Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
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across countries. The unilateral liberalisation of trade through lowering MFN tariffs allows
countries to specialise in what they produce relatively better than other countries. Regional
liberalisation can also lead to such improvement - this is the trade creation and trade
reorientation discussed earlier.
• Where there is an increase in competition or regulation which reduces the degree to
which firms might be able to exploit their monopoly power, this is likely to lead to a reduction
in prices, and therefore a reduction in the extent to which the mark-up firms choose over their
costs. This pro-competitive effect reduces price distortions and hence introduces more
allocative efficiency. Opening up to international trade allows foreign firms to compete in the
domestic market and therefore increase competition. Where there are not many firms in the
domestic industry it is easier for such firms to charge higher prices as they have a degree of
monopoly power. The opening up to international trade can be a powerful force for
introducing competition and reducing that monopoly power. Clearly the extent to which this is
the case depends on the domestic market structure and the degree of monopoly power that
domestic firms have. However, this can be high in many developing countries and in many
industries. It is worth noting, of course, that this applies to both goods and services - as many
service industries can be highly imperfectly competitive. A good example of this is
telecommunications. In many countries this was for a long time a protected industry where
typically telephony was supplied by domestic monopolists. Many countries have now
liberalised telephony services and have witnessed dramatic decreases in prices and increases
in quality.
• Over time, one would expect that more efficient firms in an industry would increase
their share of the market, and that less efficient firms would decrease their share. Similarly one
might expect more efficient firms to enter the industry, and for inefficient firms to exist. As this
process occurs then we have an improvement in the allocation of firms - hence an increase in
allocative efficiency. This intra-sectorial reallocation is part of the natural dynamic within
industries. However there is now a substantial literature which shows how opening up to
international trade can have a marked impact on this form of reallocation. This is principally
because on the export side there are normally higher costs associated with exporting and
therefore it is more likely that the more productive firms will be successful. As they increase
their exports, they become more productive and increase the pressure on less competitive
domestic firms. On the import side, once again it is more likely that the more productive firms
will be able to deal with the increase competition. The exit of the less efficient firms and the
retention of the more efficient firms serve to increase the average productivity of the domestic
economy.
In summary then, greater openness to international trade can increase the rate of growth of an
economy through various channels. This covers (i) the impact of trade on investment and
improvement in the quality of the workforce; (ii) improvements in the allocation of resources
- for example, countries specialising in what they do best, or within an industry from more
efficient firms increasing their market share and less efficient firms decreasing their share or