Article 3 - The Evolution of Deep Trade Agreements

The most remarkable evolution in the field of international investment law is undoubtedly the massive proliferation of Bilateral Investment Treaties (BITs) and Preferential Trade Agreements (PTAs), either in the form of Free Trade Agreements (FTAs) of Custom Unions (CUs). PTAs increasingly, as will be pointed out, contain provisions on the liberalization and/or protection of foreign investment, and may then be referred to as Preferential Trade and Investment Agreements (PTIAs). PTAs differ substantially in terms of the extent to which they cover investment. Agreements in the area of trade and investment either contain explicit provisions on the protection, and possibly the liberalization of foreign investment, or are aimed essentially at the regulation of trade in services and/or goods, in which case the provisions on investment are usually less extensive than in the former or even completely absent. BITs and modern PTAs which include investment protection (and liberalization) provisions, which may then be categorized as PTIAs, follow the first approach, and thus contain extensive provisions on both the liberalization and the protection of foreign investment (PTIAs), while the majority of the traditional PTAs follow the second approach, containing only a framework or framework provisions committing to further liberalization, protection and promotion of investment. This contribution aims to analyze the interrelationship between the network of bilateral investment treaties and PTIAs with respect to the protection of foreign investment. In doing so, this contribution will examine the differences in the content and rationale of PTIAs as compared to BITs, and in particular how substantive investment protection and investment dispute settlement are dealt with in PTIAs and BITs. Finally, this contribution will address whether conflicts between PTIAs and BITs are possible, and if so, how these conflicts may be addressed.

The EU is a major participant in the world sugar market, being one of the top producers, importers and exporters in the world. The reform of the EU sugar regime will affect not only the EU member states and candidates, but also countries that are associated with the EU through the preferential, regional and multilateral trade agreements. For several decades, the EU has supported and protected the EU sugar sector. Sugar from developing countries will not be able to enter the EU sugar market without preferential trade agreements. In the EU sugar regime, the unique features of the trade concessions are that sugar under preferential import quotas can enter the EU market duty-free and the price paid for sugar equals to the high EU price for sugar. This paper attempts to analyse the complex hierarchy of trade arrangements between the EU and specific groups of countries. It compares the different trade agreements – including those achieved under the WTO – and explores the impact of these upon both the EU and the other countries involved.

Preferential trade agreements are growing in number and deepening in content by incorporating disciplines that go beyond market access. They increasingly encompass non-trade-related disciplines as diverse as intellectual property rights, environment laws, or labor market regulations. Moreover, because investment is complementary to trade, preferential trade agreements provide relevant institutional frameworks to partner countries that wish to regulate their foreign investments. This paper studies the impact of deep trade agreements on foreign direct investment and examines three sub-questions. First, is the impact of trade agreements on foreign direct investment heterogeneous across types of business activity Second, is this impact heterogeneous across disciplines covered in the agreements Third, does the level of development of home and host countries matter for this impact The analysis exploits the World Bank’s data set on the content of preferential trade agreement and data on announcements of bilateral greenfield investment at the activity level. The findings show that deep trade agreements matter for investment: every additional discipline in a preferential trade agreement increases foreign direct investment by 1.4 percent, on average. Deep agreements do not impact foreign direct investment in natural resources and extractive activities and have heterogeneous effects across manufacturing- and services-related activities. The results also reveal that disciplines that go beyond the mandate the World Trade Organization matter more for foreign direct investment. Disciplines related to investment liberalization and protection, intellectual property rights, or migration increase foreign direct investment, whereas disciplines on labor market regulations reduce investment. The results are mostly driven by investment between developed and developing countries.

In this chapter, we examine three significant areas in which public international law interacts with Preferential Trade Agreements (PTAs): first, how various forms of public international law affect the interpretation of PTA provisions; second, the related issue of how PTAs contribute to customary international law and the extent to which customary international law applies to PTAs; and finally, how to resolve conflicts between PTAs and other treaties. This final section examines both substantive conflicts and problems arising from overlapping jurisdictions of PTA tribunals and other international tribunals. This survey illustrates the complex web of links between PTAs and public international law and the readiness of PTA tribunals, particularly under the North American Free Trade Agreement (NAFTA), to draw on other sources of international law in interpreting PTA provisions and otherwise determining PTA disputes. At the same time, no clear answers emerge about how to best deal with the likelihood of ever increasing conflicts between PTAs and other treaties.

