EditorsJean-Pierre Chau� our • Jean-Christophe Maur

A H A N D B O O K

Preferential Trade Agreement Policies for Development

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wb394321Typewritten Text63404

PREFERENTIALTRADE AGREEMENT

POLICIES FORDEVELOPMENT

Jean-Pierre Chauffour and Jean-Christophe Maur, Editors

PREFERENTIALTRADE AGREEMENT

POLICIES FORDEVELOPMENT

A HANDBOOK

© 2011 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.org

All rights reserved

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This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. Thefindings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the ExecutiveDirectors of The World Bank or the governments they represent.

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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher,The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

ISBN: 978-0-8213-8643-9eISBN: 978-0-8213-8644-6DOI: 10.1596/978-0-8213-8643-9

Library of Congress Cataloging-in-Publication Data.

Preferential trade agreement policies for development : a handbook / Jean-Pierre Chauffour, Jean-Christophe Maur, editors.p. cm.

Includes bibliographical references and index.ISBN 978-0-8213-8643-9 — ISBN 978-0-8213-8644-6 (electronic)1. Developing countries—Commercial policy. 2. Developing countries—Foreign economic relations. 3. Tariff

preferences—Developing countries. 4. Free trade—Developing countries. 5. Economic development—Developing coun-tries. I. Chauffour, Jean-Pierre. II. Maur, Jean-Christophe. III. World Bank.

HF1413.P69 2011382'.9091724—dc22

2011014920

Cover illustration: Barrie Maguire, NewsArt.comCover design: Drew Fasick

Foreword xiAcknowledgments xiiiAbout the Editors and Contributors xvAbbreviations xvii

Overview 1Jean-Pierre Chauffour and Jean-Christophe Maur

1 Beyond Market Access 17Jean-Pierre Chauffour and Jean-Christophe Maur

2 Landscape 37Rohini Acharya, Jo-Ann Crawford, Maryla Maliszewska, and Christelle Renard

3 Economics 69Richard Baldwin

4 North-South Preferential Trade Agreements 95Bernard Hoekman

5 Customs Unions 111Soamiely Andriamananjara

6 Preferential Trade Agreements and Multilateral Liberalization 121Richard Baldwin and Caroline Freund

7 Agriculture 143Tim Josling

8 Preferential Rules of Origin 161Paul Brenton

9 Trade Remedy Provisions 179Thomas J. Prusa

10 Product Standards 197Jean-Christophe Maur and Ben Shepherd

v

CONTENTS

11 TBT and SPS Measures, in Practice 217Andrew L. Stoler

12 Services 235Aaditya Mattoo and Pierre Sauvé

13 Labor Mobility 275Sherry Stephenson and Gary Hufbauer

14 Investment 307Sébastien Miroudot

15 Trade Facilitation 327Jean-Christophe Maur

16 Competition Policy 347Kamala Dawar and Peter Holmes

17 Government Procurement 367Kamala Dawar and Simon J. Evenett

18 Intellectual Property Rights 387Carsten Fink

19 Environment 407Anuradha R. V.

20 Labor Rights 427Kimberly Ann Elliott

21 Human Rights 443Susan Ariel Aaronson

22 Dispute Settlement 467Amelia Porges

Index 503

Boxes2.1 Typology of Preferential Trade Agreements 386.1 Is Bilateralism Bad? 1237.1 The WTO Agreement on Agriculture 1469.1 Antidumping Template 1869.2 Countervailing Duties Template 1869.3 Global Safeguards Template 1869.4 Bilateral Safeguards Template 18710.1 What Are Meta-Standards? 19810.2 Proliferation and Growing Importance of Product Standards 19810.3 Do Voluntary Standards Have Cost Effects, Too? 20110.4 Inventory Methods versus Direct Measures of Restrictiveness 20310.5 Facilitating Market Access: Harmonization, Equivalence, and Mutual Recognition 204

vi Contents

10.6 Trade Effects of Harmonization: Empirical Evidence 20510.7 Trade Effects of Mutual Recognition: Empirical Evidence 20710.8 How Small ASEAN Countries Manage to Access Certification and Accreditation Services 20910.9 The Codex Alimentarius and Preferential Trade Agreements 21311.1 WTO Standards and Guidelines on TBT and SPS Measures 21811.2 Success Story: Orchids to Australia 22411.3 Impact of SPS Measures in the China-New Zealand PTA 22611.4 WTO Assessment of TBT Implementation Costs 23011.5 Using the PTA’s Living Agreement Institutions for Capacity Building: An Example 23011.6 Dispute Settlement of TBT and SPS Measures in the WTO and within the Andean Community 23112.1 WTO+ and WTO-Extra Provisions in U.S. and EU PTAs 24112.2 Harmonization and Mutual Recognition in Services: Promise and Pitfalls 24812.3 PTAs and Digital Trade 25912.4 Tourism Liberalization in the EU–CARIFORUM EPA 26012.5 Cultural Cooperation and Aid for Trade in the EU–CARIFORUM EPA 26313.1 Labor Mobility in Statistical Terms 27713.2 Quantitative Estimates of Overall Gains from Greater Labor Mobility 27914.1 Rules on Investment at the WTO 30815.1 Definition and Scope of Trade Facilitation in Selected PTAs 32815.2 Trade Facilitation and the WTO 32915.3 The Trans-Kalahari Corridor 33015.4 Mercosur’s Transit and Cross-Border Transport Agreement 33916.1 Competition Policy and International Cooperation 35617.1 Persistence of Discrimination: Procurement Practices and the Global Economic Crisis 36917.2 Three International Government Procurement Instruments 37217.3 Examples of Flexible Provisions in Government Procurement PTAs 37518.1 Patent-Registration Linkage and Test Data Protection: The Case of Chile 39419.1 Considerations for Developing Countries in Negotiating PTAs 41220.1 Sweatshop Scandal Insurance for Brand-Name Buyers 42920.2 Labor Rights and the WTO 43020.3 NAFTA as a Tool for Promoting Rights of Mexican Migrants in the United States 43820.4 Responding to a Sweatshop Scandal through Capacity Building and Monitoring 43921.1 Transparency, Due Process, and Democracy Spillovers from the WTO 44822.1 The Protocol of Olivos 482

Figures1.1 Most Favored Nation (MFN) Tariff Rates, Weighted Mean, All Products 202.1 Total PTA Notifications Received by the World Trade Organization, by Year, 1949–2009 402.2 All PTAs Notified to the GATT/WTO, by Year of Entry into Force, 1949–2009 402.3 PTAs Notified to the GATT/WTO and in Force, by Year of Entry into Force, 1959–2009 412.4 PTAs Notified to the GATT (Pre-1995) and the WTO (Post-1995), by Legal Provision 412.5 Evolution of Notified PTAs in Force, by Type of Partner, 1958–2009 432.6 Number of PTAs under Negotiation and Signed, by Type of Partner, as of February 2010 432.7 Bilateral versus Plurilateral PTAs Notified to the GATT/WTO 442.8 Cross-Regional and Intraregional PTAs Notified to the GATT/WTO 442.9 PTAs, by Region and by Year of Entry into Force, 2000–09 452.10 PTAs in Force and under Negotiation, by Region 462.11 PTAs in Force and under Negotiation by Selected Countries and Groupings, as of February 2010 462.12 Issues Covered in Regional Trade Agreements, 1989–2009 472.13 Participation in Notified PTAs as of February 2010 (Goods) 492.14 Participation in Notified EIAs as of February 2010 (Services) 502.15 Network of Plurilateral Groupings in Europe and Central Asia 512.16 Network of Plurilateral Groupings in the Americas and the Caribbean 522.17 Network of Plurilateral Groupings in South Asia, East Asia, and the Pacific 532.18 Network of Plurilateral Groupings in Africa and the Middle East 54

Contents vii

2.19 Evolution of the Share of Intra-PTA Imports in Total Imports, 1970–2008 582.20 Evolution of the Share of Intraregional Trade in Gross Domestic Product, 1970–2008 602.21 Most Favored Nation Applied Tariffs, Trade-Weighted Average of All PTA Members Selected Periods 622.22 Proportion of Tariff-Free Imports as a Share of Total Imports, All Goods, Selected PTAs and Periods 622.23 Percentage Changes in Trade from Entry into Force of a Preferential Trade Agreement to 2008,

