Summer 2019 POL 241 Chap 6 "World Trade Organization, ”World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-existence to Coherence”


Elayne Guzman
World Trade Organization, ”World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-existence to Coherence”

Quote:
“In the first stage, the policy preferences of a government are shaped by national welfare considerations and by the politically organized groups that represent different industrial sectors. In the second stage, governments negotiate a PTA under the constraints imposed by the domestic political environment. The outcome of this game is the politically viable preferential agreement.”

Meaning/Chosen:
Starting from a situation with an arbitrary structure of trade barriers, if two or more countries freeze their net external trade vector with the rest of the world through a set of common external tariffs and eliminate the barriers of the internal trade, the welfare of the union as a whole necessarily improves and that of the rest of the world does not fall. By fixing the combined, net extra union trade vector of member countries at its pre-union level, non-member countries are guaranteed their original level of welfare. Moreover,  taking the extra union trade vector as an endowment. The joint welfare of the union is maximized by allowing free trade of goods internally.

Ensuring welfare improvement requires the elimination of internal barriers and that external vector eliminate trade diversion so that members countries import the same amount to the rest of the world as they did initially. Successive expansion of such trade blocs could lead to monotonic welfare improvements until global trade is reached.  

Reference:
The WTO and Preferential Trade Agreements: From Co-Existence to Coherence
WTO World Trade Report, 2011. Posted: 14 Feb 2015

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