Preferential Trading Arrangements: A survey of the theory and current issues.
This paper reviews the theory of economic integration pioneered by Jacob Viner and examines the resource allocation and welfare effects of preferential tariff reductions. The dynamic gains from integration are examined in turn, including the achievement of economies of scale and improved technical, allocative and price efficiency resulting from intensified competition. The paper discusses the causes and consequences of the recent trend toward preferential trading arrangements and the reasons why policy markets view them as superior to nonpreferential protection. Conditions for optimal partners in preferential arrangements are derived, and the optimality of three actual or prospective integration arrangements is discussed in light of these conditions: The U.S-Canada free trade agreement, the EC internal market program, and prospective integration initiatives in Africa. The papeer concludes with a discussion of the implications of the trend toward preferential trading arrangements for the multilateral trading system and the prospects for liberalization in the Uruguay Round.