Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States

With Special Emphasis on the TPS-OIC

There is no clear definition of "substantially all" and this is discussed in more detail later in

this report. However, it is commonly accepted to mean at least 90% of trade; with many

agreements extending this to (almost) all trade. Given that the trade liberalised is

"substantial", the effects on trade and on welfare are, in principle, expected to be more

important than with a PTA. Trade effects would depend, eventually, on many factors such as

the compatibility of the trade structures of the countries involved and/or the level of the

original tariffs being reduced. Negative or positive welfare effects depends, additionally, on the

efficiency of supply of the partner in the products to be imported. Additionally, as tariffs are

eliminated, tariff revenue will be reduced and this can be an issue for certain countries where

tariff revenue is a substantial component of government revenue.

Bilateral trade agreements involving one or more developed countries have to be notified to

the WTO under Art. XXIV and, consequently, they take the form of a FTA. Examples of these are

agreements involving the US (such as US-Jordan or US-Morocco) or the EU (EPAS or the EU-

Morocco). However, it is possible for developing countries to form FTAs and to notify them

under the Enabling Clause such as Chile-Colombia or Colombia-Mexico).

Customs Unions (CU)

In contrast to FTAs where each member retains the capacity of establishing the level of

the tariff applied to non-members, in a customs unions the member states agree on a "common

external tariff" (CET) which is then applied to all non-members of the agreement. Not only

there is free trade between its members (given the FTA element), there is also an agreed

common tariff applied to third countries. Therefore, as long as there is free trade between

members and a CET, the possibility of trade deflection is eliminated, thus also eliminating the

need for Rules of Origin. As tariffs applied are the same regardless of the applicant member,

there is no possibility of exploiting any difference between low and high tariffs applied. Once a

good enters one of the members, it becomes "national" of that trade agreement and it can

travel freely to the other members.

In order for goods to travel freely between members, there then needs to be an agreement on

the way that any tariff revenue collected would be shared among members. Duties collected on

goods imported from outside of the customs union need to be collected and shared somehow.

In most existing customs unions, customs revenues are collected and retained at the point of

consumption. This requires that imports into the customs union must travel in bond to their

final destination, where the tariff is then paid. This raises the administrative costs of importing

and may require the re-introduction of rules of origin to deal with imports that are

transformed within one country, which can undermine some of the economic benefits derived

from the customs union.

It is possible that the customs authority of the country where the product initially entered the

customs union collects tariff revenue and then transfers the revenue to the good’s final