Although many believe preferential trade agreements (PTAs) are incompatible with the World Trade Organization (WTO), we lack empirical evidence on this topic. In this article, we examine international trade agreements—the source of trade law—and employ two types of text analysis to determine the presence of the WTO in PTAs. Our systematic comparisons of post-Uruguay Round PTAs and relevant WTO agreements reveal a strong, two-part presence of the WTO in PTAs. Nearly all recent PTAs reference the WTO explicitly, often dozens of times across multiple chapters. Likewise, in many of these same PTAs we find that substantial portions of treaty language—sometime the majority of a chapter—is copied verbatim from a WTO agreement. Moreover, multiple regression analyses reveal that larger countries and those most active in preferential agreement making are actually most likely to include a strong WTO presence in their PTAs. Additionally, the presence of the WTO in PTAs has increased over time. Our study contributes novel and robust empirical evidence to suggest that the ties between the WTO and PTAs are more solid than is realized.

This research work evaluates the proposition that trade liberalisation is instrumental in pulling FDI inflows to emerging economies. Using panel random effects model on annual data of 6 emerging countries including Brazil, China, India, Mexico, Russian Federation and Turkey from 1996 to 2014, it is found that liberalisation of trade and investment regime measured by trade agreements significantly affect the multinationals' overseas investment decision. Market size, development level and human capital, considered essential by foreign investors, also have a significant positive effect on incoming FDI. Preferential and regional trade agreements increase the openness of a country's economic and investment borders. They reduce duties, taxes, tariffs as well as the inflexibility in regime policies vis-a-vis foreign firm operations. This usually ensue trade and investment liberalisation and consequentially has a positive impact on FDI inflows to these nations. Among trade agreements only the preferential trade agreement is found to be significantly positive. It is plausible given the fact that except for Mexico all other countries selected are far away from the major FDI source nations

<p>Abstract: International Environmental Agreements suffer from a strong free-riding incentive that generally leads to failure of coalition formation in the economics literature and have been largely unsuccessful in practice. At the same time, preferential trade agreements (PTAs) have increasingly included elements not specifically related to trade, such as domestic policy over the environment, labour, intellectual property, health and investment. One area that has received a great deal of attention is deep agreements is the environment. In this dissertation, we develop three models of asymmetric countries, that include both trade and environmental externalities and study the incentives to form international trade agreements between those asymmetric countries. First, we develop a two-country, two-good model with cross-border negative spillovers and perfect competition in product markets. We compare shallow (trade only) and deep (trade and environment) trade agreements between those two large asymmetric countries, and we show that deep and shallow trade agreements have different outcomes in terms of world and individual countries welfares, trade specialization and environmental damages. Next, we develop two three-country, three-goods models, a “competing importers model” and a “competing exporters model”, and examine equilibrium agreements and environmental outcomes assuming (i) environmental agreements are negotiated separately, (ii) trade agreements are shallow, and (iii) trade agreements are deep. To examine the stability of endogenous deep and shallow trade agreements we set up various three stage games and use coalition-proof Nash equilibria refinement to circumvent the multiplicity of Nash equilibria. Furthermore, in order to examine the differences between shallow and deep trade agreements, we develop extended games where countries can choose between different deep and shallow PTAs and investigate how equilibrium agreements differ based on being deep or shallow. Therefore, in two different models of multiple asymmetric countries, we ask and answer the following questions: (i) how do equilibrium agreements differ when countries choose deep rather than shallow agreements?; (ii) given the choice between deep and shallow trade agreements, would countries prefer to incorporate an environmental clause into their equilibrium trade deal?; and (iii) what are the implications of including non-trade elements in PTAs for the pursuit of global free trade?</p>

<p>Abstract: International Environmental Agreements suffer from a strong free-riding incentive that generally leads to failure of coalition formation in the economics literature and have been largely unsuccessful in practice. At the same time, preferential trade agreements (PTAs) have increasingly included elements not specifically related to trade, such as domestic policy over the environment, labour, intellectual property, health and investment. One area that has received a great deal of attention is deep agreements is the environment. In this dissertation, we develop three models of asymmetric countries, that include both trade and environmental externalities and study the incentives to form international trade agreements between those asymmetric countries. First, we develop a two-country, two-good model with cross-border negative spillovers and perfect competition in product markets. We compare shallow (trade only) and deep (trade and environment) trade agreements between those two large asymmetric countries, and we show that deep and shallow trade agreements have different outcomes in terms of world and individual countries welfares, trade specialization and environmental damages. Next, we develop two three-country, three-goods models, a “competing importers model” and a “competing exporters model”, and examine equilibrium agreements and environmental outcomes assuming (i) environmental agreements are negotiated separately, (ii) trade agreements are shallow, and (iii) trade agreements are deep. To examine the stability of endogenous deep and shallow trade agreements we set up various three stage games and use coalition-proof Nash equilibria refinement to circumvent the multiplicity of Nash equilibria. Furthermore, in order to examine the differences between shallow and deep trade agreements, we develop extended games where countries can choose between different deep and shallow PTAs and investigate how equilibrium agreements differ based on being deep or shallow. Therefore, in two different models of multiple asymmetric countries, we ask and answer the following questions: (i) how do equilibrium agreements differ when countries choose deep rather than shallow agreements?; (ii) given the choice between deep and shallow trade agreements, would countries prefer to incorporate an environmental clause into their equilibrium trade deal?; and (iii) what are the implications of including non-trade elements in PTAs for the pursuit of global free trade?</p>

