Impact and Implications of International Trade Agreements

Published Date: 19 Mar 2018

It also requires from its signatories to extend most-favoured-nation (MFN) status to other trading partners participating in the WTO. MFN status means that each WTO member receives the same tariff treatment for its goods in foreign markets as that extended to the “most-favoured” country competing in the same market, and in consequence eliminating any possible preferences or discriminatory activities.

In 1995 the GATT became the World Trade Organization (WTO), which now encompasses more than 140 member countries, oversees four important international trade agreements: the GATT, the General Agreement on Trade in Services (GATS), and agreement on trade-related intellectual property rights and trade-related investment, which are called respectively TRIPS and TRIMS. Furthermore, GATT permits the formation of free trade areas and customs unions among WTO members. Free trade areas are characterized by elimination of all of tariffs on trade with each of the member countries, with simultaneously remaining autonomous in terms of determining their tariffs with non-members. One of the examples for such an area is included in the objectives of European Free Trade Association (EFTA), which is composed primarily of Scandinavian countries.

A customs union constitutes a group of countries that eliminate all tariffs on trade among themselves but maintain a common external tariff on trade with countries outside the union. A good example of a formation of a customs union was the European Economic Community (EC) that came into force with the Treaty of Rome signed in 1957 by France, Germany, Italy and the Benelux. The Treaty provided for the establishment of a common market, a customs union and common policies[1]. Nowadays it is known as the European Union (EU), it includes twenty-seven European countries and it has gone beyond simply reducing barriers to trade among member states and forming a customs union. EU has achieved its greater economic integration by becoming a common market, which coordinates and harmonizes each country’s tax, industrial and agricultural policies. Many members have also formed a single currency area by replacing their domestic currencies with the euro.

Nevertheless, many trade agreements not including duty reduction schemes are later on completed with the objective to arrange an FTA in the future. In cases of agreements including non WTO members, it is usually specified in the agreement that MFN rates will (continue to) be applied. Among many agreements without duty reduction schemes we can enumerate, for instance, the already mentioned Bilateral Investment Agreement (BIT), which set forth actionable standards of conduct that applies to the nation’s government in their treatment of foreign investors, including i.a. fair and equitable treatment, protection from expropriation and free transfer of means with full protection and security[2]. The amount of signed BIT’s has been constantly increasing, since 1990s from 446 signed agreements to over 2500 active BITs in 2007, according to United Nations Conference on Trade and Development (UNCTAD)[3]. To other agreements without duty reduction schemes we can include Foreign Investment and Protection Agreements (FIPA), Economic Partnership Agreement (EPA), Trade and Investment Framework Agreement (TIFA), Economic Framework Agreement, or Partnership Cooperation Agreement.

The growing trend of signing international trade agreements is irreversible in any region of the globe, and is becoming a dominant factor influencing immensely all of the international economic relations nowadays. The more of them are signed, the more urgent the need to assess their actual impact. Thus, it is crucial to correctly evaluate the potential impact of the agreements, especially during theirs negotiation phase. In the recent years there has been a large demand for impact assessment studies of trade agreements, both before and after negotiations. Conducting solid studies concerning their impact is considered to be particularly important for developing countries, because they need to adjust their policies in a way to diminish or completely avoid the possible negative effects and maximize potential benefits. Nevertheless, accurate impact assessment methodology it is not easy from the technical point of view, mainly because of the lack of economic theories which specialize in developing countries. Thus, due to insufficient appropriate knowledge and support, it is difficult for the governments of developing countries to conduct a relevant policy from the economic studies[4].

Furthermore, in conducting an impact assessment analysis of the International Trade agreements it is important to be able to evaluate all of the potential gains, difficulties and implications. Economic theory since the middle of the 18^th century has implied numerous advantages in lowering tariffs for most parties in most situations, and economists view the commitment to trade liberalisation as a welfare-maximizing pursuit. The main gain from trade was considered to derive from specialization on the basis of comparative advantage. Income is considered to be growing more rapidly in countries open to international trade than in those more closed to trade. This phenomenon is dramatically illustrated in China’s rapid growth after 1978, and India’s after 1991. These dates indicating when major trade reforms took place in those countries[5].

However we have to keep in mind, that although trade liberalisation in the form of international trade agreements may contribute to the overall national welfare, it is also responsible for disruptive consequences within societies by producing losers and gainers, such as import-competing industries and consumers respectively. Besides economic gains and losses, trade agreements also provide important political outcomes to the parties involved, as a consequence of facilitated international cooperation, institutionalized rules of reciprocity, monitoring and enforcement.

