Politics of preferential trade agreements

International political economy examines the interactions between countries on the global stage. It studies the effects of policy decisions on the global economy and the impact of international relations on economic stability. One of the most important topics in international political economy is the politics of preferential trade agreements. Preferential trade agreements are agreements between two or more countries that reduce trade barriers and promote economic integration. These agreements allow countries to increase trade and investment opportunities, leading to economic growth and stability. They also provide a platform for countries to negotiate better terms on different issues such as labour, environmental standards, and intellectual property protection. The politics of preferential trade agreements can be complex, as countries must balance their own interests with the interests of their partners. Understanding how these agreements are negotiated and how they impact countries is essential for understanding international political economy.

Multilateral vs preferential trading

Multilateral trade is between three or more countries and is governed by international organisations such as the World Trade Organization (WTO). Multilateral trade is based on the principle of non-discrimination, meaning that all WTO member countries are treated equally and have the same market access.

Preferential trade refers to trade between two or more countries governed by a preferential trade agreement (PTA), such as a free trade agreement (FTA) or a customs union. PTAs are often formed between countries with a close economic relationship and seek to reduce trade barriers. Unlike multilateral trade, PTAs are discriminatory and provide preferential treatment to the countries that are party to the agreement.

The General Agreement on Tariffs and Trade (GATT), the precursor to the WTO, played a significant role in liberalising international trade and reducing trade barriers. The GATT and the WTO have helped to increase global trade and economic growth by promoting trade liberalisation and reducing tariffs and other trade barriers.

However, over time, the effectiveness of the GATT/WTO in reducing trade barriers has declined. This is partly due to the proliferation of PTAs, which have increased in number and significance in recent decades. PTAs have often been used as a means to circumvent the rules of the GATT/WTO and provide preferential treatment to certain countries or industries. This has led to a proliferation of trade barriers and a fragmentation of the global trading system.

In general, the proliferation of PTAs has had a negative effect on global trade, as it has led to a proliferation of trade barriers and a fragmentation of the global trading system. This has made it more difficult for countries to access foreign markets and has led to a decline in global trade over time.

The General Agreement on Tariffs and Trade (GATT), the precursor to the World Trade Organization (WTO), played a significant role in liberalising international trade and reducing trade barriers. The GATT and the WTO have helped to increase global trade and economic growth by promoting trade liberalisation and reducing tariffs and other trade barriers.

In the past, colonialism significantly impacted international trade and the global economy. During the era of colonialism, many countries were dominated by colonial powers, which often exploited the resources and labour of these countries for their economic benefit. This led to a significant imbalance in the global economy and a concentration of wealth and power in the hands of a few colonial powers.

The GATT and the WTO have helped mitigate some of the adverse effects of colonialism by promoting trade liberalisation and reducing trade barriers. This has allowed countries previously dominated by colonial powers to participate more fully in the global economy and benefit from increased trade and economic growth.

However, the proliferation of preferential trade agreements (PTAs) in recent decades has hurt global trade. It has tended to undermine the principles of non-discrimination and equal access to markets that are central to the GATT/WTO. Moreover, PTAs often provide preferential treatment to certain countries or industries, creating imbalances and distorting trade. In this way, PTAs may reinforce some of the negative effects of colonialism and contribute to a fragmentation of the global trading system.

Historical background

German Customs Union

The German Customs Union, also known as the Zollverein, was a trade coalition of German states that was established in 1834. The Zollverein was created to reduce tariffs and trade barriers between the participating states, including Prussia, Bavaria, Saxony, and other German states. The goal of the Zollverein was to create a common market within Germany, facilitating trade and economic growth.

The establishment of the Zollverein played a significant role in the economic development of Germany and was an important precursor to the unification of Germany in 1871. The Zollverein helped reduce trade barriers and facilitated the development of a common market within Germany, which facilitated the growth of industry and commerce. Moreover, the economic success of the Zollverein was a major factor in the eventual unification of the German states, as it demonstrated the benefits of economic cooperation and integration.

After the unification of Germany in 1871, the Zollverein continued to function as the main economic institution of the newly-formed German Empire. However, the Zollverein was eventually dissolved in 1890 after introducing the German Empire’s first customs tariff, establishing a common tariff system for the entire German Empire.

