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Sunday, November 01, 2015

  • 4:55 AM
TSCFWA -- On 5 October, 12 nations signed an agreement that, if ratified, will form the largest trade bloc in the world, accounting for roughly 40% of global income. The Trans-Pacific Partnership (TPP) brings together the US, Canada, Japan and nine other Pacific Rim economies—although, notably, neither China nor India are involved at the moment. The TPP is a prime example of what economists call a preferential trade agreement (PTA).

With the Doha round of multilateral trade negotiations under the World Trade Organization (WTO) all but dead, attention has shifted to PTAs as an avenue to jumpstart global trade. Yet, PTAs—as distinct from multilateral trade liberalization under the WTO—raise a host of distinct analytical questions. There is by now a lot of literature in economics that analyzes both the economics and the political economy of preferential—as opposed to multilateral—trade liberalization.

In a 2012 research paper, economist Pravin Krishna, a professor at Johns Hopkins University, provides a comprehensive overview of the debates around PTAs. I draw on this paper, and works cited in it, in what follows.

While PTAs are sometimes misleadingly referred to as “free trade areas”—a case in point being the North American Free Trade Agreement (NAFTA)—the reality is that they are a very different beast from free trade. A fundamental proposition of international trade theory asserts that in the absence of market failures, a movement towards freer trade—by, say, cutting tariffs and quotas that restrict imports—will be generally efficiency-enhancing for an economy.

And for a “small” economy—one that does not influence the prices of goods and services it trades in the global economy—the best policy will be a move to completely unfettered, fully free trade—again, in the absence of market failures.

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