Trade Agreements

Trade agreements are when two or more nations agree on the terms of trade between them. They
determine the tariffs and duties that countries impose on imports and exports. All trade
agreements affect international trade.

Types of Trade Agreements

There are three types of trade agreements.

1. Unilateral trade agreement occurs when a country imposes trade restrictions and no
other country reciprocates.

A country can also unilaterally loosen trade restrictions, but that rarely happens. It would
put the country at a competitive disadvantage. The United States and other developed
countries only do this as a type of foreign aid. They want to help emerging markets
strengthen strategic industries that are too small to be a threat. It helps the emerging
market's economy grow, creating new markets for U.S. exporters.

2. Bilateral trade agreements are between two countries. Both countries agree to loosen
trade restrictions to expand business opportunities between them. They lower tariffs and
confer preferred trade status with each other. The sticking point usually centers around
key protected or subsidized domestic industries. For most countries, these are in the
automotive, oil or food production industries. The United States has 14 bilateral
agreements. The Obama administration was negotiating the world's largest bilateral
agreement.
3. Multilateral trade agreements are the most difficult to negotiate. These are among three
countries or more. The greater the number of participants, the more difficult the
negotiations are. They are also more complex than bilateral agreements. Each country has
its own needs and requests.

Once negotiated, multilateral agreements are very powerful. They cover a larger
geographic area. That confers a greater competitive advantage on the signatories. All
countries also give each other most favored nation status. They agree to treat each other
equally.

The largest multilateral agreement is the North American Free Trade Agreement. It is
between the United States, Canada and Mexico. Their combined economic output is $20
trillion. Over NAFTA's first two decades, regional trade increased from roughly $290
billion in 1993 to more than $1.1 trillion in 2016. But it also cost between 500,000 to
750,000 U.S. jobs. Most were in the manufacturing industry in California, New York,
Michigan and Texas.
Advantages

1. Increased Production The purpose of trade is to provide access to a greater variety of

goods and services. According to the Heritage Foundation, free trade “fosters
competition, spurring companies to innovate and develop better products…keeping prices
low and quality high.” Free trade allows regions and companies to focus on the goods or
services that they do best. International trade increases a company’s market share. This
causes lower cost and increased productivity, leading to higher rates of production.
2. Economic Development Free trade rewards risk-taking through increased sales and
market share. When larger countries like the United States take advantage of free trade,
their economies grow. This growth overflows into smaller countries that are
economically unstable or mired in poverty but are open to trade. The Heritage Foundation
reports, “The advantage for poor countries in being able to trade for capital is that the
payoff is more immediate in their private sectors.”
3. International Cooperation Free trade forces companies to support the rule of law. The
World Trade Organization requires members to honor all agreements and abide by all
WTO rulings. Countries that do not enforce contracts lose business and investors move
their money elsewhere. If a country wants to retain the benefits of free trade, then they
must obey the rules. The Heritage Foundation reports that free trade also “transmits ideas
and values,” which it says leads to stronger and more stable governments in smaller
countries.
4. Resource Allocation Free trade improves the allocation of global resources. If countries
or people can trade for the items they need, they can focus on making the ones they do
best. Imports tend to suppress inflation, since each product or service comes from the best
supply source. According to the CATO institute, “we benefit from the lower prices that
imports give us, and we can use the money we save to buy things made at home.”
5. Business Incentives Trade agreements open markets and offer business incentives and
protections. They include commitments to protect intellectual property rights and labor
rights and open regions to competition. They also govern environmental standards and
improve customs facilitation. According to Alan Blinder, professor of economics at
Princeton University, “exporters tend to be more technologically sophisticated and to
create better jobs.” Trade and finance are mutually supportive. Finally, global investment
allows for greater diversification and risk sharing.
Disadvantage

