Wednesday, July 20, 2011

Do PTAs Create Trade or Divert Trade?

World Trade Organization (WTO) Secretary-General Pascal Lamy has recently revived the question of whether regional or preferential trade agreements (PTAs) help or hurt the WTO's overarching goal of free trade.  On the one hand, some argue that PTA's create trade between the members of the PTA, thereby increasing trade overall and benefitting the worldwide economy.  On the other hand, some contend that PTA's simply divert international trade to trade among the PTA partners. 

Director-General Lamy seemed to take the latter view in his speech today launching the World Trade Report 2011.  He warned that PTAs “may lock in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement . . .The new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs.”

The WTO rules permit PTAs, subject to notification and some oversight and regulation, but the rules have not really been enforced.  This issue continues to arise as countries like the United States consider signing additional regional and bilateral free trade agreements, such as the ones currently under consideration by the U.S. Senate with Columbia, South Korea and Panama.


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