Competitive Liberalization or Competitive Diversion? The Relationship between Preferential Trade Agreements and the Multilateral Trading System

This article discusses whether the current proliferation of preferential trade agreements-the so-called "competitive liberalization"-encourages evolution toward multilateral free trade. It argues that countries pursuing preferential trade initiatives are in pursuit of the economic rents resulting from the trade diversion associated with trade preference (or discrimination). By lowering the margin of preference, multilateral trade liberalization reduces those rents and is likely to be resisted by members of trade-diverting preferential blocs. Future preferential agreements should be designed to be less trade diverting in order to be more compatible with the objective of global free trade.