Question

Discuss 5 conditions under which preferential trading arrangements will most likely lead to trade creation and increased welfare of member nations.

Answer 1

Preferential Trade Arrangements is regarded as the loosest from of economic integration. It provides lower trade barriers to participating nations than to non- member nations. In PTA, tariff reductions will be offered to a set of trade partner countries in some product categories. There will be reduction in tariff, not complete elimination. A most suitable example for this type of economic integration is British Commonwealth Preference Scheme, which is established in 1932, by U.K with members and some of the former members of the British Empire Conditions under which PTAs will most likely lead to trade creation and increased welfare of member nations are as follows Higher pre0agreement trade barriers. In this case, there is a greater probability that, formation of PTA will create trade and will also result in increased welfare among member nations Greater number of participant countries. In this situation, there is greater probability that low-cost and efficient producers fall within the agreement. When member nations are competitive in nature, agreement may result in specialization in production and trade creation. PTAs will be more beneficial when member nations are geographically closer. This will cause a lesser transportation cost and thus will increase welfare Higher pre-agreement trade and good economic relationships among potential members. This will enhance the opportunities of trade creations and may result in significant welfare gains -