Preferential Trade Agreements.

Preferential Trade Agreements are treaties between states giving preferential access to each other’s domestic market. They may be multilateral or bilateral. They are commonly regional in scope, such as the EU and NAFTA agreements.

Preferential agreements are permissible under GATT rules provided that trade restrictions are eliminated on most trade between the participants and that customs duties are not higher than the average that formerly applied between the participants prior to the regional trade agreement.

There may be a free trade agreement or a customs union.  A free trade agreement necessitates the maintenance of border controls and restrictions in order to monitor rule of origin.   Otherwise in the absence of a common external policy, distortions could occur by the import of goods through low tariff members passing to high tariff members thereby circumventing the latter’s tariffs.

There has been a proliferation of preferential trade agreements in the last three decades. Most have performed free trade agreements rather than customs unions.

The existence of an exception to the general principle for such agreements may appear surprising. It is rationalised on the basis that the customs unions variety is similar to a single country with a common customs tariff and common commercial policy.

In order to be compliant for GATT purposes so as to apply by exception to the general MFN / non-discrimination principles, certain requirements apply. The agreement must be notified to the WTO. The Committee on Regional Trade Agreements may review the agreement and make recommendations to the WTO General Council as to compliance.

A formal complaint may be made to the dispute settlement body. A panel is convened. An appeal may be made to an appellate body. Such challenges have been very rare. No notified regional trade agreement has failed the above tests.

The duties and restricted regulations must be eliminated in respect of substantially all the trade between the relevant states. This applies to both customs unions and free trade areas. The customs and duties and regulations on third country trade must be no higher or restrictive than was the case before the preferential trade agreement.

In the case of a customs union, which of necessity has a common external tariff, it must be no more restrictive on the whole in respect of third country trade, after than before. This matter can be difficult to judge and by no agreed methods.

In the case of fair trade agreements, the words “on the whole” do not apply and a measure by measure approach can be taken.

Regulations and duties must be no onerous or restrictive than the corresponding duties and regulations prior to the free trade agreement. In the case of customs unions, substantially the same duties or regulations must be applied by each member to third party trade.

Regional Trade Arrangements

The regional trade blocs operate in conjunction with the GATT system. There are over 300 regional trade (preferential) agreements made between GATT members. The most significant is European Union. There are other significant arrangements including NAFTA between USA, Canada and Mexico. They also include MERCOSUR (South America), ASEAN in Asia and COMESA in Eastern and South Africa.

Regional arrangements are permitted provided that they eliminate restrictions on most trade between the members and that customs duties are no higher than the duties which prevailed on average through the territories concerned prior to their formation.

The two forms of regional agreement are a Free Trade Agreement which leaves the member countries free to have their own trade and tariff policies in relation to the rest of the world and a customs union. The customs union liberalises trade between states and requires the adoption of a common external tariff in relation to third countries. The EU is a customs union and free trade area. EEA and NAFTA are a free trade areas only.

Free trade areas must maintain rules of origin. Otherwise a trader could import goods through low tariff member countries and transfer them to high tariff countries. See separately the chapters on rules of origin. In contrast, where there is a customs union, member countries remove restrictions on trade in goods between themselves and also harmonise their trade policies as regards third countries.

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