Franc zone

The Franc zone, also known as the French franc zone or the CFA franc zone, is a group of countries in West and Central Africa that have adopted the CFA franc as their official currency. The CFA franc is a currency pegged to the euro and used as a common currency in these countries. The franc zone was established in 1901 and was originally limited to a few countries in West Africa. In 1938, the franc zone was expanded to include most of the former French colonies in West and Central Africa.

The franc zone has played an important role in the participating countries’ economies, as it has provided a stable currency and facilitated trade and investment. However, the franc zone has also been the subject of criticism, as it has been seen as a vestige of colonialism and a means for France to exert economic influence over its former colonies.

The franc zone is still in existence, although it has undergone some changes over the years. In 1994, the CFA franc was revalued, and the franc zone was renamed the ‘Francophone Africa Monetary Union’ (UEMOA). The UEMOA comprises eight West African countries and is overseen by the Central Bank of West African States (BCEAO). In addition to the CFA franc, the UEMOA also includes the Central African CFA franc, used in six Central African countries.

British imperial preference

British imperial preference was a system of tariffs and trade agreements that was established by the United Kingdom in the early 20th century. The system was designed to provide preferential treatment to the countries of the British Empire, which included countries in Africa, the Caribbean, and Asia, as well as Canada and Australia.

British imperial preference was established at the Ottawa Conference in 1932, which representatives of the British Empire attended. The conference resulted in the creation of the Imperial Economic Conference, which was responsible for coordinating economic policy among the member countries of the British Empire.

Under the system of British imperial preference, member countries of the British Empire were granted preferential access to each other’s markets, with lower tariffs on their exports to the UK and other imperial countries. The system’s goal was to promote trade and economic cooperation within the British Empire and boost the economies of the participating countries.

British imperial preference remained in place until the UK acceded to the European Economic Community (EEC) in 1973. After joining the EEC, the UK became part of the common market and was required to reduce tariffs on imports from other EEC countries. This effectively ended the system of British imperial preference, as the UK could no longer provide preferential treatment to the countries of the British Empire.

GATT article XXIV

Article XXIV of the General Agreement on Tariffs and Trade (GATT) is a provision that allows countries to form customs unions or free trade areas. Customs unions are agreements between two or more countries to eliminate tariffs and other trade barriers and adopt a common external tariff on imports from non-member countries. Free trade areas are agreements between two or more countries to eliminate tariffs and trade barriers. Still, each country maintains its own tariffs on imports from non-member countries. Article XXIV of the GATT allows countries to form customs unions or free trade areas as long as certain conditions are met. These conditions include: The member countries must eliminate tariffs and other trade barriers between them. The member countries must adopt a common external tariff on imports from non-member countries. The member countries must not discriminate against non-member countries in applying their trade policies. Article XXIV of the GATT has played an important role in facilitating the formation of customs unions and free trade areas worldwide. It has allowed countries to reduce trade barriers and create larger economic blocs that can be more competitive in the global economy. However, the proliferation of customs unions and free trade areas has also led to a fragmentation of the global trading system. It has been criticised for creating imbalances and distorting trade.

Enabling clause (1979)

The enabling clause, also known as the ‘Enabling Clause of 1979,’ is a provision in the World Trade Organization (WTO) that allows developing countries to be granted special treatment in trade negotiations. The enabling clause was adopted in 1979 at the General Council of the WTO to address developing countries’ concerns about their participation in the international trading system.

Under the enabling clause, developing countries can negotiate trade agreements and commitments more flexibly than developed countries. This allows them to take into account their specific economic and development needs and adopt trade policies better suited to their circumstances.

The enabling clause has played an important role in promoting the participation of developing countries in the international trading system and in helping them to benefit from trade and economic growth. It has also helped to ensure that the interests of developing countries are taken into account in trade negotiations and that they can participate more fully in the global economy.

Rise of new regionalism

The 1950s

The rise of new regionalism can be traced back to the 1950s. The first steps towards European integration were established by establishing the European Coal and Steel Community (ECSC) and the European Economic Community (EEC). These early efforts at regional integration were motivated by a desire to promote economic cooperation and to reduce the risk of conflict in post-war Europe.

