Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
13
tariff may be reduced but not necessarily eliminated. In addition, in a PTA not all trade will be
covered by the agreement, and there are frequently long lists of excluded products (or short
lists of products included). Nevertheless, it is possible to have agreements where full
preferences are introduced in a limited set of products or that partial preferences are intro-
duced in substantially all trade. Key and necessary components of this type of agreement are
the underlying Rules of Origin. Without them, as discussed earlier, it would be possible for
non-members to channel trade from one member to another using the preference in place.
This somewhat vague characterization of PTAs introduces its most distinctive feature - that is
its high degree of flexibility as countries can design the agreement without limited restrictions
or constraints. However, in turn, such flexibility can lead (and frequently has been the case) to
the construction of agreements which are de facto ineffective For example an agreement might
grant preferences on those products where the MFN tariffs are already very low; leading to an
agreement with minimum effects on trade and, consequently, on economic welfare. As will be
discussed later in this report such agreements are only WTO compatible under the Enabling
Clause and as a consequence apply to developing countries. Examples of these agreements are
the Latin American Integration Association (LAIA) or the agreements signed by India with
Mercosur or Chile. Moreover, under this category falls the Global System of Trade Preferences
among Developing Countries (GSTP), a country wide system of partial preferences between
developing countries. The TPS-OIC is also an example of a PTA.
Agriculture One key issue which often arises is whether to include agriculture as part of a
given PTA. From the domestic political economy point of view this can raise challenges arising
from the additional competition by regional partners. The regional partners may be lower-cost
producers or have superior marketing or trade infrastructure. As argued in Chauffour et. al
(2011) the policy dilemma is whether protect the domestic sector, or to subject it to further
competition in the hope that it will respond by undertaking structural and technological
reform enabling it to become competitive regionally and possibly globally. From a political
economy point of view, for many countries, the sector is frequently a sensitive sector owing
due to proportion of the population engaged in agricultural activities; and also because of the
presence of quotas, as well as production and/or export subsidies. Liberalisation of agriculture
in geographically contiguous regional PTAs can lead to realisation of scale economies and
rationalisation of production and investment.
Free Trade Agreements (FTAs)
This is a subset but extremely special case of a PTA. In a FTA, "substantially all" trade must be
covered and full preferences must be granted. Therefore, this agreement constitutes a deeper
level of ambition than a PTA. While agreements notified under the Enabling Clause are not
required to be FTAs; those notified under Art.XXIV of the GATT have to at least match this
characterization. The key feature of an FTA is that each participating country retains control
over their external tariffs while liberalising trade between themselves. Hence as with PTAs in
order to prevent trade deflection, rules of origin are required.