America led the world in creating the General Agreement onTariffs and Trade (GATT), which did just that, by encouraging the reduction oftariffs and liberalization of other import restrictions.

Article XXIV of the General Agreement on Tariffs and Trade (GATT) provides animportant exception to Article 1 (most favoured nation clause) by permittingcountries to enter into preferential free trade agreements (PTAs). That is, tariffreductions must be applied in a non discriminatory manner to all signatories to theagreement.

Members of FTAs like NAFTA and the custom unions (CU) like the EU shouldeliminate trade barriers.

The GATT was the onlymultilateral instrument governing international trade from1948 until the WTO was established in 1995.


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Contd

Political imperatives that led the United States to abandon its

once-principled stand on non discrimination and admit Article

XXIV's exceptions.

US Canada bilateral trade

In the 1950s, six European countries were allowed to form a

common market under the exception granted by Article XXIV

of the GATT charter.

In the 1970s, less developed members were allowed to sign

PTAs with each other.


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CONSEQUENCES

Bad for smaller countries

US Columbia FTA

The Mexico Soft Drinks Case

Disadvantage of NAFTA (HFCS Controversy)

Inclusion of Trade Unrelated Agendas

Labour and environmental standards

Intellectual property enforcement.

Social standards be grafted into trade agreements.


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Contd

The "spaghetti-bowl"phenomenon: Discriminatory tariff rates

Rules of origin

Content requirements Inclusion of nontrade issues in trade agreements

An ever-increasingly complex web of preferential

commitments and rules of origin adds to thecosts of trade and weakens any sense ofresponsibility to a single multilateral order.


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What should we do now?

Things that are not possible: Halting the formation of PTAs

dramatic expansion of global trade

cross-border investment

Output

Consolidating agreements into less discriminatory regional blocs or encouraging PTA membersto lower their external barriers.

Transparency Mechanism for Regional Trade Mechanisms

Only feasible solution:

Reduce global MFN tariffs to such negligible levels that PTAs no longer matter.

Depends upon future unilateral efforts at trade liberalization and further progressat the WTO.


13/13THANKYOU!!

Termites in the Trading System

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