It is especially important in terms of conducting impact assessment analyses of trade agreements for developing countries as I have previously written, for which they constitute an important institutional context within which they can build up their coalitions and improve their bargaining position in the global market. Moreover, developing countries prefer more defined rules and greater enforcement capacity. The main reason for this is the fear of marginalization or peripherality, namely the inability of developing countries to take advantage of trade liberalisation and emerging as full players in the international system[6]. Due to their international as well as domestic weaknesses, usually caused by their colonial past, these countries are more of the rule-takers rather than agenda-setters. As an illustration, countries like Brazil and India despite taking part in many negotiations they have repeatedly complained about their concerns being disregarded. The same applies to smaller developing countries which have found it difficult to even take part in key decision making meetings.

In addition, there even exist a phenomenon called “Third World Schizophrenia”, which was used by Mohammed Ayoob in his article “The Third World in the System of States: Acute Schizophrenia or Growing Pains?”[7] It illustrates the behaviour of developing countries trying to bring about systemic changes and aiming at adjusting to an international order, but as a result of their vulnerabilities and their past they also have the incentive to preserve the existing system of rules that ensures their very survival. As a consequence of these two pressures, decision-making centres of these countries are faced with conflicting demands, and thus this situation is referred to either as schizophrenic, or similar to the growing pains of adolescence.

International trade agreements and the liberalisation process that follows them, besides being economically beneficial, it is also very often politically feasible. Due to the fact that some countries are legally binded by multilateral trade organizations and agreements, their lack of commitment may have punitive consequences of various types, depending on the nature of the agreement and its enforcement mechanism. Thus, governments tend to hide behind the possible consequences of lack of obedience that could range from the international disapproval to compensation of all the costs incurred as a result of this country’s actions. By claiming that their international commitments bind them to act freely, they are able to justify especially unpopular actions that are supposed to have longer-term benefits, and not solely in trade manners. This is why many of the programmes of economic and restructuralization reforms from the 1980s and 1990s, in particular those involving both controversial and possible distributive consequences for the society, were hidden in the shadow of international economic agreements and organizations[8].

Thus, it comes as no surprise that historically, countries have been reluctant to reduce trade barriers and enthusiastic to raise them, even though the classical trade theory states that gains from trade accrue to any country that lowers their trade barriers, irrespectively of what other countries do. Despite this promise of economic benefits coming from free trade, many states have chosen the path of protectionism throughout history. An example can be found in the case of the Great Depression period, when following the stock market crash of 1929, the US Congress adopted the Smoot Hawley Tariff Act in 1930 that raised US tariffs to an average of nearly 60% interest[9].

Explanation of this behaviour comes from the economic theory and the notion of “optimal tariff”, which tells us that it may be in the interest of a large economy to restrict trade at a certain “optimal” level, as it will be a change of the terms of trade in its favour. This obviously does not apply to small economies, for which liberalisation of trade or lack of it may bring different results, conditioned by many economic, political and social factors. For large economies this situation looks different, thus the optimal tariff may appear as a good solution to some of them. However, is it really an efficient one? The interpretation of this problem in terms of the game theory would imply that even though it is in each country’s interest to impose restrictions, the outcome of such action might be inefficient, especially in the long-term calculation. Once one large country will impose restrictions, the other might as well follow this behaviour, which would result in the overall decrease of global market efficiency and economic welfare. Thus, the best way of preventing such a mutually destructive situation from happening is by ensuring mutual reciprocity in trade commitments, which increases the economic gains as well as the output.

In any case, mutual reciprocity being a foundation for most of the concluded trade agreements all over the world does not always guarantee their success. Multilateral trade agreements and organisations, such as the WTO, have been accused of inefficiency due to the problem with maintaining and extending the liberal world trading system, slow pace of trade liberalisation negotiations, and inadequate requirements for consensus among the members, which immensely limits the possible scope of reform of trade agreements. Moreover, some sectors such as trade in agriculture, textiles and apparel have not experienced any significant cuts in tariffs, and thus they had much less success, especially in comparison with, for instance, industrial goods. According to UNCTAD data, non duty-free trade still faces an average tariff of about 7% in manufacturing and about 18% in agriculture.