1. Massive Job Losses As trade barriers are eliminated, certain goods may be cheaper to
obtain overseas than to make domestically. Because of that, job losses are likely as less
competitive industries wither away. While most economists would argue that these
workers can be allocated to more efficient industries in which the United States has a
comparative advantage and that this benefits the country as a whole, that's not always
likely or practical. Furthermore, those adjustments are easier to make in the long term
than in the short term. It isn't always easy for someone who's worked in a factory all her
life to start a new career as an information technology specialist, for example.
2. Predatory Pricing If trade takes place with no barriers at all, even an efficient company
may be burned by an overseas rival with a predatory pricing strategy. A foreign company
with deep pockets, for example, might dump its products into the U.S. market to force
everyone else out of the market. Once that occurs, the company will enjoy a monopoly
position and be able to price accordingly. Some free trade agreements allow for
retaliatory tariffs if such actions can be proved.
3. Increased Vulnerability From a strategic perspective, free trade can leave a country
vulnerable if it causes the demise of critical industries. If a country grows dependent on
another for critical products or services, it can be subject to political pressure and denied
access to the goods if the agreement is suddenly severed. Moreover, a country with a free
trade agreement or a preferential trade agreement with a neighboring country may fight
against an expansion of that agreement to other nations if doing so will hurt its own
position. One example of this occurred when Russia threatened to break its trade
agreement with Ukraine and place a tariff on Ukrainian goods when the latter sought
closer ties with the European Union.
4. New Industries Can't Develop Developing industries often benefit from domestic
strategies that influence production, such as protective tariffs or tax breaks. As these
protections vanish, new industries may find it difficult to establish themselves. It would
be hard for an entrepreneur with the goal of succeeding in an industry where cost is a
high barrier to entry, for example, to consider launching her product in a particular
country if foreign competitors already enjoy economies of scale and easy access to
domestic markets.
5. Tax Troubles Free trade can hinder the ability of a nation to collect taxes from domestic
corporations. A country that allows free trade and the free flow of capital outside of its
borders and has a high tax rate may see portable industries migrate elsewhere. While
some jobs are hard to move – a farm, for example, can't easily be relocated overseas –
businesses may find it easier to shift headquarters elsewhere and change accounting
methods to record profits in more tax-advantageous areas.
The Role of the WTO in Trade Agreements

Once agreements move beyond the regional level, they usually need help. The World Trade
Organization steps in at that point. It is an international body that helps negotiate global trade
agreements. Once in place, the WTO enforces the agreements and responds to complaints.

The WTO currently enforces the General Agreement on Tariffs and Trade. The world almost
received greater free trade from the next round, known as the Doha Round Trade Agreement. If
successful, Doha would have reduced tariffs across the board for all WTO members.

Unfortunately, the two most powerful economies refused to budge on a key sticking point. Both
the United States and the EU resisted lowering farm subsidies. These subsidies made their food
export prices lower than those in many emerging market countries. Low food prices would have
put many local farmers out of business. When that happens, they must look for jobs in congested
urban areas. The U.S. and EU refusals to cut subsidies doomed the Doha round. It is a thorn in
the side of all future world multilateral trade agreements.

The failure of Doha allowed China to gain a global trade foothold. It has signed bilateral trade
agreements with dozens of countries in Africa, Asia, and Latin America. Chinese companies
receive rights to develop the country's oil and other commodities. In return, China provides loans
and technical or business support,
AGREEMENT ON SOUTH ASIAN FREE TRADE AREA

The South Asian Association for Regional Cooperation (SAARC) was established on December
8, [Link] SAARC Charter was adopted by Governments of Bangladesh, Bhutan,India,
Maldives, Nepal, Pakistan and Sri Lanka with a aim to accelerate the process of economic and
social development in Member [Link] Agreement on South Asian Free Trade Area (SAFTA)
was signed at Islamabad during the Twelfth SAARC Summit on 6 January 2004. The
ratification of SAFTA by all the member countries is major achievement of SAARC mandate.Â
SAARC Secretariat on 22 March 2006 has issued a Notification formally announcing the entry
into force of SAFTA Agreement with effect from 1st January 2006. The entry into force of the
Agreement thus launches the South Asian Free Trade Area which would be completed by 1st
January 2016.

The first round of customs duty reduction would take place, as agreed by the Member States, in
July/August2006.