In the 1960s and 1970s, regional integration efforts expanded beyond Europe to other parts of the world. This included forming regional trade agreements, such as the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico.

Despite its commitment to multilateralism, the United States has often supported the development of regional trade agreements, as they can provide economic benefits to the participating countries and can serve as a stepping stone towards broader global trade liberalisation. However, the proliferation of regional trade agreements has also been criticised for creating a fragmentation of the global trading system and for potentially undermining the multilateral trading system.

In recent decades, there has been a significant increase in the number and significance of regional trade agreements worldwide. This trend, known as ‘new regionalism,’ has been driven by a variety of factors, including technological change, economic globalization, and changes in the global political landscape. The rise of new regionalism has significantly impacted the global trading system. It has led to a proliferation of trade barriers and a fragmentation of the global economy.

The 1980s

In the 1980s, regional integration efforts continued to deepen and expand, with the European Union (EU) adopting the Single European Act (SEA) in 1986. The SEA was a major step towards creating a single market within the EU and aimed to remove barriers to trade and investment within the EU. It also established the principle of ‘subsidiarity,’ which holds that decisions should be taken at the lowest possible level of government.

The 1980s also saw the conclusion of several important regional trade agreements in North America. The Canada-United States Free Trade Agreement (CUFTA) was signed in 1988 and came into effect in 1989. It was the first free trade agreement between the United States and a foreign country and was a significant step towards creating the North American Free Trade Agreement (NAFTA), which was signed in 1992 and came into effect in 1994.

NAFTA was a comprehensive free trade agreement between the United States, Canada, and Mexico that eliminated tariffs and trade barriers between the participating countries. It was a major step towards regional economic integration in North America and significantly impacted the global trading system.

The 1980s marked a significant turning point in the evolution of regional trade agreements, as they became increasingly comprehensive and covered a wide range of economic sectors. The conclusion of these agreements marked a shift towards a more integrated and interdependent global economy.

The 1990s

In the 1990s, regional integration efforts continued to deepen and expand, with the European Union (EU) moving towards the creation of a single currency through the establishment of the Economic and Monetary Union (EMU). The EMU was launched in 1999 and involved the adoption of a common currency, the euro, by participating countries.

The 1990s also saw the conclusion of several important regional trade agreements in other parts of the world. For example, in 1991, the Southern Common Market (MERCOSUR) was established as a regional trade agreement between Argentina, Brazil, Paraguay, and Uruguay. MERCOSUR was designed to promote economic integration and cooperation between the participating countries and reduce trade and investment barriers.

In 1992, the Association of Southeast Asian Nations (ASEAN) established the ASEAN Free Trade Area (AFTA), which aimed to promote economic integration and cooperation among the member countries of ASEAN. AFTA was designed to reduce tariffs and other trade barriers between the participating countries and to create a single market within ASEAN.

In addition to these regional trade agreements, the 1990s also saw a significant increase in the number of bilateral trade agreements between countries worldwide. These agreements, typically between two countries, have been used to facilitate trade and investment between the participating countries. The proliferation of bilateral trade agreements in the 1990s contributed to further fragmentation of the global trading system and has been a source of concern for proponents of the multilateral trading system.

Types of economic cooperation

There are several different types of economic cooperation that countries can engage in, including:

1. Partial economic cooperation: This refers to economic cooperation between two or more countries that is limited to specific sectors or issues. It may involve the exchange of goods or services, the sharing of technology or knowledge, or the joint development of projects or initiatives.
2. Free trade area: A free trade area is an agreement between two or more countries to eliminate tariffs and other trade barriers between them, but each country maintains its own tariffs on imports from non-member countries. Free trade areas are designed to promote trade and economic cooperation between the participating countries.
3. Customs union: A customs union is an agreement between two or more countries to eliminate tariffs and other trade barriers between them and to adopt a common external tariff on imports from non-member countries. Customs unions are designed to create a common market within the member countries and to facilitate trade and investment between them.
4. Single market: A single market is an economic area in which goods, services, capital, and people can move freely. The four freedoms of the single market are the free movement of goods, the free movement of services, the free movement of capital, and the free movement of people. These freedoms are designed to promote economic integration and cooperation among the member countries.
5. Economic and monetary union: Economic and monetary union (EMU) is an economic and monetary integration of two or more countries that involves adopting a common currency and coordinating economic and monetary policies. The EMU is designed to promote economic stability and cooperation among the member countries and to facilitate trade and investment.

