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4. Describe 4 categories of preferential trading agreements.

Artiecle : ArticleTrade economists have grouped preferential trading agreements into several categories: free trade agreements, customs unions, common markets, and economic union.A free trade agreement (FTA) describes a preferential arrangementin which tariffs are lowered relative to other members but maintained against theoutside world. A customs union is a preferential arrangement in which all tariffsamong the members are eliminated, while external tariffs are adjusted to a common level. By GATT/WTO rules, the common external tariff must on average be no higher than the pre-union tariff, and "compensation" is negotiated by nonmember countries when accession of a member "harms" the nonmember. The United States, for example, received compensation when Spain joined the European Union because, inter alia, the United States was disadvantaged with respect to wheat exports to Spain. A common market is a customs union which, in addition,permits free movement of factors of production, like labor and capital, among the member countries. Finally, an economic union is a common market which additionally has common economic laws covering issues such as standards across members.5 As Viner (1950) presciently pointed out, the more extensive the coverage and the more complete the reduction in trade barriers, the more political pressures there are likely to be to achieve a "level playing field" with respect to taxtreatment, government policies (as, for example, with respect to environmental protection), and other issues.