Based on Gravity Model Estimates 633.1 Trade Pattern for a Simple Preferential Trade Association 703.2 Trading Equilibriums in a Preferential Trade Association 713.3 Ambiguous Net Welfare Effects 723.4 Effects of Preferential Frictional Barrier Liberalization on Prices and Imports 733.5 Welfare Effects of Preferential TBT Liberalization: Viner’s Ambiguity Vanishes 733.6 Competition (COMP) and Break-Even (BE) Curves 743.7 Prices, Output, and Equilibrium Firm Size in a Closed Economy 753.8 Prices, Output, and Equilibrium Firm Size with Integration 773.9 Welfare Effects of Complete Liberalization 783.10 Demand-Linked Circular Causality 793.11 Input-Cost-Linked Circular Causality 803.12 Locational Equilibrium Diagram 813.13 Locational Equilibrium Diagram with Trade Liberalization 823.14 Trade Arrangements and Industrialization 823.15 Location of Japanese Auto and Electrical Machinery Plants in East Asia, 1975–2004 853A.1 Johnson’s Diagram, Small Home and Partner Countries 873A.2 The Small PTA Diagram: A Simple Case 883B.1 Monopoly Profit Maximization 903B.2 Duopolist as Monopolist on Residual Demand: Example of a Nonequilibrium 913B.3 Duopoly and Oligopoly: Expectation-Consistent Outputs 916.1 Net Welfare Effects, Preferential Trade Agreement to Global Free Trade 1256.2 Relationship between MFN Tariffs and Home Welfare 1256.3 Juggernaut Logic 1276.4 Juggernaut Building Block Logic 1286.5 Imported MFN Liberalization 1316.6 An Economic Theory of the GATT 1328.1 Restrictiveness (R-Index) of Rules of Origin in Free Trade Agreements 1719.1 Hub-and-Spoke and Cross-Regional Arrangement of PTAs 1889.2 Intra-PTA Antidumping Filings, Sample of 74 PTAs 19410.1 Elements of a Standards Infrastructure 20012.1 Services-Related PTAs as a Share of Total PTA Notifications to the WTO, 2010 23612.2 Services-Related PTAs Notified to the WTO, by Country Group 23612.3 Sectoral Coverage of PTAs and of GATS Offers and Schedules, Selected Countries 25712.4 GATS+ Advances in East Asian PTAs with Services Provisions, by Sector 26112.5 GATS+ Advances in East Asian PTAs with Services Provisions, by Mode 26212A.1 GATS and EU–CARIFORUM Commitments Compared: Barbados 26612A.2 GATS and EU–CARIFORUM Commitments Compared: Dominican Republic 26712A.3 GATS and EU–CARIFORUM Commitments Compared: Jamaica 26812A.4 GATS and EU–CARIFORUM Commitments Compared: Trinidad and Tobago 26913.1 Theoretical Gains from Liberalization of Mode 4 27813.2 Theoretical Effect on Developed Countries of Liberalization of Mode 4 27913.3 Theoretical Effect on Developing Countries of Liberalization of Mode 4 27913A.1 Provisions on Mode 4 in PTAs between the United States and Developing Countries 30013A.2 Provisions on Mode 4 in PTAs between Canada and Developing Countries 30113A.3 Provisions on Mode 4 in PTAs between the European Union (EU) and Developing Countries 30213A.4 Provisions on Mode 4 in PTAs between Japan and Developing Countries 30213A.5 Provisions on Mode 4 in PTAs between Australia and New Zealand and Developing Countries 30313A.6 Provisions on Mode 4 in PTAs between Developed and Developing Countries 30414.1 Total Number of PTAs and Number with Investment Provisions, 1970–2009 30817.1 PTAs Containing Government Procurement Provisions, 2009 371

viii Contents

Tables1.1 Types and Scope of Regulatory Objectives in Selected Areas Covered by Trade Liberalization Agreements 292.1 Deep Commitments in Selected EU and U.S. PTAs, by Type of Provision 482.2 Correlation between Intra-PTA and Total Export Growth Rates, 1970–2008 612.3 Estimation Results of the Gravity Model of the Average Trade between Two Partners, Selected PTAs 612A.1 Membership of Selected Plurilateral Preferential Trade Agreements 643.1 ASEAN Tariffs on Engines and Automobiles, Most Favored Nation (MFN) Tariffs and

Common Effective Preference Tariffs (CEPTs), 2008 843.2 Intraindustry Trade as a Share of Internal and External Trade of PTAs 864.1 European Union (EU) Instruments and EU and National Objectives 1065.1 Selected Customs Unions, in Force and Planned 1127.1 Summary of Provisions Affecting Agriculture in NAFTA, U.S.–Chile, U.S.–Australia,

and CAFTA Agreements 1568.1 Summary of Methods for Determining Origin 1649.1 Trade-Contingent Initiations and Measures in PTAs, 1995–2007 1819.2 Contingent Protection Rules in Selected PTAs 1829.3 Characteristics of PTAs 1849.4 Summary of Contingent Protection Rules in PTAs 1859.5 Cross-Tabulation of Contingent Protection Rules, by Hub 1899.6 Antidumping Template for Selected PTA Hubs 1899.7 Countervailing Duties Template for Selected PTA Hubs 1909.8 Global Safeguards Template for Selected PTA Hubs 1919.9 Bilateral Safeguards Template for Selected PTA Hubs 1929.10 Characteristics of PTAs That Have Disallowed Trade Remedies 1939.11 Antidumping Activity, by PTA Status 19410.1 Prevalence of Harmonization and Mutual Recognition in Preferential Trade Agreements 20710.2 Content of Preferential Trade Agreements Relating to Provisions on Standards 20811.1 Comparison of Main Features Relating to TBT and SPS Measures, 11 PTAs 21912.1 Key Disciplines in PTAs That Cover Services 24412.2 Negotiating Approaches in Services Trade 25312.3 Key Features of PTAs That Cover Services 25512.4 Average Percentage of Subsectors Subject to Market Access Commitments on Mode 3,

Selected Country Groupings 25812.5 GATS Commitments, GATS DDA Offers, and “Best” PTA Commitments for All Members

Reviewed, Selected Sectors 25812A.1 Preferential Trade Agreements (PTAs) That Include Provisions on Trade in Services 26412A.2 Classification of Preferential Trade Agreements (PTAs) Featuring Services Provisions by Country Group 26513.1 Bilateral Labor Agreements with Developing-Country Partners: Government Programs

for Temporary Workers 28813A.1 Quantitative Estimates of Gains from Increased Labor Mobility 29213A.2 Agreements between the United States and Developing Countries 29313A.3 Agreements between Canada and Developing Countries 29413A.4 Agreements between the European Union and Developing Countries 29513A.5 Agreements between Japan and Developing Countries 29613A.6 Agreements between Australia and New Zealand and Developing Countries 29714A.1 Overview of Recent PTAs Covering Investment 32214A.2 Selected Empirical Studies on the Impact of Bilateral Investment Measures 32415.1 Functions of Selected Corridors 33816.1 Cartel Overcharges and Deterrent Effect, Vitamin Industry, 1990s 35416.2 Models of Regional Competition Regimes 35718.1 U.S. Free Trade Agreement (FTA) Landscape 39018.2 Principal TRIPS+ Provisions in U.S. Free Trade Agreements (FTAs) Ratified between 2001 and 2006 39218.3 European Union (EU) Preferential Trade Agreements (PTAs) and Economic

Partnership Agreements (EPAs) 39820.1 Sanctions Authorized for Labor Violations in U.S. Preferential Trade Agreements 43621.1 Examples of Human Rights Embedded in PTAs: Demandeurs and Position of Provisions in Agreement 445

Contents ix

21.2 The Universal Declaration on Human Rights and Its Two Covenants 44621.3 Examples of Avenues and Actions at the WTO Related to Human Rights, 2005–10 44721.4 Human Rights in Preferential Trade Agreements: Comparing EFTA, the EU,

the United States, and Canada 44921.5 Examples of Human Rights Embedded in Preferential Trade Agreements 450

x Contents

Regional integration is increasingly recognized as a key avenue for promoting economic growth and reducing poverty.Preferential trade agreements (PTAs) have become a central instrument of regional integration in all parts of the world.Beyond market access and the progressive elimination of barriers at the border, PTAs are increasingly being used to addressa host of behind-the-border issues, also known as “deep integration” issues, in order to promote cooperation in the areas ofinvestment, trade facilitation, competition policy, and government procurement, as well as wider social issues related to theregulation of the environment and the protection of labor and human rights.

While the multilateral route to trade integration remains the first-best option, the stalling of the Doha Round of nego-tiations has led to a temporary impasse. Countries—developed and developing alike—have turned to the regional or bilat-eral route. With close to 300 PTAs notified to the World Trade Organization, regionalism has become a reality on theground. Many countries are members of multiple PTAs, and the pace of negotiations on new agreements is accelerating.While it has been known for a long time that the traditional preferential market access elements of PTAs are likely to besuboptimal from a welfare perspective, as compared to multilateral or even unilateral liberalization, and that third partiesoften suffer from these arrangements, policy makers around the world expect these costs to be dwarfed by the deep inte-gration benefits of modern PTAs.

The purpose of this handbook on preferential trade agreement policies for development is to explore the various waysin which policy makers and trade negotiators in the developing world can limit the costs and maximize the benefits of theirregional integration efforts. Today’s modern PTAs are shaping a broad and comprehensive reform agenda that developingcountries can adopt and implement with full ownership and mutual accountability. Preferential market access is no longerthe predominant motive. Increasingly important is the use of PTAs to promote competitiveness, upgrade production stan-dards, liberalize services, modernize regulatory regimes, promote labor mobility, protect intellectual property, improvegovernance, and foster transparency and the rule of law; and, in time, to help build common regional values and norms fora more peaceful and prosperous world.

Open regionalism as a complement to a freer and more transparent, rules-based multilateral trading system has beenpromoted by the World Bank for many years. Regional integration continues to play a positive transformational role inEurope, North America, East Asia, and Latin America, and the same forces are poised to deepen integration in the MiddleEast and North Africa, South Asia, and Sub-Saharan Africa. In the course of wide-ranging consultations on the WorldBank’s upcoming international trade strategy, regional integration and cross-border trade cooperation emerged as one ofthe four main themes.

I hope that this handbook—the collective effort of some of the world’s most renowned trade economists—enhances theunderstanding of various institutional arrangements and their possible development implications, thereby helping realizethe promise of open regionalism and trade for poverty reduction.