Forms of economic cooperation

There are several different types of economic cooperation, which can be classified based on the geography and number of participating countries:

1. Regional economic cooperation refers to economic cooperation between countries that are located in the same region of the world. Examples of regional economic cooperation include the European Union (EU) in Europe and the Association of Southeast Asian Nations (ASEAN) in Asia.
2. Interregional economic cooperation refers to economic cooperation between countries that are located in different regions of the world. Examples of interregional economic cooperation include the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico and the Trans-Pacific Partnership (TPP) between countries in the Asia-Pacific region.

Economic cooperation can also be classified based on the number of participating countries:

1. Bilateral economic cooperation refers to economic cooperation between two countries. Examples of bilateral economic cooperation include free trade agreements between two countries and economic partnerships between two countries.
2. Multilateral economic cooperation refers to economic cooperation between three or more countries. Examples of multilateral economic cooperation include the World Trade Organization (WTO), which is a multilateral organisation that promotes global trade and economic cooperation, and regional trade agreements that involve multiple countries.

Economic cooperation can also be classified based on the economic development of the participating countries:

1. North-North economic cooperation refers to economic cooperation between countries that are classified as developed countries.
2. South-South economic cooperation refers to economic cooperation between countries that are classified as developing countries.
3. North-South economic cooperation refers to economic cooperation between developed and developing countries. This type of cooperation often involves the transfer of resources and technology from developed countries to developing countries in order to promote economic development and reduce poverty.

Debates

There has been a significant debate about the effects of preferential trade agreements (PTAs) on the multilateral trading system. PTAs are agreements between two or more countries that provide preferential treatment to certain countries or industries, often in the form of lower tariffs or other trade barriers.

PTAs have been criticised for potentially undermining the principles of non-discrimination and equal access to markets that are central to the multilateral trading system. When countries enter into PTAs, they may provide preferential treatment to certain countries or industries, creating imbalances and distorting trade. This can lead to a fragmentation of the global trading system and make it more difficult for non-member countries to access markets.

However, PTAs can also have positive effects on the multilateral trading system. PTAs can serve as a stepping stone towards broader global trade liberalisation and help build capacity and promote economic development in participating countries. In addition, PTAs can help facilitate trade and economic cooperation between countries and provide a forum for addressing trade-related issues.

The effects of PTAs on the multilateral trading system are complex and depend on various factors, including the specific terms of the agreements and their impact on trade flows. While PTAs can have both positive and negative effects, countries need to ensure that they are consistent with the rules and principles of the multilateral trading system and do not undermine the broader goal of global trade liberalisation.

Some argue that PTAs can be ‘stumbling blocks’ that undermine the multilateral trading system by creating imbalances and distorting trade. For example, when countries enter into PTAs, they may provide preferential treatment to certain countries or industries, leading to a fragmentation of the global trading system and making it more difficult for non-member countries to access markets. This can lead to a proliferation of trade barriers and undermine the principles of non-discrimination and equal access to markets central to the multilateral trading system.

Others argue that PTAs can be ‘building blocks’ that contribute to the development of the multilateral trading system. For example, PTAs can serve as a stepping stone towards broader global trade liberalisation and help build capacity and promote economic development in participating countries. In addition, PTAs can help facilitate trade and economic cooperation between countries and provide a forum for addressing trade-related issues.

The effects of PTAs on the multilateral trading system are complex and depend on various factors, including the specific terms of the agreements and their impact on trade flows. While PTAs can have both positive and negative effects, countries need to ensure that they are consistent with the rules and principles of the multilateral trading system and do not undermine the broader goal of global trade liberalisation.

International politics

Traditional explanations

Demand side

Neofunctionalism is a perspective that emphasises the role of demand-side factors in shaping global economic relations. According to neo-functionalism, the integration of regional economies can lead to the development of transnational networks and the emergence of supranational institutions that can shape global economic relations.

