Preferential Trade Agreements: A Law and Economics Analysis

Preferential trade agreements (PTAs) have become increasingly popular among countries seeking to increase economic growth and promote trade. As the name suggests, PTAs are trade agreements between two or more countries that give preferential treatment to certain products or services.

While PTAs can provide benefits such as increased trade and economic growth, they also face criticism for potentially harming non-participating countries, creating trade diversion, and increasing complexity in the global trading system. In this article, we will conduct a law and economics analysis of PTAs to evaluate their benefits and drawbacks.

Benefits of PTAs

Firstly, PTAs can increase trade among participating countries by eliminating tariffs and non-tariff barriers. When countries in a PTA lower trade barriers, it becomes easier and less expensive for companies to trade with each other. As a result, the market for goods and services expands, and producers and consumers both benefit.

Secondly, PTAs can promote economic growth by attracting foreign investment, which can lead to job creation, technological innovation, and increased competition. For example, if a country in a PTA has a more favorable business environment than the other countries, it may attract investment from companies looking to expand their operations.

Thirdly, PTAs can help countries to diversify their export markets and reduce their reliance on one or a few trading partners. By forming trade agreements with more countries, a country can reduce the risk of economic shocks from one particular market.

Drawbacks of PTAs

On the other hand, PTAs can have negative impacts, both on non-participating countries and within member countries.

Firstly, PTAs can create trade diversion by diverting trade from non-participating countries to participating countries. For example, if a country enters into a PTA with another country, it may choose to trade more with that country, even if a more efficient producer exists in a non-participating country.

Secondly, PTAs can increase the complexity of the global trading system, making it more difficult for businesses to navigate. Each new PTA creates new rules and regulations that companies must comply with, which increases the cost of doing business.

Thirdly, smaller or less developed countries may not benefit from PTAs as much as larger or more developed countries. In a PTA between a large, developed country and a smaller, less developed country, tariffs on goods from the smaller country may be eliminated, but that may not result in a significant increase in exports, due to the smaller country’s limited production capacity and inability to compete with larger countries that can produce goods more efficiently.

Conclusion

Overall, PTAs can provide benefits to participating countries by increasing trade, promoting economic growth, and diversifying export markets. However, they can also create trade diversion, increase complexity in the global trading system, and result in uneven benefits for smaller or less developed countries. It is important that countries carefully consider the potential benefits and drawbacks of PTAs before entering into them, and that the global trading system is regulated to ensure that all countries can benefit fairly.