Mahmoud MohieldinManaging DirectorWorld Bank Group

xi

FOREWORD

This handbook is the product of a rich and fruitful collaboration among an outstanding set of distinguished individuals—economists, lawyers, and professional practitioners from around the world on the challenges and opportunities of preferentialtrade agreements (PTAs) for developing countries. This collaboration was made possible by the support of the Multi-Donor Trust Fund for Trade and Development (MDTF-TD) financed by contributions from the governments of Finland,Norway, Sweden, and the United Kingdom.

The editors would like to extend their special thanks to the 26 authors who contributed to this volume for the quality oftheir research, their professional insights, and their patience in dealing with our multiple requests from the initial concep-tual stages, first drafts, lectures, and final assembly of the material. Without their unique knowledge and expertise, thepreparation of this handbook would simply not have been possible.

This book is the result of the close cooperation of two World Bank vice presidencies: Otaviano Canuto, vice president ofthe Poverty Reduction and Economic Management (PREM) Network, and Sanjay Pradhan, vice president of the WorldBank Institute (WBI). Strong support from the Development Economics and Africa vice presidencies must also beacknowledged, in particular through substantive contributions to chapters of this book and insightful comments.

The World Bank project on preferential trade agreements was originally the brain child of Uri Dadush, director of theWorld Bank International Trade Department, who in the Global Economic Prospects 2005: Trade, Regionalism, and Develop-ment (Washington, DC: World Bank, 2005) rightfully identified regionalism as an increasingly complex yet potentially pro-ductive avenue for promoting trade, economic integration, and development. When Bernard Hoekman took over thedirection of the department, he not only provided the overall intellectual guidance for this project but also magnified itsreach and helped us assemble the best possible crew of advisers and reviewers. Among them, we are particularly gratefulto Richard Baldwin, Clem Boonekamp, Olivier Cattaneo, Jaime de Melo, Antoni Estevadeordal, Carsten Fink, Caroline Freund, Daria Goldstein, Mona Haddad, Gary Hufbauer, Nuno Limão, Patrick Low, Richard Newfarmer, Marcelo Olarreaga, and Sherry Stephenson for their overall guidance and support in various phases of this project.

This endeavor was complemented by a World Bank Institute initiative, under the lead of Roumeen Islam, manager of thePoverty Reduction team, to bring focus and an entirely new program of activities on regional integration. This initiativeturned out to be instrumental in the conception of this handbook.

Notwithstanding fierce competing work priorities, Mona Haddad, sector manager (PREM), and Raj Nallari, manager(WBI), provided constant support without which the realization of this large project would not have been feasible.

The editors would also like to acknowledge the contributions of many reviewers of individual chapters: Susan Aaronson,Rolf Adlung, Julia Almeida Salles, Bruce Blonigen, Olivier Cadot, Steve Charnovitz, Meredith Crowley, Jaime de Melo,Daria Goldstein, Lee-Ann Jackson, Steven Jaffee, Michael Jensen, Muthukumara Mani, Toni Matsudaira, Gerard McLinden,Roberta Piermartini, Daniel Sokol, and Jon Strand. Other colleagues at the World Bank have volunteered to share theirknowledge and enthusiasm and provided invaluable advice and recommendations throughout the process, including Jean-François Arvis, Aaditya Mattoo, Maurice Schiff, Ravindra Yatawara, and Gianni Zanini.

A special appreciation goes naturally to our experienced team of peer reviewers, who shared their international expert-ise and helped improve both the scope and focus of the entire manuscript: Ndiame Diop, Antoni Estevadeordal, andRichard Newfarmer.

A book cannot exist without an effective production team. This book benefited from the impeccable professionalism ofthe World Bank’s Office of the Publisher. Stephen McGroarty and Mark Ingebretsen managed the publication process in

xiii

ACKNOWLEDGMENTS

the smoothest possible way. Nancy Levine did an outstanding job at copyediting the entire volume. She deserves most ofthe credit for ensuring the readability of the technical parts of the book, and for making it, if not a page turner, an accessi-ble tool for experts. We would also like to thank the dedicated and professional support provided by the administrativeteam in the International Trade Department and WBI, including Cynthia Abidin-Saurman, Anita Chen, Nene Mane,Rebecca Martin, Anita Nyajur, Vasumathi Rollakanty, and Amelia Yuson. Special thanks also to Charumathi Rama Rao,who provided support on the financial management aspects of the project, and to Stacey Chow, who effectively coordinatesthe International Trade Department’s publication program.

The editors would also like to thank the participants in the conference on the European and Asian approaches to DeepIntegration co-hosted by the Centre for the Analysis of Regional Integration at Sussex (CARIS) at Sussex University onSeptember 14–15, 2009; in particular, Michael Gasiorek, Peter Holmes, Jim Rollo, Zhen Khun Wang, and Alan Winters foruseful and constructive feedback on early drafts of the chapters.

Our thanks also go to the participants to the 2009–10 WBI courses on PTA and Development in Washington, DC,Dakar, and Arusha, and particularly to those who have contributed to their success: Raymond Boumbouya, CaiphasChekwoti, Göte Hansson, Peter Kiuluku, Tharcisse Ntilivamunda, and Ina Hoxha Zaloshnja. A particular thought goes tothe late Dipo Busari and his family. We owe a lot to the excellence of instructors and speakers who contributed to thecourses: Richard Baldwin, Paul Brenton, Nora Dihel, Kimberley Elliott, Simon Evenett, Carsten Fink, Caroline Freund,Larry Hinkle, Bernard Hoekman, Peter Holmes, Gary Hufbauer, Oliver Jammes, Tim Josling, Charles Kunaka, Thea Lee, Javier Lopez, Aadittya Mattoo, Bonard Mawpe, Mary Mbithi, Abdoulaye Ndiaye, Ibrahima Bouna Niang, Tom Prusa,Andrew Roberts, Sebastian Sáez, Pierre Sauvé, Ben Shepherd, Yolanda Strachan, David Tarr, and Gianni Zanini.

These thanks should not associate in any way our collaborators and partners in the production of this book to anyremaining errors and shortcomings, which remain solely those of the editors.

xiv Acknowledgments

The Editors

Jean-Pierre Chauffour is lead economist in the World Bank’s International Trade Department, Poverty Reduction andEconomic Management (PREM) network, where he works on regionalism, competitiveness, and trade policy issues. Priorto joining the Bank in 2007, he spent 15 years at the International Monetary Fund (IMF) where he held various positions,including mission chief in the African Department and representative to the World Trade Organization (WTO) and UnitedNations (UN) in Geneva. Mr. Chauffour has extensive economic policy experience and has worked in many areas of thedeveloping world, most extensively in Africa, the Middle East, and Eastern Europe. He holds master’s degrees in economicsand in money, banking, and finance from the Panthéon-Sorbonne University in Paris, France. He is the author of ThePower of Freedom: Uniting Human Rights and Development (Washington, DC: Cato Institute, 2009).

Jean-Christophe Maur is senior economist in the growth and competitiveness practice of the World Bank Institute and afellow with the Group d’Economie Mondiale at the Institut d’Etudes Politiques de Paris. His current areas of work coverregional integration issues, services liberalization, and contributing to the World Bank’s Development Debates platform.Mr. Maur joined the World Bank in 2008 from the U.K. Department of International Development, where he participatedin U.K. trade negotiations in trade facilitation and goods market access. He was also tasked to manage the multilateral tradeassistance cooperation with the World Bank and contributed to create the multi-donor trust fund for trade and develop-ment. His research interests cover regional trade integration and public goods, trade facilitation, standards, and intellectualproperty rights. He holds a doctorate in economics from Institut d’Etudes Politiques de Paris, and is a graduate of theESSEC Business School. He was also a visiting fellow at Harvard University.

The Contributors

Susan Ariel Aaronson, associate research professor of international affairs, George Washington University, Washington, DC, and research fellow, World Trade Institute, Bern.

Rohini Acharya, chief of regional trade agreements section, World Trade Organization, Geneva.

Soamiely Andriamananjara, senior economist, Growth and Competitiveness Practice, World Bank Institute, Washington, DC.

Richard Baldwin, professor of international economics, Graduate Institute of International and Development Studies, Geneva.

Paul Brenton, lead economist (Trade and Regional Integration), Poverty Reduction and Economic Management, Africa Region, World Bank, London.

Jo-Ann Crawford, counselor, World Trade Organization, Geneva.

Kamala Dawar, Graduate Institute of International and Development Studies, Geneva.

Kimberly Ann Elliott, senior fellow, Center for Global Development, Washington, DC.

xv

ABOUT THE EDITORS AND CONTRIBUTORS

Simon Evenett, professor of international trade and economic development, University of St. Gallen, Switzerland.

Carsten Fink, chief economist, World Intellectual Property Organization, Geneva.

Caroline Freund, chief economist, Middle East and North Africa Region, World Bank, Washington, DC.

Bernard Hoekman, sector director, International Trade Department, World Bank, Washington, DC.

Peter Holmes, Jean Monnet Reader in the Economics of European Integration, University of Sussex, Brighton, U.K.

Gary Hufbauer, Reginald Jones Senior Fellow, Peterson Institute for International Economics, Washington, DC.

Tim Josling, professor emeritus, Food Research Institute, Stanford University, Stanford, California.

Maryla Maliszewska, economist, Development Prospects Group, World Bank, Washington, DC.