Neofunctionalism suggests that integration can occur through a bottom-up process, in which the economic benefits of integration lead to increased demand for cooperation and further integration. This process is known as spillover, in which the economic benefits of integration in one sector or area spill over into other sectors or areas, leading to a more integrated global economy.

For example, neo-functionalism suggests that the integration of regional economies through trade and investment can lead to the development of transnational production and distribution networks, which can facilitate the flow of goods and services across borders. This integration can also lead to the emergence of supranational institutions, such as the European Union (EU), that can shape global economic relations and promote further integration.

There are a variety of actors that can shape global economic relations, including:

1. Interest groups: Interest groups are organisations that seek to promote the interests of a specific group or sector. They can include businesses, trade unions, environmental groups, and other organisations. Interest groups can shape global economic relations by advocating for specific policies or by lobbying governments and international organisations.
2. Firms: Firms are business enterprises that produce and sell goods and services. They can shape global economic relations by engaging in international trade and investment, facilitating the flow of goods and services across borders and promoting economic integration.
3. Citizens: Citizens are individuals who live within a particular country and are subject to its laws and policies. They can shape global economic relations by participating in the political process and expressing their preferences through voting and consumption patterns.

These actors can play a significant role in shaping global economic relations and influence governments’ and international organisations’ policies and practices.

There are a variety of motivations that can drive actors to engage in global economic relations, including:

1. Economic gains: One of the main motivations for actors to engage in global economic relations is the potential for economic gains. This can include the opportunity to access new markets, to benefit from economies of scale, and to take advantage of lower production costs.
2. Transaction costs: Transaction costs refer to the costs associated with conducting business, such as the costs of negotiating contracts, enforcing agreements, and protecting property rights. Actors may be motivated to engage in global economic relations to reduce transaction costs and facilitate the flow of goods and services across borders.
3. Uncertainty: Actors may also be motivated to engage in global economic relations to reduce uncertainty. This can include the uncertainty associated with changes in domestic economic conditions and the uncertainty associated with global economic conditions. Engaging in global economic relations can help actors to diversify their risk and to access new sources of demand.

These motivations can influence the decisions of actors to engage in global economic relations and can shape the nature of these relations.

Supply side

Intergovernmentalism is a perspective that emphasises the role of supply-side factors in shaping global economic relations. According to intergovernmentalism, the integration of regional economies is driven by the actions of governments and is shaped by intergovernmental bargaining and negotiation.

Intergovernmentalism suggests that integration occurs through a top-down process in which governments negotiate and agree to integrate their economies. This process is known as bargaining, in which governments negotiate the terms of economic integration and the distribution of costs and benefits.

For example, intergovernmentalism suggests that the integration of regional economies through trade and investment is driven by the actions of governments and is shaped by intergovernmental bargaining and negotiation. Governments may negotiate the terms of economic integration and the distribution of costs and benefits to promote the interests of their own domestic industries or achieve other policy objectives.

In the context of intergovernmentalism, the main actors that shape global economic relations are national governments and policymakers. National governments are the primary actors responsible for shaping economic policy and negotiating the terms of economic integration with other countries. They can shape global economic relations by negotiating trade and investment agreements, by setting tariffs and other trade barriers, and by adopting economic policies that promote or inhibit economic integration.

Policymakers are individuals within national governments who are responsible for developing and implementing economic policy. They can play a significant role in shaping global economic relations by negotiating trade and investment agreements, setting economic policies that promote or inhibit economic integration, and influencing national governments’ decisions.

There are a variety of motivations that can drive national governments and policymakers to engage in global economic relations, including:

1. Political gains: National governments and policymakers may be motivated to engage in global economic relations to achieve political gains. This can include the opportunity to shape the rules and institutions of the global economy, influence other countries’ policies, and enhance their own country’s reputation and influence.
2. Leadership: National governments and policymakers may also be motivated to engage in global economic relations to demonstrate leadership and shape the direction of global economic developments. This can include the opportunity to set the agenda for global economic discussions and shape the global economy’s rules and institutions.
3. Geopolitics: National governments and policymakers may also be motivated to engage in global economic relations by geopolitical considerations. This can include the desire to enhance their own country’s economic and strategic position relative to other countries, secure access to natural resources, or respond to security threats.

