The raises relevant questions in the realm of

The world
trading system has shifted from one in which international trade relations were
mainly multilateral to one in which an open multilateral system coexists with a
proliferation of diverse Preferential
Trade Agreements (PTAs). Such coexistence raises relevant questions in the
realm of international political economy concerning the compatibility of
apparently opposite forces: are PTAs building or stumbling blocks for the
multilateral trading system? The debate seems to be far from reaching consensus;
while some political economists argue that these agreements are evidence of and a step towards further
liberalisation, others defend that PTAs threaten further liberalising efforts
and should be circumscribed (or even proscribed)
by the World Trade Organisation (WTO). The essay will address the current state
of the debate concerning the systemic effects of PTAs and related empirical
evidence presented by both their proponents and opponents. The essay holds that
although there are sufficient motives to be concerned with the potential
systemic effects posed by PTAs’ proliferation, there can be no strong
assumption in either direction. Moreover, the essay postulates that it seems
fruitless to advocate PTAs’ outlaw; rather one should seek to understand what can be done to make them more
compatible with the multilateral system’s further liberalisation. Firstly, the
essay will give a brief rundown of PTAs’ creation and spread. Secondly, it will
address the main theoretical arguments held by both sides of the debate, along
with some empirical evidence.

The nineteenth
century has been an important turning point in trade agreements’ modus operandi, during which most
European countries began using the most favoured nation (MFN) clause in their
bilateral trade agreements. Such clause assured that those countries exports
would face the lowest tariff when compared to any other trading partner,
avoiding them floating tariff rates and costing negotiations over trading
terms. However, only in 1923 the United States began
to acknowledge that the “one country at a time” approach was too
heavy to hold and started the MFN clause’s introduction in bilateral treaties
of Commerce, Friendship, and Navigation (Viner, 1924). In 1934, the MFN clause became
manifest in the Reciprocal Trade Agreement Act (RTAA) in its unconditioned
form. After the Second World War, a charter for the International Trade
Organization (ITO) was drawn up at the Havana Conference in 1947. Nevertheless, the focus on other multilateral economic
institutions such as the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (IBRD) led to a
“schizophrenic document” (Krueger, 1999: 105), which stipulated contradictory
measures that envisaged both an open trading system and the primacy of domestic
goals. Since the charter was not ratified,
the General Agreement on Tariffs and Trade (GATT) articles became the
international trading system’s pillars.

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The articles’
wording conceived that the only exemption from the multilateral economic and
trade structure would be a Customs Union (CU). However, the United States and
Canada adhesion to such structure was decisive (Ibid.). Since both countries nurtured the interest of reducing tariffs between themselves and maintaining
the current tariffs with other countries, they exerted pressure to lengthen such exemption to specific free
trade agreements (FTAs) (Hart, 1994). The
outcome was the acceptance of preferential “arrangements” (Article
XXIV, GATT) as long as they fulfilled some conditions that would keep them away
from returning to the previous bilateral negotiations scheme. Such
pre-requirements were: i) the preference
should be total, meaning that tariff barriers between the parties should be
zero; ii) the preference should be
achieved within the agreed phased timetable; and iii) the preference should not mean increased protection against

The first wave
of preferential trade activity in the
1960s followed the creation of the European Economic Community (ECC) and the
subsequent European Free Trade Area (EFTA), which were the most prominent
experiences. Although the coexistence of such experiences
with the multilateral and non-preferential economic and trade structure was
mostly understood as politically-driven and trade-liberalising since it implied
a partial or total removal of trade barriers between its members, it led to a rising political and academic debate. Nevertheless,
most of the PTAs and CUs formed during
this wave were either irrelevant or failures (Krueger, 1999; Hoekman and
Kostecki, 2009), being good examples the Latin American Free Trade Area’s lack
of visible results and the East African Customs Union’s dissolution. The trend
toward a multilateral economic and trade structure lasted until the late 1970s
and determined the decline of academic interest in PTAs. A similar level of controversy only emerged again in
the 1980s not only with the decision of the United States to extend its trade
preferences (to some Caribbean countries and Israel) but also with Mexico’s
aspiration announcement of join for a North American Free Trade Agreement
(NAFTA), which represented the beginning of the second wave. The
disintegration of the Soviet Union and its replacement by newly independent states in Eastern Europe led
to a proliferation of PTAs between them and Western Europe countries. In the
early 2000s, the East Asian countries led the third wave of preferential trade activity with the decision
of transforming the Association of Southeast Asian Nations (ASEAN) in an FTA along with the announcement of an
Asia-Pacific Economic Cooperation (APEC), which included countries on the other
side of the Pacific. Over the last decade, PTAs
continued to proliferate not only qualitatively and geographically but also in
terms of the participants’ income (Manger, 2009; Manger, 2012). That has been
spreading doubts dividing political economists on whether PTAs are building or
stumbling blocks for a multilateral trading order (Frankel et al., 1998; Limão,
2007; Bhagwati, 2008).

Some political
economists defend that the building block’s outcome is more likely to deepen
trade liberalisation (Ethier, 1998) and they ground their opinion on five main arguments.
Nonetheless, despite the persuading arguments and findings, others regard PTAs’
proliferation as having a mainly negative impact on the multilateral trading
system. On the one hand, some authors defend that such agreements’ results are
either irrelevant to the world trading system (Foroutan, 1998; Tumbarello, 2007)
or dependent on each PTA degree of integration (Medvedev, 2006). On the other hand,
some even argue that PTAs are capable of transforming it into a litigious and
fractured system with greater barriers between blocks and characterised by
trade diversion and by the triumph of protectionist pressures (Bhagwati, 1995;
Limão; 2007; Bhagwati, 2008). 


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