Preferential trade agreements (PTAs) are a critical part of the international trade architecture, but they remain poorly understood. In part, this is because there is surprisingly limited information on what their features are and how they work in practice. This disconnect became patently clear in the aftermath of the Brexit referendum, which has pulled the United Kingdom out of the European internal market, the most achieved form of PTA. As I have argued, getting Brexit done will be as difficult as getting an egg out of an omelet. This is because preferential trade agreements have changed dramatically and increased in complexity in recent years.
This Handbook carefully documents this dramatic shift: the evolution of PTAs into “deep” trade agreements. The wealth of new data that detail the content of PTAs will be essential for researchers and practitioners in trade and beyond. It will help us address difficult questions on the design and effects of deep integration and disintegration and on the future of international economic governance at a moment when these issues are at the front line of the policy debate.
Let me put things in perspective. Controversy over the effects of preferential trade agreements, whether they are good or bad, and particularly their relationship with the multilateral trade system, has persisted despite the evolution of PTAs.
Since the early days of the post-war multilateral economic order, some trade experts have lamented that these arrangements would create discrimination across countries and fragment the world economy. Others (among which I include myself) have emphasized the complementarity between regionalism and multilateralism, stressing that preferential trade agreements could create a dynamic reform process leading to more, not less, global integration.
These arguments revolved around the notion that PTAs were essentially about tariffs. This was true in the 1950s, but it is no longer true today. First, while tariff preferences are negotiated in all trade agreements, they matter much less today than they did 70 years ago. As the WTO noted in the World Trade Report 2011, a major reason is that most-favored-nation (MFN) tariffs (i.e., the tariffs applied to all trade partners in a non-discriminatory way) have declined over time, with more than half of global merchandise trade having applied MFN rates of zero.
Second, more than tariffs, preferential trade agreements today are about regulatory measures and other so called non-tariff measures that were once the exclusive domain of domestic policymaking. As shown by recent research at the World Bank, over 50 percent of the close to 300 PTAs in force today cover policy areas such as competition, subsidies, and regulatory standards.
For these reasons, “deep” trade agreements, as trade experts refer to this new class of agreements, are fundamentally different than the previous generation of PTAs. They aim not only to create market access between members but also to establish broader economic integration rights in goods, services, and factor markets. Deep agreements support these rights by regulating the behavior of importing and exporting governments. They frequently aim to improve efficiency and consumer or social welfare, as in the case of competition or environmental provisions. As noted by the authors in the Overview, ultimately deep trade agreements contribute to setting the rules of the game that define how economies integrate, function, and grow.
The new evidence on the evolution of deep trade agreements should change the way we think about the international trade architecture. PTAs continue to play a critical role in creating market access through tariff reductions. In fact, PTAs have reduced trade-weighted average tariffs rates to less than 5 percent for more than two-thirds of countries. But what sets recent trade agreements, particularly post 2000, apart is the large increase in commitments in areas such as services, trade facilitation, investment, and movement of capital. Many of these areas are not covered in the WTO, and for those that are, PTAs often commit countries to deeper, more substantive integration of markets. Over the past two decades, PTAs have also seen an increase in regulatory requirements – the most striking and important of which is the increased emphasis on enforcement of rules and dispute settlement.
Deep trade agreements are mostly driven by advanced economies, namely, the EU, the United States, and Japan. PTAs signed between advanced economies and between advanced and developing countries have deepened the most in the past 20 years. With very few exceptions, such as the Pacific Alliance, preferential trade agreements among developing countries have remained closer to the original purpose of trade agreements to grant reciprocal market access in goods. This is true also for China, whose PTAs have remained limited in scope. In this respect, while there are different approaches to deep integration in the EU, the United States, and Japan, a Chinese model has yet to emerge.
The evolution in the institutions overseeing deep integration has corresponded to a broader evolution in the nature of international trade.The old world of trade was a world where production systems were national and where obstacles to trade were designed to protect domestic producers from foreign competition. By contrast, the new world is a world where production is transnational along global supply chains of goods and services and where obstacles to trade are aimed at protecting the consumer from risks. We are moving from the administration of protection – quotas, tariffs, and subsidies – to the administration of precaution – security, safety, health, and environmental sustainability. Indeed, much of this administration is what deep trade agreements are about.
This changing content raises a series of new questions for policymakers and for researchers. What are the driving forces behind “deep” trade agreements and what are their effect? How should deep trade agreements be designed to promote welfare of all members and minimize discrimination of non-members? How can we find common ground between different integration approaches and use preferential agreements as laboratories for reform of the multilateral trade system?
These are difficult questions, but they are also timely and indispensable questions. The technological innovations that led to the rise of global supply chains are here to stay. So is the increased attention that consumers pose to regulations that protect their health and the environment where they live.
The “green wave” is coming fast and strong onto the shores of international trade. And while one would hope that the recent surge in international trade tensions would subside, the challenge of competing economic systems with different rules on subsidies, competition, and state-owned enterprises will remain. What these issues have in common is that they are about deep integration. Whether they are addressed multilaterally, regionally, or bilaterally remains a major question about the future of the governance of globalization. My conviction is that the new data and analysis in this Handbook will help us all, both trade experts and others, understand how trade rules can contribute to better harnessing globalization.
Former Director General of the World Trade Organization