When it comes to policymaking, preferential trade agreements are classified into traditional and advanced, such that the former covers few policy areas and focuses on tariff reduction, while the number of policy areas covered by advanced PTAs has increased significantly in the past two decades.
Until the late 1990s, when the number of such agreements began to rise, most new agreements covered fewer than 10 policy areas. Since the beginning of the 21st century, the new agreements covered between 10 and 20 policy areas while PTAs struck between the US and the European Union cover more than 52 policy areas.
In the general classification of the new generation of trade agreements, those with 10 and 20 areas envision regulatory issues related to trade, such as subsidies or technical barriers in the way of trade. When the number of policy areas in the agreement exceeds 20, they often include fields that are not directly related to business and cover issues such as labor, scientific and work migrations, and the environment.
Amin Maleki and Maryam Khalili-Asl, members of the Institute for Trade Studies and Research, prefaced their write-up for the Persian daily Etemad with this note. A translation of the text follows:
The inclusion of new areas in advanced PTAs is not accidental. Today, we know that the key to solve the riddle of developing trade of “components and parts of manufacturing industry”, as one of the most prosperous areas of global trade with a growth of more than 4.5 times compared to other areas, is improving global value chains.
The improvement of global value chains per se comes from the development of bilateral and multilateral preferential trade agreements horizontally (among different countries) and vertically (including broader items and more policy areas that are beyond tariff policies and include areas such as investment, competition, technology, capital movement and intellectual property rights). In fact, it was necessary for countries to reduce trade barriers and increase the coordination of trade and investment policies, laws and standards to put up a better performance and move from the first links of the chain to the middle and upper links.
Paul Krugman, an American economist, says the production process is divided into several stages in different countries; added value is being created at each stage. Richard Baldwin, a professor of international economics, sees it as a part of the globalization process, consisting of two phases: slicing up of the value chain at the international level and cross-border spillovers.
Advanced preferential trade agreements have enabled governments to internalize the positive side effects of global trade in technology, skills and expertise, solve coordination problems, connect domestic producers to global and regional production processes and integrate into production networks and facilitate global value chains. They shift the distribution of imports to the right, indicating that countries with advanced agreements benefit more from the division of labor in global trade.
Countries sign advanced agreement when global value chains increase because in addition to the removal of barriers between direct trading partners, barriers between third countries will be cleared as well.
Iran has signed 10 preferential trade agreements since the Islamic Revolution of 1979, of which the agreement with Syria is a free trade agreement while those signed with Uzbekistan, Pakistan, Tunisia, Cuba, Kyrgyzstan, Bosnia and Herzegovina, Belarus, Turkey and Afghanistan are preferential trade agreements.
Relationship Between Agreements & Global Chain
Studies show that there is a strong positive correlation between preferential trade agreements and participation in the global value chain.
Advanced preferential trade agreements cement the integration of global value chains; the revocation of PTAs hurts global value chains. This effect is greater for industries with higher added value. Therefore, such agreements allow countries to integrate in industries with a higher level of added value such as service industries with research and development activities or retail services. The conclusion of advanced agreements has a significant positive impact on global value chain trade. Adding a condition to PTAs would increase bilateral trade in parts and components by 1.5% and added value of reexports increases by 0.4%. In other words, such preferential trade agreements double the trade in parts and components, and increase the reexport added value by 22%.
Iran’s PTAs are all traditional agreements and only include the bilateral tariff reduction. Their structures are completely traditional and are in the form of tariff reduction. This structure has two main problems. First, with the reduction of the country’s tariff barriers, the power of getting concessions reduces to a great extent, and second, the coverage of concessions received has low compliance with the main export areas of the country. In other words, in the presence of higher export capacity, concessions were not gained. Both of these important challenges make it necessary for policymakers to reach modern agreements in the future.
In the current Iranian year (ending March 20), the Iranian tariff wall was lowered significantly given the increase in the base rate of customs duties from 42,000 rials to the rate set in the Integrated Forex Deal System, locally known as Nima, to prevent import-triggered inflation. The tariff reduced for 1,130 sections by nearly 41%, while it declined by 25.5% for all imports. The outcome of traditional preferential trade agreement with their only tool being the reduction in tariff is the decline in bargaining power and the possibility of gaining concessions in the agreement, which reduces the efficiency of the agreement in using the trade capacities of the opposite party.
Today, it is vital that the institutions in charge of reaching preferential trade agreements, including Iran’s Vice Presidency for Legal Affairs, Trade Promotion Organization and the related ministries to distance themselves from the traditional structure in new cases. The first step would be to target “medium depth” policy areas that include tax breaks, research and development, education, skills, technology and innovation.
In closing, trade agreements have currently become the main platform of economic cooperation through the channel of trade development. The point is that advanced preferential trade agreements play a more significant role in developing countries because trade in these countries faces more obstacles and internal institutions are weaker than those in developed economies.
Preferential trade agreements are one of the main ways to attract investment and enter global value chains in knowledge-based industries such as electronics, automobiles and pharmaceuticals. Limiting the agreements to one area, such as tariff reduction (the current situation), is a form of sanctioning oneself by decision makers who are not aware of other capacities.