Under Article 7 of the Agreement tariff reduction Modality is defined as Trade Liberalisation
Programme (TLP) – in the first phase, India, Pakistan and Sri Lanka will bring down their
customs tariff to 20% by 1st January 2008. As far as the LDC Member States i.e. Bangladesh,
Bhutan, Maldives and Nepal are concerned, they would reduce their customs tariff to 30% . First
tariff reduction would be effected on 1st July 2006 by all Member States with the exception of
Nepal which would do so on 1st August 2006.

Article-7 of the Agreement contains modalities of tariff reduction under TLP, which are as
follows:-

 No tariff reduction on items in theSensitive List.

 Non-LDCs (Pakistan, India, Sri Lanka) shall reduce tariff to 0-5% for LDCs
(Bangladesh, Bhutan,
 Nepal, Maldives) within three years (2009)
 Tariff Reduction by Non-LDCs for Non-LDCs Reduction in two phases:
 Phase-I (2006-2008)Existing tariff rates above 20% to be reduced to 20% within two
years Tariff below 20% to be reduced on margin of preference basis of 10% per year.
 Phase-II (2008-2013) Tariff to be reduced to 0-5% within 5 years.
Andean Community

The Andean Community (Spanish: Comunidad Andina, CAN) is a free trade area with the
objective of creating a customs union comprising the South American countries of Bolivia,
Colombia, Ecuador, and Peru. The trade bloc was called the Andean Pact until 1996 and came
into existence when the Cartagena Agreement was signed in 1969. Its headquarters are in Lima,
Peru.

The Andean Community has 98 million inhabitants living in an area of 4,700,000 square
kilometers, whose Gross Domestic Product amounted to US$745.3 billion in 2005, including
Venezuela, who was a member at that time. Its estimated GDP PPP for 2011 amounts to
US$902.86 billion, excluding Venezuela.

The original Andean Pact was founded in 1969 by Bolivia, Chile, Colombia, Ecuador, and Peru.
In 1973 the pact gained its sixth member, Venezuela. In 1976 however, its membership was
again reduced to five when Chile withdrew. Venezuela announced its withdrawal in 2006,
reducing the Andean Community to four member states.

Recently, with the new cooperation agreement with Mercosur, the Andean Community gained
four new associate members: Argentina, Brazil, Paraguay, and Uruguay. These four Mercosur
members were granted associate membership by the Andean Council of Foreign Ministers
meeting in an enlarged session with the Commission (of the Andean Community) on July 7,
2005. This moves reciprocates the actions of Mercosur which granted associate membership to
all the Andean Community nations by virtue of the Economic Complementarity Agreements
(Free Trade agreements) signed between the CAN and individual Mercosur members.
Asia-Pacific Economic Cooperation

Asia-Pacific Economic Cooperation (APEC) is an inter-governmental forum for 21 Pacific Rim

member economies that promotes free trade throughout the Asia-Pacific region. Inspired from
the success of Association of Southeast Asian Nations (ASEAN)’s series of post-ministerial
conferences launched in the mid-1980s, the APEC was established in 1989 in response to the
growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in
other parts of the world; and to establish new markets for agricultural products and raw materials
beyond [Link] in Singapore, the APEC is recognised as one of the oldest forums
and highest-level multilateral blocs in the Asia-Pacific region, and exerts a significant global
influence.

An annual APEC Economic Leaders' Meeting is attended by the heads of government of all
APEC members except Republic of China (which is represented by a ministerial-level official
under the name Chinese Taipei as economic leader).The location of the meeting rotates annually
among the member economies, and a famous tradition, followed for most (but not all) summits,
involves the attending leaders dressing in a national costume of the host country. APEC has three
official observers: the Association of Southeast Asian Nations Secretariat, the Pacific Economic
Cooperation Council and the Pacific Islands Forum [Link]'s Host Economy of the
Year is considered to be invited in the first place for geographical representation to attend G20
meetings following G20 guidelines.