Aaditya Mattoo, research manager, Trade and International Integration, World Bank, Washington, DC.

Sébastien Miroudot, trade policy analyst, Organisation for Economic Co-operation and Development (OECD), Paris.

Amelia Porges, principal, Law Offices of Amelia Porges PLLC, Arlington, Virginia.

Thomas Prusa, professor of economics, Rutgers University, Brunswick, New Jersey.

Anuradha R.V., partner, Clarus Law Associates, New Delhi.

Christelle Renard, RTA database administrator, World Trade Organization, Geneva.

Pierre Sauvé, deputy managing director and director of studies, World Trade Institute, University of Bern.

Ben Shepherd, principal, Developing Trade Consultants Ltd., New York City.

Sherry Stephenson, head, institutional relations, Organization of American States, Washington, DC.

Andrew Stoler, executive director, Institute for International Trade, University of Adelaide, Australia.

xvi About the Editors and Contributors

AB Appellate Body (WTO)ACP African, Caribbean, and Pacific (States)ACWL Advisory Centre on WTO LawADR alternative dispute resolutionAFAS ASEAN Framework Agreement on ServicesAFTA ASEAN Free Trade AreaAGOA African Growth and Opportunity Act (U.S.)ANZCERTA Australia–New Zealand Closer Economic Relations Trade AgreementANZGPA Australia and New Zealand Government Procurement AgreementAPEC Asia-Pacific Economic CooperationAPTA Asia-Pacific Trade AgreementASEAN Association of Southeast Asian NationsATIGA ASEAN Trade in Goods AgreementATJ Andean Tribunal of JusticeAUSFTA Australia–U.S. Free Trade AgreementBIT bilateral investment treatyBLA bilateral labor agreementBTA bilateral trade agreementCACJ Central American Court of JusticeCACM Central American Common MarketCAFTA Central America Free Trade AgreementCAFTA–DR Dominican Republic–CAFTACAN Comunidad Andina (Andean Community)CAP Common Agricultural Policy (EU)CARICOM Caribbean Community CARIFORUM Caribbean Forum of African, Caribbean, and Pacific (ACP) StatesCEC Council for Economic Cooperation (NAFTA); Commission of the European CommunitiesCEFTA Central European Free Trade AgreementCEMAC Economic and Monetary Community of Central Africa (Communauté Économique et

Monétaire de l’Afrique Centrale)CEPA Closer Economic Partnership Agreement (China)CEPAL/ECLAC Comisión Económica para América Latina/Economic Commission for Latin America and the

CaribbeanCEPT common effective preference tariffCET common external tariffCIF cost, insurance, and freightCIS Commonwealth of Independent StatesCOMESA Common Market for Eastern and Southern AfricaCTC change of tariff classification

xvii

ABBREVIATIONS

CUSFTA Canada–U.S. Free Trade AgreementCVD countervailing dutiesDDA Doha Development AgendaDSB Dispute Settlement Body (WTO)DSM Dispute Settlement Mechanism (WTO)DSU Dispute Settlement Understanding (WTO)DTT double-taxation treatyEAC East African Community; environmental affairs councilEBA Everything But Arms (EU)ECJ European Court of JusticeECLAC/CEPAL Economic Commission for Latin America and the Caribbean/ Comisión Económica para

América LatinaECO Economic Cooperation OrganizationECOWAS Economic Community of West African StatesEDI electronic data interchangeEEA European Economic AreaEEC European Economic Community (for historical references)EFTA European Free Trade AssociationEGS environmental goods and servicesEIA economic integration agreement; environmental impact assessmentENP European Neighborhood PolicyEPA economic partnership agreementESM emergency safeguard mechanismEU European UnionFAO Food and Agriculture Organization (of the United Nations)FDI foreign direct investmentFOB free on boardFTA free trade agreement; free trade areaFTAA Free Trade Area of the AmericasFTC Free Trade Commission (NAFTA)GAFTA Greater Arab Free Trade AgreementGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGCC Gulf Cooperation CouncilGDP gross domestic productGI geographical indicationGNP gross national productGPA Government Procurement Agreement (WTO)GSP generalized system of preferencesHS Harmonized SystemICCPR International Covenant on Civil and Political Rights ICESCR International Covenant on Economic, Social and Cultural RightsICN International Competition NetworkICSID International Centre for the Settlement of Investment DisputesICT information and communication technologyICTSD International Center for Trade and Sustainable DevelopmentIMF International Monetary FundIPR intellectual property rightISO International Organization for StandardizationIT information technologyITO International Trade Organization

xviii Abbreviations

LAIA/ALADI Latin American Integration Association/Asociación Latinoamericana de IntegraciónMercosur Southern Cone Common Market (Mercado Común del Sur)MFA Multifibre ArrangementMFN most favored nationMLAT mutual legal assistance treatyMNC multinational corporationMNE multinational enterpriseMRA mutual recognition agreementMTN multilateral trade negotiationNAAEC North American Agreement on Environmental Cooperation (side agreement to NAFTA)NAALC North American Agreement on Labor Cooperation (side agreement to NAFTA) NACEC North American Commission for Environmental Cooperation NAFTA North American Free Trade AgreementNGO nongovernmental organizationNTM nontariff measureOAS Organization of American StatesOCT Overseas Countries and TerritoriesOECD Organisation for Economic Co-operation and DevelopmentOSBP one-stop border postPAFTA Pan-Arab Free Trade AreaPICTA Pacific Island Countries Trade AgreementPRTR pollutant release and transfer registryPTA preferential trade agreementREIO regional economic integration organizationROO rule of originRoW Rest of the WorldRTA regional trade agreement; reciprocal preferential agreementSAARC South Asian Association for Regional CooperationSACU Southern African Customs UnionSAD single administrative documentSADC Southern African Development CommunitySAFTA South Asian Free Trade Area; Singapore–Australia Free Trade AgreementSAR special administrative regionSIA sustainability impact assessmentSME small and medium-size enterpriseSPARTECA South Pacific Regional Trade and Economic Co-operation AgreementSPS sanitary and phytosanitaryTBT technical barriers to tradeTDCA Trade, Development, and Cooperation Agreement (EU–South Africa)TEC Treaty establishing the European CommunityTFAP trade facilitation action planTIFA trade and investment framework agreementTPA Trade Promotion Act of 2002 (U.S.)TPR Tribunal Permanente de Revisión (Mercosur)TPRM Trade Policy Review Mechanism (WTO)TPSEP Trans-Pacific Strategic Economic PartnershipTRIMS Trade-Related Investment MeasuresTRIPS Trade-Related Aspects of Intellectual Property RightsTRQ tariff-rate quotaTWP temporary worker programUDHR Universal Declaration of Human Rights

Abbreviations xix

UNCITRAL United Nations Commission on International Trade LawUNCTAD United Nations Conference on Trade and DevelopmentUSITC U.S. International Trade CommissionUSTR United States Trade RepresentativeVER voluntary export restraintWAEMU/UEMOA West African Economic and Monetary Union/Union Économique et Monétaire Ouest-AfricaineWCO World Customs OrganizationWIPO World Intellectual Property OrganizationWTO World Trade Organization

xx Abbreviations

Preferential trade agreements (PTAs) have become a cor-nerstone of the international trade system. The surge intheir number and scope is fast reshaping the architecture ofthe world trading system and the trading environment ofdeveloping countries. The integration of these diverseagreements into a multilateral framework that facilitatesthe expansion of trade is likely to be one of the main chal-lenges facing the world trading system in the coming years.

Hundreds of preferential agreements—free trade agree-ments and customs unions that involve reciprocal tariffreductions—are currently in force, including close to 300that had been notified to the World Trade Organization(WTO) as of end-2010. Such a proliferation of regionaland bilateral PTAs, together with the sluggishness of DohaRound negotiations toward a new multilateral trade agree-ment, pose serious challenges to the promotion of a moreopen, transparent, rules-based multilateral trading system.Although PTAs may promote development, they necessar-ily discriminate against nonmembers and can thereforelead to trade diversion in a way that hurts both membercountries and excluded countries. At the same time, PTAscreate larger and more competitive markets and benefitproducers and consumers through economies of scale andlower prices, among other effects. Beyond market accessmotives, PTAs are increasingly used as engines of change inmany developing countries, to promote, implement, andlock in reforms in a wide range of policy areas such asinvestment regimes, competition rules, and governmentprocurement.

In many developing countries, regional integration hasbecome a key means of promoting economic growth andfighting poverty. In fact, no low-income country has man-aged to grow and sustainably reduce poverty withoutglobal or regional trade integration. In the short term,regional trade contributes to growth by expanding marketsfor goods and services. In the medium to long term,regional integration contributes to growth through

improvements in productivity brought about by the trans-fer of improved technology, learning by doing, andincreased competition. Bilateral or regional integration canbe an important engine of trade competitiveness, both forsmall, very poor, landlocked countries and for less region-ally integrated or diversified middle-income countries.

At the same time, the multitude of PTAs is becomingcumbersome to manage for many developing countries.As agreements proliferate, countries become members ofseveral different agreements. The average African country,for instance, belongs to four different agreements, and theaverage Latin America country belongs to seven. Thiscreates what has been referred to as a “spaghetti bowl” ofoverlapping arrangements, often with different tariffschedules, different exclusions of particular sectors orproducts, different periods of implementation, differentrules of origin, different customs procedures, and so on.The proliferation of bilateral and regional PTAs mayundermine progress toward a more open, transparent, andrules-based multilateral trading system.

