PTAs: Building Block or Stumbling Block

Question 1

Building Block vs Stumbling Block - Freund & Ornelas

Answer 1

• Free access to the domestic market enjoyed by the PTA partners’ exporters lowers the market share of the domestic industry
• So, PTAs make any price increase generated by a higher external tariff less valuable for the domestic industry because it also benefit the PTA exporters
• So if the government attempts to help domestic producers by imposing a higher external tariff, PTA exporters also absorb part of the surplus because the tariff cannot be imposed against them
• The leakage effect is caused because domestic producers now have less power on the domestic market, so they are less powerful to influence the creation of other PTAs

Criticism
- This is not true in particular sectors, like agriculture because it is seen as an issue of sovereignty so all countries are very protective of those rights

Question 2

Trade Creation vs Trade Diversion

Answer 2

Trade creation
- Occurs when the formation of a PTA leads to the replacement of high-cost domestic goods, with low-cost imports, thus increasing trade between countries

Trade diversion
- Occurs when the formation of a PTA leads to the replacement of low-cost imports from non-members, with high-cost imports from member states

Question 3

Concerns about PTAs

Answer 3

Is preferential liberalization a free trade policy?
- If trade diversion dominates over trade creation, PTAs are more about protectionism than liberalization
- PTAs may be used to empower protectionist groups
-Trade agreements can be instrument of protectionism because politics are in the middle

Question 4

How can tariffs be used as a political tool? - Limao

Answer 4

• When countries set high tariffs for certain goods then, tariff reduction can be used for political advantage
• Example: If the US has high tariff on coffee, they could agree to sign a trade agreement with Colombia, but only if they agree to come down on the drug trade

Question 5

PTAs as a Stumbling Block

Answer 5

• Power of protectionist groups is high (and they are interested in creating PTAs because that means that other more efficient countries have an even smaller share of the market)
• States have non-economic goals
• Diverts resources from multilateral to bilateral negotiations
• Each PTA member invests and specializes towards the other rather than overall
• There are conflicting standards and regulations between PTAs

Criticisms
- States often create PTAs with their natural trading partners which leads to an increase in trade between the two
- Also, due to the domino effect, other states then ask to create their own PTAs, liberalizing further

Question 6

PTAs as a Building Block

Answer 6

• PTAs are formed between natural trading partners (gravity model - Bergstrand)
• The leakage effect weakens the power of protectionist groups
• Teaches states how to negotiate
• Strengthens bargaining power of small states