The APEC was initially inspired when ASEAN’s series of post-ministerial conferences, launched
in the mid-1980s, had demonstrated the feasibility and value of regular conferences among
ministerial-level representatives of both developed and developing economies. By 1989, the post
ministerial conferences had expanded to embrace 12 members (the then six members of ASEAN
and its six dialogue partners). The developments led Australian Prime Minister Bob Hawke to
believe the necessity of region-wide co-operation on economic matters. In January 1989, Bob
Hawke called for more effective economic co-operation across the Pacific Rim region. This led
to the first meeting of APEC in the Australian capital of Canberra in November, chaired by
Australian Foreign Affairs Minister Gareth Evans. Attended by ministers from twelve countries,
the meeting concluded with commitments for future annual meetings in Singapore and South
Korea. Ten months later, 12 Asia-Pacific economies met in Canberra, Australia, to establish
APEC. The APEC Secretariat, based in Singapore, was established to co-ordinate the activities
of the organisation.
Regional Economic Integration

Regional economic integration has enabled countries to focus on issues that are relevant to their
stage of development as well as encourage trade between neighbors.

There are four main types of regional economic integration.

1. Free trade area. This is the most basic form of economic cooperation. Member countries
remove all barriers to trade between themselves but are free to independently determine
trade policies with nonmember nations. An example is the North American Free Trade
Agreement (NAFTA).
2. Customs union. This type provides for economic cooperation as in a free-trade zone.
Barriers to trade are removed between member countries. The primary difference from
the free trade area is that members agree to treat trade with nonmember countries in a
similar manner. The Gulf Cooperation Council (GCC)Cooperation Council for the Arab
States of the Gulf website, accessed April 30, 2011, [Link]
[Link]/eng/[Link]. is an example.
3. Common market. This type allows for the creation of economically integrated markets
between member countries. Trade barriers are removed, as are any restrictions on the
movement of labor and capital between member countries. Like customs unions, there is
a common trade policy for trade with nonmember nations. The primary advantage to
workers is that they no longer need a visa or work permit to work in another member
country of a common market. An example is the Common Market for Eastern and
Southern Africa (COMESA).Common Market for Eastern and Southern Africa website,
accessed April 30, 2011, [Link]
4. Economic union. This type is created when countries enter into an economic agreement
to remove barriers to trade and adopt common economic policies. An example is the
European Union (EU).Europa, the Official Website of the European Union, accessed
April 30, 2011, [Link]

In the past decade, there has been an increase in these trading blocs with more than one hundred
agreements in place and more in discussion. A trade bloc is basically a free-trade zone, or near-
free-trade zone, formed by one or more tax, tariff, and trade agreements between two or more
countries. Some trading blocs have resulted in agreements that have been more substantive than
others in creating economic cooperation. Of course, there are pros and cons for creating regional
agreements.
Pros

The pros of creating regional agreements include the following:

 Trade creation. These agreements create more opportunities for countries to trade with
one another by removing the barriers to trade and investment. Due to a reduction or
removal of tariffs, cooperation results in cheaper prices for consumers in the bloc
countries. Studies indicate that regional economic integration significantly contributes to
the relatively high growth rates in the less-developed countries.
 Employment opportunities. By removing restrictions on labor movement, economic
integration can help expand job opportunities.
 Consensus and cooperation. Member nations may find it easier to agree with smaller
numbers of countries. Regional understanding and similarities may also facilitate closer
political cooperation.

Cons

The cons involved in creating regional agreements include the following:

 Trade diversion. The flip side to trade creation is trade diversion. Member countries
may trade more with each other than with nonmember nations. This may mean increased
trade with a less efficient or more expensive producer because it is in a member country.
In this sense, weaker companies can be protected inadvertently with the bloc agreement
acting as a trade barrier. In essence, regional agreements have formed new trade barriers
with countries outside of the trading bloc.
 Employment shifts and reductions. Countries may move production to cheaper labor
markets in member countries. Similarly, workers may move to gain access to better jobs
and wages. Sudden shifts in employment can tax the resources of member countries.
 Loss of national sovereignty. With each new round of discussions and agreements
within a regional bloc, nations may find that they have to give up more of their political
and economic rights. In the opening case study, you learned how the economic crisis in
Greece is threatening not only the EU in general but also the rights of Greece and other
member nations to determine their own domestic economic policies.