This Handbook offers an introduction to the complexworld of modern PTAs. It follows in the steps of earlier,seminal World Bank publications on the economics andpractice of PTAs, notably New Dimensions in Regional Inte-gration (De Melo and Panagariya 1996), Trade Blocs (WorldBank 2000), and Regional Integration and Development(Schiff and Winters 2003). Supplementing these earlierpublications, this volume aims at taking its audiencebeyond the traditional market access paradigm to considermore broadly and systematically the numerous regulatorypolicy dimensions that are contained in modern PTAs. Inparticular, it offers a framework for understanding a num-ber of behind-the-border policies typically covered inPTAs, including labor mobility, investment, trade facilita-tion, competition, and government procurement, as well asother societal and more normative policies related to intel-lectual property, environment, labor rights, and human

1

Overview

Jean-Pierre Chauffour and Jean-Christophe Maur

tions of these links for development, rather than to assessthe individual merits of given PTA initiatives.

The remainder of this overview offers a brief survey ofthe contents of the Handbook to help readers navigateamong the topics and to put the various parts in perspective.

A Road Map of the Handbook

This volume consists of 22 mostly original and unpub-lished chapters written by renowned international tradeacademics and experts. They originate from the course onpreferential trade agreements designed by the World BankInstitute and from the regional integration work of theWorld Bank’s International Trade Department.

Chapter 1 highlights the main theme and raison d’êtreof the Handbook: that modern PTAs are essentially preoc-cupied by a wide range of behind-the-border and deepintegration issues that represent considerable opportuni-ties and challenges for low-income countries, beyond thebenefits of market access. Chapter 2 maps the landscape ofregionalism, chapter 3 presents the economic theory ofPTAs, and chapter 4 describes the characteristics of poten-tially development-friendly PTAs. Chapter 5 examines thespecificities of customs unions, one of the most advancedforms of PTA. Chapter 6 discusses the tension betweenregionalism and multilateralism. Next, chapters 7 through17 survey current practice in the main policy areas typicallycovered in PTAs: agriculture policy, rules of origin, productstandards, technical barriers, trade remedies, services, labormobility, and deep integration areas related to investment,trade facilitation, competition policy, and governmentprocurement. Chapters 18 through 21 review a number ofmore normative issues that are increasingly incorporatedinto PTAs—intellectual property, environment, laborrights, and human rights. Chapter 22 closes the volumewith a discussion of the cross-cutting issue of disputesettlement in PTAs.

From a methodological standpoint, each policy areahas been researched with a set of generic questions inmind. How do provisions in a given policy area compareacross selected relevant PTAs and (when applicable) withWTO rules? What are the legal and economic implicationsof different formulations? Are there particular economicdevelopment benefits or costs associated with differentapproaches? To what extent are third parties being dis-criminated against, and are PTA provisions conducive toopen regionalism? How binding are the provisions in theshort term and the longer term? What dispute settlementmechanisms would be used in case of disagreements, andhow? Are there particular approaches (e.g., hard law ver-sus soft law) that can be advocated or that should be

rights. These latter are increasingly among the policiesdriven by powerful trading blocs as they strive to influencedeveloping countries and the evolution of the global trad-ing system.

The Handbook is also inspired by the numerousrequests received by the World Bank from developingcountries or groups of developing countries worldwide foradvice on PTAs, including those currently being negoti-ated, as an aid in understanding the obligations and thepossible economic and development implications of vari-ous provisions. In light of these requests, and in view of thegrowing but fragmented knowledge on PTAs, the Hand-book seeks to provide a first point of entry into the issues,to inform the policy debate in this area, and to help tradepolicy makers, researchers, and practitioners, amongothers, better understand and navigate the world of PTAs.In particular, the book has been written with a view toinforming policy makers and trade negotiators in devel-oping countries about the economic and developmentimplications of different approaches to the most impor-tant sectoral provisions in PTAs. The ultimate objective ofthe Handbook is to help developing countries use PTAsproactively, as instruments to bolster their trade competi-tiveness and leverage the global economy to promotegrowth and poverty reduction.

The content of the Handbook is largely nontechnicaland has been written to be accessible for a large audienceof policy makers, general academics, and other stake-holders who are not necessarily economists or legal spe-cialists. It is designed to be used for both graduate andundergraduate teaching in economics, international rela-tions, political science, and law, but it may also be of spe-cial interest to informed readers who may not havedetailed knowledge of all aspects of PTAs. One of its keyobjectives is to offer an entry point to specialized areascovered in PTAs. For this reason, each chapter can beread independently, as a guide to the most salient issuesarising in PTAs today. Given the rapidly evolving natureof many issues discussed in the Handbook, the volume isto be regarded as a window into the issues covered byPTAs, not as a definitive appraisal.

Although the global evolution of preferentialismbetrays the influence of particular countries and integra-tion initiatives, the Handbook purposely chooses not todiscuss as stand-alone issues important bilateral or pluri-lateral initiatives led by large economies such as the European Union (EU) and the United States. Rather, itrefers throughout to specific relevant examples. The focusis chiefly to promote understanding, from an analyticalperspective, of the links between sectoral issues in deepintegration and preferential liberalization and the implica-

2 Jean-Pierre Chauffour and Jean-Christophe Maur

avoided? What are the implications of the provisions forbuilding up institutions and for technical assistanceneeds? To what extent do the provisions help deliverregional public goods or tackle market failures that areregional in nature?

Beyond Market Access

Beyond market access, PTAs have become potentialinstruments of choice for many developing countries forpromoting wide-ranging reforms and promoting owner-ship, mutual accountability, and results. In chapter 1, Jean-Pierre Chauffour and Jean-Christophe Maur discusswhy, for many low-income countries, PTAs are increas-ingly the core of a credible development strategy foraccelerating economic growth and reducing poverty.Choosing meaningful issues, with the right partner, withadequate technical assistance, and employing a cooperativeapproach, may bring about substantial progress toward lib-eralization and can serve as a positive signal or trigger formore challenging areas. To be sure, the maintenance ofhigh border barriers toward third parties entails discrimi-nation and costs, and traditional PTAs clearly represent aninferior solution compared with multilateral liberalization.But market access is no longer the only or even the mainitem on the agenda of negotiators, especially those ofdeveloping countries, since deep integration really involvesthe contemplation of a domestic reform strategy. In thisrespect, prioritization of core objectives should be a centralconsideration of negotiators.

From a theoretical standpoint, the economic paradigmof traditional or shallow PTAs does not necessarily apply todeep and comprehensive PTAs. Concepts such as mercan-tilist reciprocal liberalization, trade creation and diversion,or a textual approach toward the design of PTAs may stillunderpin the reasoning of many policy makers, but theyare often not valid, or only partially explanatory, for deepintegration liberalization. Discrimination is still an issue indeep PTAs, but it may not be the pervasive problem it is ingoods-only PTAs, especially if the principle of open accessto any regulatory treatment is respected.

More worrying than discrimination, perhaps, in view ofthe desirable objective of multilateral liberalization, is theinherent complexity created by overlapping and conflictingregulatory regimes in the myriad of PTAs. This concern isalready clearly identified, and the call for multilateralizingregionalism already voiced, in the WTO. Complexityrequires that some core principles should be followed. Thekey to making PTAs complementary to a nondiscrimina-tory multilateral system and supportive of development isto strive for open regionalism in the shape of agreements

characterized by low external barriers to trade, liberalizedservices markets, nonrestrictive rules of origins for servicesas well as for goods, a focus on reducing transaction costsat borders, and transparency and the availability of dueprocess.

Another answer to complexity, and one not sufficientlyconsidered, according to the authors, by developing coun-tries, is selectivity. Liberalization is a complex matter, notonly from a capacity standpoint, but also politically. Over-loading the negotiating agenda (which will later becomethe implementing agenda) creates a distraction from whatmay be achievable and where gains may be the mostimportant. Agreements bloated by too many issues maylose significance and fail to achieve much.

Finally, the dynamics of North-South, South-South, andNorth-North PTAs differ considerably. Asymmetric agree-ments make cooperation less easy and may provide lessscope for transnational public goods and mutual recogni-tion but may open greater prospects for lock-in and foraccess to imported regulatory regimes, when needed. Mar-ket access considerations will dominate for the small part-ner, whereas the larger partner will seek, beyond that, todiffuse its regulatory norms, including values norms, andto trigger competitive liberalization effects in partnercountries.

Landscape

Today’s multilateral trading system is characterized by acriss-crossing web of ever more complex PTAs. In chapter 2,Rohini Acharya, Jo-Ann Crawford, Maryla Maliszewska,and Christelle Renard survey the landscape of PTAs andnote that recent developments and trends can be summedup in a number of stylized facts:

• PTAs have become ubiquitous, and participation inPTAs is becoming more diverse, spreading to most geo-graphic regions, especially East Asia and the Pacific.North-South preferential partnerships are on the rise, as anumber of developing countries elect to forgo unilateralprograms such as the generalized system of preferences(GSP) in favor of reciprocal agreements. Cross-regionalagreements are also expanding, in an attempt to keep ona level playing field with other countries that are alsogaining preferences.

