When the GATT [General Agreement on Tariffs and Trade] first came into being in 1948, regional arrangements were considered exceptional. Indeed, it was not until the beginnings of the European integration process in the 1950s that a significant part of international trade was to become preferential. In the ensuing years, several other preferential agreements were established, but it was not until the 1980s that they started to become the significant component of world trade that it is today. The major increment in the number of agreements came in the 1990s. We can count almost 400 preferential trade agreements currently in existence, and each member of the WTO on average belongs to 13 separate agreements.
A number of reasons can be adduced to explain their rising and continuing. They may serve political or strategic ends. Countries may wish to go further and faster in the direction of economic integration than they have been able to do in the WTO. They may be motivated by a fear of exclusion as competing countries secure better access to markets of interest. They may be an insurance policy against future protectionism. They may act as a signalling device to attract foreign investment. They may also serve as a vehicle for policy consolidation nationally, using an international obligation to make it harder for domestic interests to exert an influence over trade policy.
Tariffs and preferential trade agreements
Recent evidence would suggest that preferential trade agreements cannot be predominantly about securing tariff preferences. This is partly because over half of world trade is already duty-free on a most-favoured-nation (MFN) basis. The WTO’s World Trade Report 2011 calculated that only about 15 per cent of global merchandise trade flows in 2008 enjoyed preferential tariff treatment. This somewhat surprising figure was not only accounted for by the extent of MFN duty-free trade, but also by the fact that preferential agreements have often not departed from MFN tariff rates where those rates are above average. Some two-thirds of tariff lines with MFN tariffs exceeding 15 per cent have not been preferentially reduced in PTAs. In effect, less than 2 per cent of world trade is eligible for preference margins in excess of 10 percentage points.
It is also noteworthy that non-preferential MFN tariffs are low. On average, they were equal to 4 per cent in 2009. These numbers lead us to the conclusion, then, that tariffs have diminished in significance as a trade policy instrument over the years, and that tariffs do not motivate preferential trade agreements in any significant measure. This does not mean that tariffs no longer matter. High rates in some sectors – what we call tariff peaks in our jargon – and nuisance tariffs in others still deserve policy attention.
Deep integration, global value chains and non-tariff measures
An analysis of the contents of the more far-reaching preferential trade agreements that have emerged in recent years would suggest a marked tendency for these agreements to go more deeply into policy areas that have been addressed less profoundly, or not addressed in the WTO. This relates both to a range of non-tariff measures (NTMs), such as product standards, and to other areas, such as investment and competition policy.
One reason for deep integration has been the emergence of global value chains. Until not long ago, we thought of products in terms of a single national origin, bearing a label saying “made in China” or “made in Germany”. The expansion over the last two decades or so of global value chains means that most products are assembled with inputs from many countries. In other words, today’s goods are increasingly “made in the world”. Trade in intermediate goods – a proxy for global value chain production – now comprises close to 60 per cent of total trade in goods, and continues to be a dynamic sector in international trade.
An important consequence of the evolution of production networks is that imports matter as much as exports and both contribute to job creation and to growth. These relationships reflect a new and more intense form of interdependency through trade.
Note: The preceding is an extract of a speech delivered by WTO Director-General Pascal Lamy at the University of International Business and Economics in Beijing on 20 September 2012.
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