Preferential Trade Agreement

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Preferential Trade Agreements, or PTAs, are formal arrangements of trade between countries that see benefits from trade amongst themselves. In many cases, these benefits are the product of proximity; countries close to one another are better able to conduct trade both because of lower transportation costs and greater possibilities for transparency. When trade agreements are constructed in this regional manner, they are sometimes referred to as Regional Trade Agreements, or RTAs. There is much debate as to whether PTAs increase or divert trade. The basic principles behind these two arguments are that while PTAs may foster trade that would otherwise not exist, they also have the potential to capture trade that would otherwise take place with members outside of the PTA and away from the lowest cost producer. Ideally, trade creation should outweigh trade diversion.

Another controversy surrounding PTAs are their apparent contradiction with the principles of the World Trade Organization. The WTO is governed in part by a "Most Favored Nation" mentality, which holds that no one should enjoy preferential treatment in international trade and that tariffs should be the same for everyone. However, despite this principle, PTAs are allowed under the Article XXIV exception of the charter of the WTO.

One final critique of PTAs holds that rich countries who enter into PTAs are forcing smaller countries to do the same, yielding trading blocks and hindering progress towards total free trade.

Forms of Preferential Trade Agreements

Free Trade Assosiations: In Free Trade Associations, internal trade must be free from tariffs. Examples include the North American Free Trade Agreement and the ASEAN Free Trade Area.

Customs Unions: In Customs Unions, equal tariffs must be set by all members. The EU is an example of a Customs Union.