How preferential are preferential trade agreements

Assume that people are interested on the market access ASEAN countries would get under a PTA with the EU. Usually, preferential access is measured as the difference (expressed in %) between your tariff faced by an MFN exporter (i.e. an exporter that trades with the EU on a MFN basis without the preferential scheme) and the tariff faced by an ASEAN member when it exports to the EU. Thus, the preferential margin is zero for products with zero MFN tariffs.

However, as first described by Low et al. (2005), for countries just like the EU (and US) that extend preferential usage of many trading partners, you need to gauge the preferential access against the effective tariff paid by all the exporters to the EU at that tariff line level instead of against the MFN tariff. Call this gauge the adjusted preferential access measure (Low et al. call it the “competition-based preferential access” measure). According to the measure, a country like Singapore that currently pays the MFN tariff on its exports to the EU receives less market access than competing exporters to the EU and gets a poor preferential margin, unless all the countries selling to the EU for that tariff line are also MFN exporters. Of course, this adjustment pays to insofar as there is some competition across partners, which is most likely likely, even at the HS-10 tariff level (HS-10 being the EU Harmonised system of imports classification including 12,145 products or tariff lines). Aggregating across products provides overall adjusted preferential access for a country.

But negotiators also wish to know if the change in effective market access is for products that count, i.e. if it reflects a little or large “value” for these preferences. They would like to know if the resulting change in market access affects HS-10 products with negligible market share (nothing could be surmised about developments at the extensive margin from a direct effect analysis based on market shares). Or they could need to know if products that are candidates for exemption from preferences through the negotiation count a whole lot. We propose a “new” Lorenz-like representation of the distribution of preferential access across products (Carrère et al. forthcoming). We take the very best 100 products ranked by decreasing shares altogether exports and plot them against the cumulated preferential market access, unadjusted or adjusted. The adjusted market access measure is normalised by the cumulative market access, so the cumulative sum of adjusted market access over the top 100 products sums to at least one 1 (because the top 100 products usually do not increase all exports, the horizontal axis will not soon add up to 100% therefore the resulting curve isn’t exactly a Lorenz curve). 1 This Lorenz-like representation is convenient. As being a standard Lorenz curve depicting the extent of income inequality, the more convex the curves, the more skewed preferences are towards products that count little in the full total value of exports.

Although the proposed ASEAN-EU PTA could be about a lot more than market access, preferential usage of trading partners remains among the principal objectives on both sides and was clearly mentioned when negotiations were launched. The problem for ASEAN members is they are a heterogeneous group that’ll be affected very differently by a PTA with the EU. Indeed, aside from Singapore, all ASEAN members get some good preferential usage of developed-country markets. The three low-income countries in ASEAN, Cambodia, Laos, and Myanmar, take advantage of the “Everything but Arms” scheme that provides them duty-free-quota free usage of the EU. Another group which includes Brunei, Indonesia, Malaysia, Philippines, Thailand, and Vietnam gets the typical Generalised System of Preferences granted by the EU. It really is thus clear that the proposed PTA with the EU will erode preferences on some products for the low-income countries in ASEAN vis-à-vis other ASEAN members. In relative terms, at least, ASEAN partners without EBA preferences will gain market access.

Figure 1 contrasts the extent of market access for an EBA exporter (Cambodia), a GSP exporter (Indonesia), and the only real MFN exporter (Singapore). For every among the three selected countries, the figure provides weighted (by export shares) average unadjusted and adjusted preferential market access in brackets. In every cases, the curves become very steep as you approaches the last ten products roughly. Those will be the products that could gain the most preferential access however they are also currently negligible in the export basket, never reaching 3% of export value. This pattern reflects the workings of political-economy motives in the determination of rent transfers granted through preferential market access – tariff preferences are granted to sectors and products where they face little competition, i.e. usually to sectors and products that export negligible amounts to the EU.

Figure 1 . Cumulative exports against cumulative preferences

(HS-10 digit what to the EU25 in 2004)

Average unadjusted and adjusted preferential market access weighted by export shares in brackets

The black and gray curves in Figure 1 will be the unadjusted and adjusted curves respectively. The length between your current adjusted and unadjusted lines (solid ones) indicates the extent of erosion because of competition by other preference-receiving countries in today’s situation. The distance between your gray solid and gray dashed lines indicates the extent of loss/gain with regard to the adjusted preferential margin when implementing the proposed FTA between your EU and ASEAN countries. According to find 1, you will find a clear loss for Cambodia (the EBA country) and gains for Indonesia (GSP) and Singapore (MFN). Going a step further and comparing the patterns across EBA and GSP ASEAN exporters would show that the EBA group is fairly homogeneous in ASEAN, however, not the GSP group, therefore the former would form an all natural negotiating group however, not the latter (see details in Carrère et al. forthcoming).

These measures of market access claim that ASEAN members will face completely different outcomes when negotiating as an organization with the EU or US, that have extensive trade preference programmes. This diversity can be likely to be within other countries negotiating PTAs, including the “Economic Partnership Agreements” or negotiations for LDCs’ market access beneath the Doha round (see Carrère and de Melo 2009). Regarding ASEAN, even the EBA beneficiaries’ effective market access is cut in two once EU preferential usage of other partners is considered. The tiny aggregate value of preferences captured by the “Lorenz-like” curves in the export/preference-margin space show clearly that preferences are always received for products with really small export shares.

This simple pictorial representation of effective market access helps explain the contrast between ex ante assessments of preferential market access that often predict welfare gains from reciprocal preferential tariff reductions and the outcomes of negotiations that reveal tensions leading to many exceptions to full market access. For instance, in recognition of the various degrees of development among its members, in every its PTA negotiations, ASEAN has individual exception lists. The tensions in today’s “Economic Partnership Agreements” negotiations also suggest divergence of interests across member countries in the same negotiation group, aside from across negotiation groups. Using the measures presented here may help better realize why “one size will not fit all” and explain the tensions in preferential trade negotiations.

1 Unadjusted preferences can’t be normalised to 100% because they may take on positive or negative values.

Low, P. R. Piermanti, and J. Richetering (2005), “Multilateral Answers to the Erosions of non-reciprocal Preferences in NAMA”, ERSD- 2005-05, (Geneva, World Trade Organization).