• There is some consolidation of PTA networks as bilateralrelationships are replaced by plurilateral PTAs among thesame partners. This is the case, for instance, in LatinAmerica. Agreements between regional blocs—for exam-ple, between the European Free Trade Association (EFTA)and the Southern African Customs Union (SACU)—are

Overview 3

within the PTA to ensure welfare gains for all. The poten-tial negative effect of PTAs on third countries could beaddressed by lowering PTA external tariffs to leave thethird countries’ trade levels unchanged. Even though this israrely how PTAs operate in practice, they are, in theory, notnecessarily bad for world welfare, from a static perspective.

There is more to the economics of PTAs than the meremechanistic static effects. PTAs can generate complexdynamic gains that operate by changing the rate at whichnew factors of production, mainly capital, are accumu-lated. Signers of regional trade deals have long emphasizedthe importance of the dynamic, or growth, effect of PTAs,which may sensibly alter the economic benefits of prefer-ential liberalization. One of the mainstay justifications forPTAs is the belief that uniting small economies will makeregional firms more efficient and more competitive byallowing them access to a bigger market. Indeed, in thepresence of imperfect competition and economies of scale,the size of the market matters. Preferential liberalizationand defragmentation of national markets lead immediatelyto more competition because more firms are present in themarket. This, in turn, results in industrial restructuringand upgrading because firms need to grow to cover theircosts in the more competitive environment, and the leastefficient firms exit the market. In the end, the region is leftwith a more efficient industrial structure, with fewer, big-ger, more efficient firms competing more effectively witheach other.

A further dynamic effect from preferential liberaliza-tion may stem from the location decisions of firms in thePTA—a source of potential distributional impact withinthe preference zone. Firms may benefit from the existenceof positive externalities (or agglomeration forces) associ-ated with being located close to where markets and otherproducers are. However, there are also negative externali-ties (or dispersion forces) linked with geographic concen-tration, such as higher cost for land or labor. The balanceof agglomeration and dispersion forces is altered withpreferential liberalization, but in a complex way. In theory,lowering trade costs reduces dispersion forces but alsodiminishes agglomeration forces. The alteration of thebalance has implications that are potentially important—but are indeterminate in theory and case-specific—forthe location decisions of firms. Members of a PTA arethus likely to benefit unequally from these complexdynamic gains.

North-South PTAs

Issues related to the distributional effects of PTAs amongtheir members are of particular concern in the context of

also on the increase. In Asia, countries long resistantto preferential trade liberalization are catching up,with the emergence of plurilateral PTAs that coexistalongside bilateral PTAs involving the same sets ofpartners.

• The structural configuration of PTAs is changing,with bilateral PTAs becoming increasingly the norm.Such PTAs can be concluded more rapidly, and theyconfirm a shift away from using PTAs as a means offorging traditional regional partnerships among geo-graphically proximate countries and toward usingthem to negotiate strategic, bilateral market access,often among countries in different regions. Indeed,cross-regional PTAs account for two-thirds of thosecurrently under negotiation.

• The regulatory scope of PTAs is rapidly becomingbroader and deeper. On issues that fall under the cur-rent mandate of the WTO, some countries have electedto take on bilateral commitments that exceed those theyhave accepted at the multilateral level—that are“WTO+.” In addition, some countries are undertaking“WTO-extra” commitments in PTAs on issues that lieoutside the current WTO mandate.

• For a number of plurilateral PTAs, intra-PTA imports asa share of total imports have increased, and both intra-PTA exports and total exports have grown. PTA partnersin selected plurilateral PTAs seem to trade more inter-nally than would be expected in the absence of a PTA,and the impact on extra-PTA exports and imports islargely positive.

Economics

The theoretical effect of PTAs depends on the efficiencywith which economic resources are allocated within andamong countries as a result of partial trade liberalization,as opposed to full and multilateral liberalization. Chapter 3,by Richard Baldwin, provides a comprehensive review ofthe theoretical economic foundation of PTAs. PTAs gener-ate a number of static effects that lead to a one-time reallo-cation of resources. The first effect is that exporters from acountry that is enjoying lower (preferential) tariffs willbenefit from the improved market access. A second, oppo-site, effect is that countries left outside the preferentialtrade area will lose out as their trade with PTA members isdisplaced by trade between members. A third, and largelyuncertain, static effect is that PTAs may divert trade andenable producers from within the PTA to displace other,more efficient producers that had been able to serve themarket when all faced the same tariff regime. Diversionconcerns can be addressed through lump-sum transfers

4 Jean-Pierre Chauffour and Jean-Christophe Maur

agreements between developed and developing countries.In chapter 4, Bernard Hoekman discusses the key develop-ment policy challenges associated with North-South PTAsand offers a number of rules of thumb and approaches formaking these PTAs development friendly. North-SouthPTAs should strive to remove barriers to trade in the devel-oped country for the products that the developing countryproduces; to lower trade barriers in the developing countrypartner or partners that raise the prices of goods and serv-ices consumed by firms and households; to promote moregeneral liberalization based on the most favored nation(MFN) principle, as this best serves global developmentprospects; to support the adoption of complementarymeasures and actions that allow the potential benefits oftrade opportunities to be realized; and to create mecha-nisms through which the private sector can be regularlyinformed of progress with implementation of the PTA andcan provide feedback to authorities.

Achieving these objectives requires that changes bemade in the way North-South PTAs are usually designed.If the goal is development, a first overarching objectiveshould be far-reaching liberalization. This can be achievedthrough a redesign of the approach to PTAs: high-incomecountries should liberalize in all sectors (not just “substan-tially all”), on a preferential basis, with liberal and simplerules of origin. Developing-country signatories shouldreduce their tariffs and apply negotiated trade policy com-mitments on an MFN (nondiscriminatory) basis.

A second necessary change is to build in significant pol-icy flexibility, as well as stronger accountability mecha-nisms. The goal should be to use PTAs as a tool for helpingdeveloping-country governments pursue priority nationalregulatory policy objectives, rather than have these objec-tives dictated by the trade partners. Economic cooperationbased on institutions that help identify good practiceswould be a desirable and risk-free way forward. Animportant corollary is that governments should be heldaccountable for performance and outcomes. This requiresmechanisms that generate the necessary information—anarea in which the private sector has an important roleto play.

A third plank of a development-focused approach isexpanded development assistance. Such aid should not belimited to the issues that are covered by an agreement, andit should be aimed at improving trade-related regulationand its implementation, as well, including services inputs,both public (government services such as customs andtrade facilitation) and private (transport, distribution,finance, etc.). The extension of the PTA agenda to regulatoryissues can be beneficial to developing countries, especially ifaccompanied by financial transfers and technical assistance

that help implement PTA disciplines and enhance theircredibility. But deep and comprehensive PTAs betweendeveloped and developing countries also bring new risks.The proposed norms will not necessarily benefit the devel-oping countries if the provisions limit policy freedom ininappropriate ways or lead to the allocation of resources toactivities that yield few immediate benefits or are complexand costly to implement.

Customs Unions

A customs union (CU) is a trade agreement whereby coun-tries preferentially grant tariff-free market access to importsfrom each other and agree to apply a common external tar-iff (CET) to imports from the rest of the world. It is one ofthe most advanced forms of PTA and generally requiresconsiderable coordination among members. In chapter 5,Soamiely Andriamananjara observes that CUs have recentlybecome less popular than simple free trade agreements(FTAs). This trend reflects the nature of the current wave ofregionalism, which is characterized by smaller cross-regional deals, flexibility, selectivity, and, most important,speed. Recent FTAs tend to be more pragmatic than theirprecursors and to focus more on strategic commercial mar-ket access and less on geographic considerations or politicalambitions. By contrast, CUs are usually set up by a relativelylarge number of geographically contiguous countries andinvolve a certain loss of policy-making autonomy.

When a country joins a CU, it agrees to relinquish someof its national sovereignty over the formulation and imple-mentation of trade policy. The implication is that a CUmember considers the loss of some autonomy to be morethan offset by the economic benefits of securing access to alarger and more harmonized regional market and ofenhancing the depth and effectiveness of the ongoingregional integration process. Some regional groupings con-sider the establishment of a CU a prerequisite or a neces-sary step toward the future establishment of some deeperform of economic integration, such as a common market.Other groups regard a CU as a useful way of pooling coun-tries’ market power, coordinating their trade policies, andcombining their negotiating powers to deal advantageouslywith the rest of the world.

The establishment of a CU involves reaching consensuson three other important issues not relevant to PTAs. First,members need to agree on a CET. The economic impact ofthe CU will be closely related to the degree of discrimina-tion it entails, which depends on the selected tariff level. Ahigher CET entails more trade diversion and greater netwelfare loss (although different economic agents will beaffected differently). Whether CUs lead to higher external

Overview 5

trading partners’ incentives for further liberalization. A keyquestion about the proliferation of PTAs, beyond theirdirect welfare impact for the countries signing them, there-fore relates to their systemic effects on the world tradingsystem. Are PTAs—leaving aside the objective of mutuallybeneficial multilateral reduction of trade barriers—a forcefor good or for bad? This question raises the more generalquestion of the interaction between PTAs and the multilat-eral trade system. Do PTAs influence multilateral liberal-ization, or is it the other way round? Or do they influenceeach other?

A traditional view among economists is that PTAs forma stumbling block in the path to freer multilateral trade.First, market access preferences granted in PTAs createincentives to resist multilateral liberalization, which woulderode these preferences by reducing external MFN tariffs.Second, market access preferences are used as bargainingchips by preference-granting nations against nontradeconcessions. Third, countries tend to choose to pursue lib-eralization with trade partners in areas that are less likely toaffect politically sensitive sectors, while still offering liber-alization gains. Moving toward further liberalization maymean undertaking much more politically difficult liberal-ization that will affect the sensitive sectors.