Overall, these motivations can influence the decisions of national governments and policymakers to engage in global economic relations and can shape the nature of these relations.

Recent explanations

Economic

There are a variety of recent explanations for the role of international politics in shaping global economic relations that focus on economic factors. These explanations include:

1. Capital-labour ratio: The capital-labour ratio refers to the amount of capital (e.g., machinery, equipment, and infrastructure) relative to the number of workers in an economy. The capital-labour ratio can influence the competitiveness of an economy and can shape global economic relations. For example, economies with a higher capital-labour ratio may be more competitive in capital-intensive industries. In comparison, economies with a lower capital-labour ratio may be more competitive in labour-intensive industries.
2. Economies of scale: Economies of scale refer to the cost advantages that firms can achieve by producing goods and services at a larger scale. The ability to achieve economies of scale can influence the competitiveness of firms and can shape global economic relations. For example, firms that can achieve economies of scale may produce goods more efficiently and at a lower cost, making them more competitive in global markets.
3. Rise of intra-firm trade and global value chains (GVCs): The rise of intra-firm trade and global value chains (GVCs) has also shaped global economic relations. Intra-firm trade refers to trade between affiliates of the same multinational corporation, while GVCs refer to the networks of firms that produce goods and services that are traded globally. The growth of intra-firm trade and GVCs has facilitated the integration of global production and distribution networks, shaping global economic relations.

These economic factors can influence the nature and direction of global economic relations and can shape the competitiveness of firms and economies in global markets.

International politics

There are a variety of recent explanations for the role of international politics in shaping global economic relations that focus on international politics. These explanations include the following:

1. WTO stagnation: The stagnation of the World Trade Organization (WTO) has shaped global economic relations in recent years. The WTO is a multilateral organisation that promotes global trade and economic cooperation. Still, it has faced significant challenges recently, including disputes over trade rules and the inability to reach consensus on new trade agreements. The stagnation of the WTO has led to a proliferation of regional and bilateral trade agreements and has shaped the nature of global economic relations.
2. Geopolitics: Geopolitical considerations have also shaped global economic relations in recent years. This can include the influence of major powers on the global economy, the impact of conflicts and tensions on trade and investment flows, and the role of natural resources in shaping economic relations.
3. Standard setting: The setting of standards and regulations can also shape global economic relations. Standards and regulations can affect the flow of goods and services across borders and influence firms’ competitiveness in global markets.
4. Exporter discrimination: Exporter discrimination refers to the practice of providing preferential treatment to certain exporters in order to promote economic development or to achieve other policy objectives. Exporter discrimination can shape global economic relations by influencing the flow of goods and services across borders and affecting firms’ competitiveness in global markets.

These international politics factors can influence the nature and direction of global economic relations and shape the global economy’s rules and institutions.

Development

There are a variety of recent explanations for the role of international politics in shaping global economic relations that focus on political risk, commitment to openness, macroeconomic credibility, and the lock-in of liberal economic reforms. These explanations include the following:

1. Political risk: Political risk refers to the risk that political factors, such as changes in government, conflicts, or instability, will disrupt economic relations or affect the economic performance of a country. Political risk can shape global economic relations by influencing the flow of trade and investment and by affecting the competitiveness of firms and economies in global markets.
2. Commitment to openness: The commitment of countries to openness, or the degree to which they are open to trade and investment, can also shape global economic relations. Countries that are more open to trade and investment may be more attractive to investors and may be more competitive in global markets. In contrast, less open countries may be less attractive and less competitive.
3. Macroeconomic credibility: The macroeconomic credibility of a country, or the degree to which it is perceived as having stable and predictable economic policies, can also shape global economic relations. Countries with high macroeconomic credibility may be more attractive to investors and competitive in global markets, while countries with low macroeconomic credibility may be less attractive and less competitive.
4. Lock-in of liberal economic reforms: The lock-in of liberal economic reforms, or the degree to which a country has committed to liberal economic policies, can also shape global economic relations. Countries committed to liberal economic reforms may be more attractive to investors and competitive in global markets. In contrast, countries that have not committed to these reforms may be less attractive and less competitive.

These factors can influence the nature and direction of global economic relations and can shape the competitiveness of firms and economies in global markets.