Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
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discussion of the possible impact of regional trading agreements on excluded countries, as well
as discussing how liberalisation can impact on economic growth, for example, through by
affecting on intra-sectoral firm level reallocations. From this we move naturally on to the role
of trade liberalisation, and regional trade liberalisation for developing countries. Finally, and
given the recent growth in the importance of global value chains, we consider the importance
of preferential trade for the integration of firms and industries in value chains.
On the empirical side we provide a summary of the methods which are typically used to assess
the impact of regional trading agreements. This therefore covers work focusing on diagnostic
statistics, formal predictive modelling (such as partial equilibrium or general equilibrium
modelling), and econometric work which attempts to establish the drivers of trade by running
statistical tests on historical data. In this section we also discuss some of the core results which
emerge from that empirical literature on the role that regional trading agreements may have
had in stimulating trade.
Before proceeding, it is important to note that the terms ’regional trading agreement’,
’preferential trading agreement’ and ’regional integration’ are often used as broad terms
covering different types of formal integration arrangements such as free trade areas or
customs unions. We follow that practice in this report
2.1. TRADE IMPLICATIONS OF CLOSER REGIONAL INTEGRATION
There is a now substantial literature on the impact of regional trade liberalisation between
countries which can take a variety of forms, ranging from preference areas, free trade areas,
customs unions, currency unions and, full economic and monetary unions. These are discussed
in more detail below but in summary, in a preference area the participating countries agree to
liberalise some of the bilateral tariffs between themselves. In a free trade area, in principle, all
tariffs should be liberalised. With both a preference area and a free trade area, each of the
participating countries retains the right to choose the tariffs it levies on imports from third
countries. Hence, if countries A and B sign a preference area agreement, each of A and B are
entitled to choose the tariffs that they levy on country C (ie the rest of the world). While on the
one hand this ensures that the countries retain control over their tariff policy, it leads to the
possibility of trade deflection. Suppose that for a given product k, that A and B completely
remove bilateral tariffs; and that their respective tariffs from third countries for this product
are 5% and 20% respectively. An economic agent in country B wishing to import the good,
then has the incentive to import the good into country A (where they pay the 5% tariff), and
then to ship the good duty free to country B. In this way they have avoided paying country B’s
20% tariff. In order to prevent such trade deflection from occurring, all preference areas and
free trade areas have rules of origin. These are the rules which determine from which country
a given product actually originates, and is thus used in determining whether a tariff is
applicable or not.