This paper studies the effect of preferential trade agreements (PTAs) on multilateral trading system using a sequential bargaining game. The study considers two formats of PTAs, i.e., when the PTA tariffs are specified before the formation of PTAs and when PTA members have to negotiate PTA tariffs after the formation of PTAs. The study finds that PTAs with specified tariffs can be building blocks to multilateral liberalization while PTAs without specified tariffs are stumbling blocks. The paper also concludes that PTAs can eliminate bargaining inefficiency called forward manipulation when PTA tariffs are specified before PTA negotiation.

Export diversification is one of the important pillars of the trade policy of developing countries. Pakistan has embarked on a geographical export diversification policy by signing preferential and free trade agreements. The gravity model is used to check whether Pakistan’s policy of preferential trade has a positive impact on its export growth. The estimation results indicate an insignificant relationship between preferential trade and export growth, and therefore implies that the agreement may have international political significance but not the economic. DOI : 10.7176/JESD/10-24-15 Publication date: December 31 st 2019

Investing in Protection by Mark Manger (2009) is an excellent piece of scholarship, as it deftly provides unique macro-level theoretical insights and supports them with illustrative micro-level case analysis. The central question of interest is what explains the recent and rapid proliferation of North-South preferential trade agreements (PTAs)? Manger argues that this pattern is best explained by foreign direct investment (FDI). Developed states form PTAs with developing countries to increase the ability of domestic firms to benefit from FDI, while simultaneously restricting the ability of foreign competitors to use these states as export platforms. Other developed states respond to this ‘offensive’ action by forming their own ‘defensive’ PTAs with the developing state to protect their domestic firm’s sunk-cost investments. This theory represents a significant advancement in our understanding of this process, offering novel predictions for both general proliferation and the specific location of North-South trade agreements. Previous explanations for PTA proliferation argue that gridlock during multilateral trade negotiations (MTNs) at the GATT/WTO have caused states to increasingly turn to bilateral and regional agreements (Mansfield and Reinhardt 2003). Though the failures of MTNs have certainly influenced the decisions of states to form PTAs, these systemic level explanations have limited explanatory power for the proliferation of North-South agreements. First, many of the specific arguments advanced in this literature as to why states form PTAs (e.g. further integration of inter-industry trade, increased bargaining leverage in MTN, etc.) simply do not apply for this subset of cases. Second, such theories offer no predictions for the specific choice of partners in such agreements, simply that PTAs in general are more likely. Manger’s book takes a large step forward toward filling this void in the literature. Rev Int Organ (2010) 5:501–504 DOI 10.1007/s11558-010-9082-5

European Union and ACP-Countries : are preferential trade agreements to be taken for granted ? Exports of developing countries may be differently stimulated. First, devel-oping countries' exports may benefit from gradual cuts in custom-duties negociated under the auspices of the GATT. Second, developing countries' exports may be favoured by preferential trade agreements like those granted by the European Union towards the ACPs. The theoretical issues of the effects of preferential trade agreements rely on the Viner's analysis of trade flows creation and diversion. The Viner's analysis is however limited to the welfare costs and benefits of the donor. Moreover, those kinds of cost-benefit analyses are by definition static. In this article, we propose a theoretical and econometrical analysis of the Yaounde and Lomé conventions effects on the ACPs' manufactured exports. From a theoretical point of view, the exports of tnanufactured goods depend on the income of import buyers, on sectorial capacity and competitiveness indicators. The two latter variables are either unobservable or unavailable on a panel of developing countries. We substitute the sectorial capacity indicator by a domestic income indicator, making further additional econometric assumptions that allow us to estimate a log linear function of the export rates of ACP's. We secondly substitute the sectorial by a global competitiveness indicator : the Real Effective Exchange Rate (REER). The use of the latter is only allowed if we control for labor and human capital endowments. The finally estimated export rate estimated function depends – positively on the income of OECD countries, human capital endowments and – negatively on the REER and the labor force. Preferential trade agreements are taken into account by binary dummies denoting ACP membership. We check separately the effects of the Conventions on the manufactured goods exports of ACPs to the European countries and to the world. Explanatory variables have the predicted effect. ACP-countries do perform better than other developing countries when they export to European countries. But the latter positive effect is more prevalent under the early conventions. Moreover, ACP-countries do not perform significantly better than other developing countries when they export towards European and non-European countries. We notice however that the Yaoundé convention granting reciprocal trade advantages has solely favoured the ACPs' exports. Some pieces of explanation are proposed. Trade agreements may have postponed economic reforms in ACP-countries, that appeared to be necessary in the face of emerging exporting countries in the South-Asia and South America. Trade agreements appear to have allowed for the durability of distorsions. In last ive diagnose more for a trade flows diversion instead of a stimulation that may question the relevance of trade agreements.

