How preferencial al preferencial trade agreements? Disentangling market access effects of preferential trading arrangements

Almost every country in the world is engaged in at least one preferential trading arrangement (PTA), and the World Bank (2005) estimates that the average WTO member is engaged in six. In addition, the major OECD trading partners are engaged in non-reciprocal preferential access schemes (the so-called “Trade Preferences for Development”) through the Generalised System of Preferences (GSP) and more recently the “Everything but Arms” (EBA) initiative for the EU and the African Growth Opportunity Act for the US, both giving duty-free-quota-free market access. Simultaneously the US and the EU are engaged in multiple PTA negotiations, sometimes with other PTA groups rather than single partners.

An important issue for trading partners is to know how much they are “giving away” or “receiving” in preferential access and to have a compact representation of this “effective” market access. This column presents a graphical approach to displaying effective market access and applies it to the recent proposed ASEAN-EU PTA.

Representing effective market access

Assume that we are interested in the market access ASEAN countries would get under a PTA with the EU. Usually, preferential access is measured as the difference (expressed in %) between the tariff faced by an MFN exporter (i.e. an exporter that trades with the EU on a MFN basis without any 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 pointed out by Low et al. (2005), for countries like the EU (and US) that extend preferential access to many trading partners, one should measure the preferential access against the effective tariff paid by all other exporters to the EU at that tariff line level rather than against the MFN tariff. Call this measure the adjusted preferential access measure (Low et al. call it the “competition-based preferential access” measure). According to this 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 then gets a negative preferential margin, unless all other countries selling to the EU for that tariff line are also MFN exporters. Of course, this adjustment is useful insofar as there is some competition across partners, which is probably 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 gives the overall adjusted preferential access for a country.

But negotiators also want to know if the change in effective market access is for products that count, i.e. if it reflects a small or large “value” for these preferences. They want to know if the resulting change in market access affects HS-10 products with negligible market share (nothing can be surmised about developments at the extensive margin from an impact analysis based on current market shares). Or they might want to know if products that are candidates for exemption from preferences during the negotiation count a lot. We propose a “new” Lorenz-like representation of the distribution of preferential access across products (Carrère et al. forthcoming). We take the top 100 products ranked by decreasing shares in total 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 that the cumulative sum of adjusted market access across the top 100 products sums to 1 (since the top 100 products do not add to all exports, the horizontal axis does not add up to 100% so the resulting curve is not exactly a Lorenz curve).1 This Lorenz-like representation is convenient. Just like 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 total value of exports.