# **3.2 Estimating the share of world trade covered by PTAs**

As argued earlier, the effects of PTAs on trade in different tariff lines may not be uniform. Specifically, due to the growing importance of zero MFN duty lines in the tariff schedules of many countries, the significant costs of meeting ROO requirements, the presence of exclusions and sensitive lists, and other factors, a large share of trade between PTA partners may take place on a MFN rather than preferential basis. This reasoning highlights a bias in most estimates of preferential trade as a share of world total (see, for example, WTO, 2003; Kommerskollegium, 2003), which tend to overstate the amount of preferential trade by considering all merchandise trade flows between PTA partners as preferential. In contrast, this paper will use a highly detailed world trade matrix to focus specifically on trade flows where preferences are likely to matter.

We begin by establishing some terminology: in the following discussion, the terms “covered” or “preferential” trade will refer to only those trade flows that take place under meaningful reciprocal preferences,<sup>23</sup> not to the total trade between the members of a PTA. In this section, we make no assumptions about the magnitude of trade flows that would have existed between PTA partners in the absence of preferences. In other words, rather than attempting to quantify PTA trade creation, the aim here is to carefully apply the above definition of preferential trade in order to arrive at a better understanding of the quantitative significance (magnitude) of preferential flows in world trade.

For this exercise, we collect bilateral merchandise trade and tariff data at the national tariff line level (6 or 8 digit Harmonized System codes) for a panel of 150 countries over the 2000-02 period. The import data are obtained from UN COMTRADE, and the tariff data from UN TRAINS databases. The two sources are merged together into a single dataset, and countries are included only if they report both trade and tariff information for at least one of the years. Due to gaps

> 23Therefore, trade that takes place under unilateral preference schemes such as General System of Preferences (GSP), USA’s African Growth and Opportunity Act (AGOA) or EU’s Everything but Arms (EBA) will not be considered preferential. There are several reasons for this choice of definition. First, unilateral preferences lie outside the WTO definition of PTAs because preferences are not mutual. Second, these schemes are of limited duration and require periodic renewal, which is not guaranteed. Third, because preferences granted under these scheme are essentially one-sided “concessions,” they tend to exclude important export products, leading to concentration of production in low value-added activities and slow development (see Panagariya, 2002; Lamy, 2002). Reflecting these criticisms, the EU is now moving away from unilateral preferences to a system of reciprocal liberalization under the Economic Partnership Agreements (EPAs). Admitedly, none of the above arguments qualify as a sufficient condition for exclusion of unilateral preferences from the definition of “preferential” trade. Ultimately, the choice to focus on reciprocal preferential agreements is made largely for convenience and to ease data gathering requirements.

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