The fact that trade, and especially agricultural trade, remains far from free is puzzling, since the superiority of free trade receives overwhelming support among economists (Gawande and Krishna, 2003; Rodrik, 1994). International trade scholars have devoted significant resources to forecasting the impact of trade policy reforms (for a survey of these studies see Congressional Budget Office, 2005), and their findings are relevant inputs for officials negotiating a trade agreement as well as for politicians in charge of ratifying it. The perceived gains and losses attached to different outcomes have been identified as a significant factor shifting the outcome of a trade agreement negotiation (McMillan, 1990). Less well-known are the factors that would impact the result of a negotiation round involving agriculture. While political scientists have devoted significant resources and developed numerous theories to explain the pattern of bargaining outcomes, the number of empirical assessments remains limited. Among the factors to blame for the low number of empirical evaluations is the scarcity of information regarding negotiation strategies and outcomes (Odell, 2002). The lack of research in this area is puzzling, since countries negotiating regionally and multilaterally have many times struggled to satisfactorily conclude negotiations due to a lack of consensus on agriculture. The potential gains that a reduction in agricultural protection worldwide could generate, and the limited knowledge on the ways negotiation outcomes can be affected, are the main motivations for this study. As stated by Hoekman and Anderson (1999) in reference to reaching an agreement on agriculture in the current WTO Doha Round of negotiations, “The potential gains from liberalization are large”, but “Getting there is another matter” (p. 175). This study focuses on U.S. trade negotiations with Western Hemisphere countries, with particular attention to sensitive agricultural products, about which the most heated bargaining occurs. Arguably as a consequence of the lack of progress at the multilateral arena, the U.S. has embarked on bilateral trade negotiations with several countries, but with a particular emphasis with Western Hemisphere partners. Thus, over the last 10 years it has ratified trade agreements with Chile, Peru, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua (the last six as part of the DR-CAFTA Agreement), and signed but not yet ratified agreements with Colombia and Panama. Following Trefler (1993), a simultaneous equation model is developed to estimate the correlation between the change in market access (ΔMA) as a result of free trade negotiations, and a number of political economy (PA) and negotiation context (NC) variables suggested by the endogenous tariff theory to be associated with the level of protection granted to a sector. The change in market access in the context of this study is represented by changes in import tariffs and tariff-rate-quotas negotiated as part of the preferential trade agreements (PTAs). While we acknowledge the increasing importance of non-tariff barriers (other than TRQs) as a way to afford protection from imports, PTAs usually do not include specific outcomes on NTBs, and therefore gauging the change in NTBs resulting from a PTA is not possible. Negotiation process variables (NP) primarily bargaining strategies, are seen by many scholars as important intervening variables to explain the pattern of market access achieved in bargaining. By focusing on sensitive agricultural products, this study controls for (NP) variables, since negotiations on sensitive agricultural products between the U.S. and its developing Western Hemisphere partners are assumed to have entailed the use of strong bargaining strategies on both sides. Political economy variables subject to be used are economic size, concentration ratios, import penetration ratios and their change, capital/labor ratios, and sectoral to total labor ratios, all argued to be positively related to the level of protection granted to a sector. Among feasible negotiation context variables are relative power of nations, foreign direct investment in the partner’s economy, unemployment rate, and tax structure (dependence on import policies as a source of revenues). The level of imports (IMP) is modeled to be a function of comparative advantage variables (CA) and the change in market access ΔMA. ΔMA = f(PA, NC NP) IMP = f(CA, ΔMA) The findings from the quantitative assessment are to be complemented with findings from selected case studies, thus expanding our understanding of the factors affecting the outcome of the bargaining activity over sensitive agricultural products in the context of preferential trade agreements.

Chapter 7 A Free Trade Area and its Neighbor's Welfare: A Revealed Preference Approach

Trade and biodiversity conservation in Africa: Complementary roles of environmental provisions in preferential trade agreements and property rights