Preferential trade agreements (PTAs) usually function alongside the multilateral trading system of the World Trade Organization (WTO). These can be in the form of reduced tariffs for goods or reduced procedures.
In our article below, we will discuss the different types of PTAs, their benefits, and everything you need to know.
What Is a Preferential Trade Agreement?
The preferential trade agreement (PTA) is a deal between two or more countries that gives special access to certain products, such as lower tariffs or trade barriers.
To qualify, exporters usually must provide a Certificate of Origin, showing the goods were made in the participating country. This is done to prevent trade deflection.
The PTA is usually reciprocal; however, it also includes non-reciprocal preferential schemes, such as the Generalized System of Preferences (GSP). Under GSP, developed countries offer preferential tariffs to imports from developing countries and require nothing in return.
Types of PTAs
There are several types of preferential trade agreements based on how many countries are involved.
Unilateral
Unilateral PTA is a one-sided and non-reciprocal trade agreement, overlapping with GSP schemes. It means one country, often a developed country, grants trade benefits to a developing country, without expecting the same in return. This type of PTA can also be revoked unilaterally.
It helps in improving and expanding exports in developing countries and improves their economic conditions.
The example of a unilateral trade agreement is the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA). It helps Pacific Island nations grow by granting preferential access to Australian and New Zealand markets.
Bilateral
A mutually beneficial agreement that promotes the exchange of products and services between the two countries. This encourages economic cooperation and benefits both participating countries.
A good example of a bilateral PTA is EU–Vietnam FTA, effective since August 1, 2020.
Multilateral
A multilateral trade agreement is an agreement between multiple countries, usually regional, but not always. It simplifies and reduces the trade cost between three or more countries.
An example is the North American Free Trade Agreement (NAFTA), which is now replaced by the United States-Mexico-Canada Agreement (USMCA).
Regional Trade Agreement
A regional trade agreement (RTA), also known as a reciprocal agreement, is a contract between a group of countries in a specific region. It can be regarded as a type of PTA because it creates preferential access, which is the core idea of a PTA.
The RTA can be bilateral between two governments or involve more than two governments. It is used to manage their trade relationships and promote economic integration. In exchange for lower trade barriers and market access, governments provide each other with perks and advantages.
RTAs consist of customs unions, free trade agreements, and partial scope agreements. Examples of regional trade agreements include the European Union (EU), the Association of Southeast Asian Nations Free Trade Area (ASEAN FTA), the United States-Mexico-Canada Agreement (USMCA), the Mercosur agreement in South America, and so on.
Preferential vs. Free Trade Agreement
Both PTAs and free trade agreements help countries trade easily. A free trade agreement can be seen as a deeper form of PTA.
A major difference between them is that a preferential trade agreement can be unilateral, but a free trade agreement is bilateral or multilateral. The free trade agreement is an agreement where member countries eliminate tariffs on most or all goods between them. It is a more complete trade deal compared to the PTA.
On the other hand, a PTA usually only lowers tariffs on certain goods and covers a small area, offering limited benefits.
Preferential Trade Agreement Benefits
PTAs are a powerful tool used by countries to design trade policies beneficial for their economies. To countries and retailers exporting and importing goods, the benefits of PTAs are as follows:
Bring Investments and Improve the Economy
Preferential trade agreements create a stable business environment and increase investor confidence. This leads to increased investments and long-term partnerships between participating countries, hence improving the overall economy.
Lower Shipping Costs
The PTA lowers trade tariffs and barriers between countries, so the total landed cost of goods is reduced. This makes international shipping more economically attractive and increases freight volume on these trade lanes.
Increased Jobs
When trade activities are increased, more labour is required. This leads to job creation and skill development.
Wide Selection of Quality Products
PTAs open doors for international markets. This allows consumers to enjoy a wide selection of products. Meanwhile, this drives competition, leading to better products at lower prices.
Examples of Successful PTAs
Many PTAs demonstrate the advantages of reduced trade barriers and tariffs. Some of the successful PTAs in the world include:
European Union (EU)
A political and economic union. The EU allows hassle-free movements of people, services, goods, and capital across European borders. Its success is attributed to deep political integration and effective policy coordination.
The North American Free Trade Agreement (NAFTA)
NAFTA is a trade agreement between the U.S., Canada, and Mexico. It eliminated most tariffs, improved trade volumes, and strengthened economic ties between these three countries.
The Association of Southeast Asian Nations (ASEAN)
ASEAN encourages regional economic integration between the ten Southeast Asian member countries, including the Philippines, Indonesia, Thailand, Vietnam, Malaysia, etc. It optimizes regional sourcing and distribution, improving collective global competitiveness.
Conclusion
A preferential trade agreement makes it cheaper and easier to trade between countries. That also benefits shipping companies by increasing demand for freight forwarders to move goods efficiently and cost-effectively.
However, PTAs have certain benefits, but these should be managed carefully to avoid undermining multilateral trade frameworks.
Frequently Asked Questions (FAQs)
What are the different types of preferential trade agreements?
PTAs can be roughly divided into three types. These include unilateral agreements, bilateral agreements, and multilateral agreements.
Is the customs union the same as the PTA?
Customs unions represent a higher level of PTA integration in which members hand up trade control authority to a supranational entity. They are formed to increase economic efficiency and establish closer political and cultural ties between the participating countries.
Moreover, to eliminate each other’s trade barriers, members of a customs union even agree to adopt similar trade policies and external tariffs. Examples of customs unions include the European Union and Mercosur.
What is the main goal of free trade agreements?
The main goal of a free trade agreement is to reduce trade barriers and tariffs. The agreement allows two or more countries to exchange goods and services with little or no tariffs to boost their economies.