At the other end of the spectrum of economic analysisare theories supporting the idea that PTAs could bebuilding blocks for overall freer trade. Liberalizationwould beget liberalization in reciprocal negotiations,generating a virtuous circle, as exporters are transformedfrom bystanders in the tariff debate to antiprotectionistsmotivated by the prospect of market access. The initialreciprocal tariff cuts in PTAs may start a liberalizationjuggernaut rolling.

So far, there is little systematic empirical evidence thatregionalism is overwhelmingly bad for the multilateraltrade system, as some had feared. Analyses tend to showcomplementarity between PTA and multilateral tariff lib-eralization. Most empirical studies find trade creationeffects in PTAs, with trade diversion as the exception.According to the natural trading partner hypothesis, coun-tries tend to engage in PTAs with only those partners thatcan offer positive welfare gains. Among the selection crite-ria for such natural partners are geography and lower tradecosts, large economic size, and economic complementari-ties (e.g., factor endowments and difference in economicssize). The complementarity effect is stronger in sectors inwhich trade bloc partners are more important suppliers,which is precisely where trade discrimination would bemore disrupting.

There is, however, also evidence of PTAs’ acting as stum-bling blocks. The United States and the European Union

tariffs remains an open question. A number of argumentsseem to suggest that CUs engender more protectionistpressures than PTAs, but this is an empirical question towhich the existing literature has not been able to providean unequivocal answer.

Second, members need to decide where and how to col-lect CET duties: at the initial port of entry into the CU, orat the final import destination. Collecting import duties atthe first port of entry could facilitate freer movement ofgoods within the CU and minimize intra-CU border con-trols, but it requires the appropriate institutional capacityto administer the revenues and, most important, a highlevel of trust among members. Most existing CUs allocaterevenues according to the final destination principle,which requires sophisticated administrative measures foridentifying the end destination of each shipment enteringthe union.

Third, members have to decide which mechanism to usefor managing CET revenues. In some cases, the CU allo-cates (a fraction of) these revenues to a joint fund tofinance regional development initiatives. Pooling customsrevenues presupposes a high level of coordinating capacityand a certain degree of trust among members and is morelikely to be sustainable when tariff revenues do not consti-tute an important part of government revenue for individ-ual members. In other cases, customs revenues are treatedas the property of individual members and are allocatedeither according to the final destination or in line with anagreed sharing formula.

The collection and allocation of customs revenues in aCU setting is clearly an area in which harmonization ofborder management (e.g., customs procedures), coopera-tion, and modernization, along with capacity building,could be critical.

PTAs and Multilateral Liberalization

In chapter 6, Richard Baldwin and Caroline Freund discussthe relative merits of preferential liberalization and the cir-cumstances under which PTAs are more likely to serve asbuilding blocks for greater multilateral trade liberalizationthan to pose stumbling blocks. On the positive side, PTAshave offered a popular way for countries to liberalize theirtrade policies and gain market access. Countries are oftenunwilling to liberalize on their own because they count ontariffs to raise tax revenues and, at times, protect domesticsectors. Reciprocal liberalization in the context of PTAsmakes liberalization easier because the increased marketaccess may counter the political-economy forces opposingliberalization. PTAs do, however, generate trade diversionand trade preference rents and these distortions alter the

6 Jean-Pierre Chauffour and Jean-Christophe Maur

liberalized less during the Uruguay Round of multilateraltrade negotiations in sectors in which preferences weregranted.

Agriculture

Turning to the key chapters of PTAs, a first consideration isoften to decide whether to include agriculture as part of thenegotiations and PTA commitments. In chapter 7, TimJosling discusses the challenges and opportunities associ-ated with the incorporation of agriculture into PTAs. Thechallenges have to do with the additional competitionfaced by domestic agriculture from regional partners thatmay be lower-cost producers or that, in the case of bilateralagreements with developed countries, may have signifi-cantly better marketing and trade infrastructure. The pol-icy dilemma is whether to subject domestic agriculture tofurther competition in the hope that the farm sector willrespond by undertaking structural and technologicalchange and becoming competitive regionally and, eventu-ally, globally. Given adequate safeguards—in particular, toavoid import surges—the better strategy would be toattempt to develop a competitive agricultural sector, butthe political economy does not always allow it.

As with other PTA chapters, the opportunities fromincorporating agriculture in PTAs go far beyond the gainsfrom trade creation. They include collective action onresearch, market development, and health and safety regu-lations, as well as cooperation on trade policy and onapproaches to development agencies and donors. Wherethese arrangements have worked well, regional marketshave been established, health and safety regulations havebeen harmonized or made more compatible, and trade hasdeveloped through investment, as firms have realized thepotential of closer market integration. By contrast, whenPTAs opt to exclude some or all agricultural sectors fromthe pressures and opportunities that come with freerregional trade, agricultural markets often remain confinedwithin national borders or focused on traditional tradeexchanges with overseas partners.

Overall, the dearth of empirical studies on economicintegration in agricultural markets makes for a lack of clearguidance for policy makers. To help close that gap, thechapter provides a brief review of experience with agricul-tural provisions in selected PTAs. The issues common to allPTAs, as they contemplate the agricultural component ofthe agreement, include the way in which tariffs are cut, theuse of tariff-rate quotas to open up markets on a progres-sive basis, the employment of safeguards to help domesticsectors cope with import surges, the treatment of subsidies(both domestic and on exports), and the provision of

public goods. In the case of regional PTAs, the treatment ofthese issues will determine the extent to which the expan-sion of intrabloc markets can lead to scale economies andthe rationalization of production and investment. In thecase of bilateral PTAs among countries that are not in the same region, there is less potential for economies ofscale and productivity gains, but PTAs could still offer away to secure market access for agricultural exports andto benefit from (at least temporary) advantages overexcluded competitors.

Rules of Origin

At the heart of the preferential regime of PTAs are the rulesof origin (ROOs) that determine the eligibility of productsto receive preferential access. In chapter 8, Paul Brentonreviews the rationale and practice of rules of origin inPTAs. The justification for preferential rules of origin is to prevent trade deflection or simple transshipment,whereby products from nonparticipating countries areredirected through a free-trade partner to avoid the pay-ment of customs duties. These rules, however, can bemanipulated to achieve other objectives, such as protectingdomestic producers of intermediate goods. Restrictiverules of order that go beyond what is necessary to preventtrade deflection could raise the economic costs of supplyingthe markets of preferential partners and the administrativecosts of proving conformity with the rules. These costs willconstrain market access relative to what is promised onpaper in the trade agreement. The rules of origin are there-fore a key element determining the magnitude and distri-bution of the economic benefits that accrue from PTAs.

There is no simple and standard set of rules of orderthat can be identified as performing the task of preventingtrade deflection. Three main criteria are used to establishwhether a product imported from a partner that containsinputs from other countries has undergone sufficient pro-cessing or a substantial transformation: (a) a change of tar-iff classification; (b) a minimum amount of domestic valueadded; or (c) use of a specific manufacturing process. Noone method is dominant; each has its advantages and dis-advantages, and different rules of origin can lead to differ-ent determinations of origin. Other features of the rules oforigin that can influence whether origin is conferred on aproduct include cumulation, which allows producers toimport materials from a specific country or regional groupof countries without undermining the origin of the prod-uct; tolerance, or de minimis, rules, which allow a certainpercentage of nonoriginating materials to be used withoutaffecting the origin of the final product; and the absorptionprinciple, which provides that parts or materials that have

Overview 7

Furthermore, provisions differ significantly for the samecountry across different PTAs, and countries do not com-monly incorporate the same trade remedy provisions in alltheir PTAs. In some cases, trade remedy provisions in PTAsmake protection easier, but in most cases, the additionalrules in PTAs tend to make protection harder to impose.Any country considering entering into a PTA should there-fore consider carefully what provisions potential partnershave included in prior agreements.

Another finding of the chapter is that PTAs are lesslikely to alter existing countervailing duty provisions thanthey are either antidumping or global safeguard rules. Thisis partly because few PTAs have created common policieson subsidies and state aid. Without such rules, and giventhe global nature of subsidy distortions, there appears tobe little motivation for PTAs to limit the application ofcountervailing duties against members. PTA provisionsregarding antidumping, countervailing duties, and globalsafeguards generally make protection more difficult toimpose than do the existing WTO rules; that is, these pro-visions are WTO+. They work against protection through acombination of additional specific rules that relax thethreshold and duration of application of measures andthrough the creation of institutions that help to defuse dis-putes. By contrast, PTA provisions on bilateral safeguardactions (e.g., transition safeguards and special industrysafeguards) offer new avenues for PTA members to restrictintra-PTA trade.

Overall, the evidence shows that PTAs reduce the inci-dence of intra-PTA antidumping and safeguard disputes.At the same time, there appears to be an increase in actionsagainst non-PTA members. So, although the liberalizationeffects of PTA tend to be reinforced by global safeguardand antidumping rules in PTAs, the trade diversion effectscan also potentially be reinforced. In addition to the dis-crimination introduced by preferential tariffs, PTAs canlead to increased discrimination against nonmembersthrough more frequent trade remedy actions against them.Overall, the chapter calls for vigilance about the impact oftrade remedy provisions in PTAs. The sheer number ofPTAs with trade remedy rules is heightening the promi-nence of the issue.

