Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
26
country has to reduce its price to find an external market or to match the advantage the
partner now has. If there is trade diversion for the importing partner country, than the
importing FTA partner loses from having to pay higher prices and loss of tariff revenue. In
contrast the FTA partner gaining market share gets higher prices within the FTA - but at the
possible expense of long term uncompetitive investment. If an initial preferential deal (e.g.
GSP) allows an excluded country access to the partner in a newly created FTA (where it is only
competitive because of preferences); this makes the new FTA partners relatively more
competitive. So previously favoured countries will lose market share. Typical examples:
Mauritius with free access to EU market for some of its sugar and its clothing will lose if EU
opens to others. Pakistan is worried about losing its relatively favoured status under GSP if
India gets an FTA with EU.
Typically included countries see the exclusion of third countries as a source of gain, and may
resist pressure for the expansion of bloc, or further external liberalisation (e.g. Mexican doubts
about China’s accession to WTO. In contrast, excluded third countries may demand to join
FTAs they have been left out of. This demand to join an FTA arising from initial exclusion is
what Baldwin identified as the domino effect (see Baldwin, 1993). If India signs an EU-India
FTA, then it is likely that Pakistan would want one too. Another effect identified by Baldwin is
the juggernaut effect: As uncompetitive importing competing industries within a trade bloc
decrease in size their protectionist power diminishes, and the influence of pro- export lobbies
grows. As this takes place the pressures to include or exclude third countries is likely to
change. Nevertheless, remaining protected industries may be very deeply entrenched and
further opposed to liberalisation in their sector towards 3rd countries.
The impact on excluded countries is likely to be higher:
1. The greater the importance of either the FTA partners for the exports of the excluded
country, the greater will be the impact of being excluded from a preferential agreement.
2. The height of tariffs. The higher are the initial tariffs between A and B the larger the
impact of any agreement on their bilateral trade, and the greater the likely impact on country
C.
3. Similarity of composition in trading structures. The more similar are the excluded
countries in their trading structures to the signatories of the agreement, the larger the scope
for the preferential agreement to cause trade diversion or trade re-orientation in these third
countries.
4. Similarity in competitiveness. A country excluded from an FTA may face less adverse
pressure on its exports where its underlying comparative advantage is in different products.
5. Height/existence of non-tariff measures. If NTMs are high but are not removed the
RTA will have less impact on 3rd parties.