Read the article and answer the question based on what you read. Please DO NOT PLAGIARISM.

6. In what cases PTAs are more successful in improving the welfare of a nation?

Article: If formation of PTAs were a stepping-stone on the way to further multilateral liberalization, even a PTA which resulted in short-term welfare losses for its members and the rest of the world might provide dynamic gains.

Analysis often starts by assuming that the average level of external tariffs is the same after the formation of the union as it was before. This assumption can be justified by the requirement of the WTO (and formerly the requirement of the GATT) that when PTAs are formed, external trade barriers should be on the whole no higher than before the agreement. But even if that requirement were not present, it is analytically useful to separate the issue of preferential alteration of trade barriers from whether those barriers are growing or shrinking. The usual starting point remains the trade-diversion and trade-creation categories first pointed out by Viner (1950). By reducing barriers to trade within the countries of the preferential trade agreement, such agreements can create new opportunities for gains from trade.8 However, not all increases in trade flows within a preferential trading agreement should be counted as a gain from the agreement. If the increase in trade within the agreement comes at the expense of trade formerly with third countries now outside the agreement, then the outside countries suffer, unless the countries comprising the newly formed PTA were sufficiently small in the international economy so as not to affect world prices of their traded commodities regardless of their behavior. Moreover, the welfare effects for the countries within the preferential agreement are ambiguous. When countries within the agreement end up buying from higher cost sources within the agreement, solely because of their tariff advantage over the lower cost sources outside the agreement, then consumers benefit. The reduced tariff means that the price they pay is lower, but the national treasury suffers because it has lost the tariffs that would have been charged and instead pays the higher cost of the imports. If gains to consumers outweigh the added amount paid to producers in the (high cost) partner country, the result can be a net welfare gain for the country; otherwise, the result can be a net welfare loss for the country within the preferential trading agreement. The degree of competition confronting individual producers may also be affected by integration, which may create gains from a procompetitive push for greater efficiency and innovation. Efforts to translate these arguments into firm rules about when PTAs are more or less likely to lead to welfare improvement have been only partially successful. Even for a given trade arrangement, such as a 100 percent reduction in tariffs among members, the effects will vary depending on the levels of tariffs prevailing prior to the preferential trading agreement, as well as the pattern of trade among members and the rest of the world: the same set of external tariffs, when reduced in different PTAs, could result in very different welfare effects depending on economic structures and patterns of trade among members and between members.A related question arises with respect to the formation of geographically contiguous trading groups. Early in the discussion regarding CUSFTA and NAFTA, Paul Krugman (1991b) and Larry Summers (1991) independently suggested that the welfare effects of a preferential trading agreement among regional groupings were likely to be positive because neighbors were "natural" trading partners. As a general statement, this assertion seems implausible. Neighbors by definition have closer proximity, but their factor endowments and production structures may be quite similar, as in the case of the United States and Canada, or quite different, as in the case of the United States and Mexico. When neighbors can be similar, it is hard to conclude that trade between neighbors will necessarily be "natural" in some way. An extreme case would be a PTA between two labor-abundant developing countries that had both provided heavy protection for their (same) capital-intensive import-competing industries, while exporting the same commodity bundle of raw materials, so that when they agree to a PTA, all the increment in trade was in goods previously imported from developed countries. Finally, concerns have been raised that a sequence of free trade agreements, especially when they overlap between different countries, may induce repeated relocation of footloose industries, with subsequent dislocation of economic activity and wasted sunk costs. There were newspaper reports of plants migrating from the Caribbean (where tariff-free entry into the United States had been granted under the Caribbean Basin Initiative) to Mexico when NAFTA came into force.