Standards

Provisions relating to the management of standards forprotection of human, animal, or plant life or health arenow a common feature of most PTAs. In chapter 10, Jean-Christophe Maur and Ben Shepherd discuss the uniquerole that PTAs can play in reducing standards barriers totrade through the recognition of equivalence of rules and

acquired originating status by satisfying the relevant rulesof origin for the particular product can be treated asbeing of domestic origin in any further processing andtransformation.

Restrictive rules of origin constrain international spe-cialization and discriminate against small, low-incomecountries where the possibilities for local sourcing are lim-ited. Simple, consistent, and predictable rules of origin aremore likely to foster the growth of trade and development.Rules of origin that vary across products and agreementsadd considerably to the complexity and costs of participat-ing in and administering trade agreements. The burden ofsuch costs is particularly heavy for small and medium-sizefirms and for firms in low-income countries. Complexsystems of rules of origin add to the burdens of customsservices and may compromise progress on trade facilita-tion. Specification of generally applicable rules of origin,with a limited number of clearly defined and justifiedexceptions, is appropriate if the objective is to stimulateintegration and to minimize the burdens on firms and cus-toms services in complying with and administering therules. Producers should be given flexibility to meet originrules by, for example, specifying in the rules that the prod-ucts may satisfy either a change of tariff requirement or avalue added criterion.

Preferences granted by member countries of the Organ-isation for Economic Co-operation and Development(OECD) would be more effective in stimulating exportsfrom developing countries if they were governed by less-restrictive rules of origin; ideally, specific rules of originshould be designed, and producers in developing countriesshould be able to gain preferential access to all developed-country markets if their product satisfies a single origintest. Restrictive rules of origin should not be used as toolsfor achieving economic development objectives—they arelikely to be counterproductive. The potential benefits oftrade agreements among developing countries can be sub-stantially undermined if those agreements contain restric-tive rules of origin.

Trade Remedies

The diversity of PTA types, ranging from goods-onlyagreements to customs unions, means that the political andeconomic demands for trade remedy provisions varygreatly across PTAs. In chapter 9, Thomas Prusa shows thatthe proliferation and diversity of PTAs have produced acomplicated pattern in the use and inclusion of trade rem-edy provisions across PTAs that defies simple characteriza-tion. Whereas some PTAs contain long discussions of traderemedy rules, others do not even mention trade remedies.

8 Jean-Pierre Chauffour and Jean-Christophe Maur

procedures. They observe that standards provisions inPTAs are likely to have welfare-enhancing effects on partic-ipating members. Although standards are classified as oneof many nontariff barriers—the relative importance ofwhich is growing with the decline in tariff duties—animportant economic distinction is that standards serve adifferent policy objective than simple discrimination againstforeign goods. Standards represent a quasi-regulatorymeans of pursuing important public policy objectives suchas environmental protection, consumer safety, food quality,and compatibility between different types of apparatus.The policy objective should therefore not be to eliminatestandards but to make them more efficient and cost effective.

Harmonization to international standards is an effectiveway of reducing the duplication of costs of complying withdifferent sets of standards. Standards harmonization mayalso facilitate market access and enable countries with noor inefficient standard policies to put better practices inplace. But it does mean compromising governments’ abilityto set national standards that may better fit the needsof local industries and consumers.

There are, broadly, two models for dealing with stan-dards measures in PTAs. Where the European Union isinvolved, the agreement often expects the EU partnercountry to harmonize its national standards and conform-ity assessment procedures with those of the EU. PTAs inthe Asia-Pacific region and those in which the UnitedStates is a partner typically address problems resultingfrom different national standards and conformity proce-dures through a preference for international standardsor the use of mutual recognition mechanisms. Bothapproaches can be successful in reducing the negativeimpact of different standards and conformity assessmentprocedures, but there is a risk that they can introduce intoglobal markets de facto discrimination, particularly againstdeveloping countries, because achieving conformity intechnical standards requires capacity and resources.

Standards indeed have the potential to discriminateagainst nonmember countries when mutual recognitionagreements are not open to third countries or when har-monization is not carried out on the basis of interna-tionally agreed standards. As in the case of contingentprotection measures and restrictive rules of origin, stan-dards may end up raising external barriers against coun-tries outside the PTA, thus eroding some of the benefits ofmultilateral liberalization. Good practices regarding stan-dards in PTAs usually promote institutional arrangementsto supervise the effective implementation of standardsprovisions. Important objectives of such arrangements are,most frequently, transparency, the diffusion of expertise,

and consultations on legal and administrative mattersthrough regular dialogue.

Standards, in Practice

Andrew Stoler, in chapter 11, discusses specific best-practiceprovisions in PTAs concerning the treatment of technicalbarriers to trade (TBTs) and sanitary and phytosanitary(SPS) measures. He recommends that the parties to a PTAaim at using international standards whenever possiblebecause doing so guarantees a high level of protection inthe integrated market and makes it easier for third partiesto trade into that market. If the parties to the PTA decide topursue harmonization of their standards and conformityassessment procedures, they should accept that it might benecessary to limit harmonization to essential health andsafety standards and to rely on mutual recognition andequivalence techniques for other areas. Where one partneris less developed than the other, the PTA will have toinclude technical assistance and capacity-building measuresto assist the institutions and exporters of the developing-country partner in adjusting to harmonization.

If technical regulations and conformity assessmentprocedures cannot be harmonized, it is important for thepurposes of the PTA that the parties work to eliminaterequirements for duplicate or multiple measures or testsfor the same product. This is particularly important forsmall and medium-size enterprises that cannot afford thehigh cost of meeting differing regulations and testingregimes. Mutual recognition agreements (MRAs) areimportant tools in this respect.

Transparency is important for business and consumersin this area of international trade. PTA partners shouldconsider incorporating WTO+ notification obligationsand a commitment not to implement any technical regu-lation or SPS measure until it has been published andcomments by the PTA partner have been taken into account.

It is recommended that the PTA be drafted as a “livingagreement” with a commitment to a work plan or priori-tization of problem resolution through harmonization,mutual recognition, equivalence measures, and otherpolicy tools that enable elimination or mitigation of trade-related problems over time. PTA provisions on TBTs andSPS measures should be legally binding, through a judi-cious combination of “soft” and “hard” law. The provisionsshould provide a pathway that permits integration toevolve and deepen over time by allowing the gradual reso-lution of TBT and SPS issues in the bilateral relationship.Such a pathway should be considered an integral part ofany PTA that aims to deal effectively with standards, certifi-cation, and conformity assessment problems. Eventual

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listing, most notably in the area of transparency. Studiesdevoted to the practice of preferential market openingsuggest that North-South PTAs based on a negative-listapproach tend to achieve the deepest, WTO+ liberalization.

The chapter also shows that gains from PTAs are likely tobe significant in services areas where there is scope for reap-ing large economies of scale. In principle, these gains canalso be realized through MFN liberalization, but in practicethe full integration of markets may require a deeper conver-gence of regulatory regimes. Regulatory cooperation may bemore desirable, and probably more feasible, within a subsetof countries than if pursued on a global scale. Regional orinternational harmonization or standardization can be animportant and cost-effective way of improving national stan-dards. Yet the best partners for regulatory cooperation arelikely to be those with the soundest regulatory frameworks,and they may not always be found within regional compacts.

There are gains from regulatory cooperation, but alsocosts. The former will dominate where national regulationcan be improved and where regulatory convergence or har-monization can be carried out, taking into account localcircumstances. The costs are likely to be smallest when for-eign regulatory preferences are similar and regulatory insti-tutions are broadly compatible.

Unless there are liberal rules of origin for investment thatconfer the full benefits of an integration scheme on third-country investors, the establishment of preferences mayresult in entry by inferior suppliers. Because the most effi-cient suppliers may also generate the greatest positive exter-nalities, the downside risks of preferential liberalization maybe greater, especially in crucial infrastructural services. Thisis particularly the case in services sectors with high location-specific sunk costs that need to be close to consumers. Pref-erential liberalization may then exert more durable effectson the nature of competition than in the case of trade ingoods. For instance, concluding an agreement that allowssecond-best providers to obtain a first-mover advantage mayimply that a country could be stuck with such providers,even if it subsequently liberalizes on an MFN basis.

Finally, PTAs have generally made little progress in tack-ling the interface between domestic regulation and trade inservices (e.g., subsidies). Despite the greater initial similar-ities in approaches to regulation and greater cross-bordercontact between regulators that geographic proximity canafford, progress in the area of domestic regulation has beenslow and generally disappointing, even at the PTA level.

Labor Mobility

The temporary movement of natural persons is a key modeof service delivery across borders. In chapter 13, Sherry

recourse to the PTA dispute settlement provisions shouldbe an option, along with recourse to the WTO DisputeSettlement Understanding (DSU).

Finally, PTA parties should agree to an overall commit-ment always to apply technical regulations and conformityassessment procedures on a national treatment basis and toallow third parties whose technical regulations and con-formity assessment procedures can be demonstrated asbeing equivalent to the level agreed to by the PTA partnersto benefit from the arrangements between the partners. Acommitment to open regionalism would help ensure thatthe PTAs support the multilateral system.

Services

In recent years, increasing numbers of PTAs have sought toinclude provisions on liberaliz