All these arguments have raised many concerns, and in consequence many countries have turned away from the multilateral process toward more preferential agreements such as bilateral, or regional ones. An example of such an agreement is the North American Free Trade Agreement (NAFTA), which went into effect in January 1994. Under its terms United States, Canada and Mexico collectively agreed to phase out all tariffs on merchandise trade and to reduce restrictions on service trade as well as foreign investment over a decade[10]. Besides that there exist numerous trade agreements between particular countries, or group of countries, and their number is constantly increasing. It has been particularly observed in terms of Preferential Trade Agreements (PTAs). As of early 2014, there were more than 300 PTAs in force, about half of which also covered services. In 2013, almost half of world trade was taking place between countries that had signed a PTA and almost a third was regulated by deep trade agreements[11].

This increase in PTAs is mostly attributed to the greater promotion of trade among the parties that are signing a PTA, but it is also a good alternative for countries when multilateral negotiations run into difficulties. Moreover, it contributes to the emergence of “competitive liberalisation”, wherein countries are challenged to reduce trade barriers to keep up with the rest of the world. For instance, after NAFTA was signed and implemented, the EU aimed at signing an FTA with Mexico, in order to ensure that European goods would not be at a competitive disadvantage in the Mexican market. On the other hand, there are still many disadvantages associated with PTAs, such as discriminatory exclusion of certain countries, or the inability to reform certain issues, such as agricultural export subsidies on the bilateral or regional level[12].

Predominantly, it appears that international trade is increasingly more regulated and influenced by policies and instruments reaching beyond tariffs. As of 2013, technical measures and requirements coming from free trade liberalization and international trade agreements regulated about two-thirds of the world trade[13]. Both multilateral and preferential agreements will remain the future of the global economy, shaping its flows and regulating the distribution of wealth. There will always be pressures to include more standards and regulations, and there will always be those that argue that such agreements serve the interests of multinational corporations and not regular citizens. Nevertheless, keeping in mind that free trade contributes to the transfer of technology and knowledge, which is especially important for the developing countries in terms of improved economic welfare, we can not simply despise this concept without accurately evaluating all of its losses and gains. International trade agreements do provide us with a greater measure of certainty in international relations, and they do provide developing countries with one of the few safeguards that they have against the powerful high-income countries. However, it is safe to say that they will continue to generate controversy, and there will always be an intense public discussion surrounding them, and the impact they make.

[1] Europa, Summaries of EU legislation. Available from: <http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_eec_en.htm>. [6 January 2015].

[2] Legal Information Institute, Bilateral investment treaty. Available from: <http://www.law.cornell.edu/wex/bilateral_investment_treaty>. [6 January 2015].

[3] United Nations Conference on Trade and Development, Quantitative data on bilateral investment treaties and double taxation treaties. Available from: <http://unctad.org/en/Pages/DIAE/International Investment Agreements (IIA)/Quantitative-data-on-bilateral-investment-treaties-and-double-taxation-treaties.aspx>. [6 January 2015].

[4] Plummer M. G., Cheong D., Hamanaka S., ‘Methodology for Impact Assessment of Free Trade Agreements’, Asian Development Bank 2010, pp. 7-9.

[5] Library of Economics and Liberty, International Trade Agreements. Available from: < http://www.econlib.org/library/Enc/InternationalTradeAgreements.html>. [6 January 2015].

[6] Narlikar A., ‘The World Trade Organization: A Very Short Introduction’, Oxford University Press Inc., New York 2005, pp. 7-8.

[7] Ayoob M. ‘The Third World in the System of States: Acute Schizophrenia or Growing Pains?’, International Studies Quarterly, vol. 33, no. 1, 1989, pp. 67-79.

[8] Narlikar A., ‘The World Trade Organization: A Very Short Introduction’, Oxford University Press Inc., New York 2005, pp. 6-7.

[9] Narlikar A., ‘The World Trade Organization: A Very Short Introduction’, Oxford University Press Inc., New York 2005, pp. 3-7.

[10] Library of Economics and Liberty, International Trade Agreements. Available from: < http://www.econlib.org/library/Enc/InternationalTradeAgreements.html>. [6 January 2015].

[11] ‘Key Statistics and Trends in Trade Policy 2014’, Trade Analysis Branch (TAB), Division on International Trade in Goods and Services, and Commodities (DITC), UNCTAD Secretariat, pp. 10-11.

[12] Library of Economics and Liberty, International Trade Agreements. Available from: < http://www.econlib.org/library/Enc/InternationalTradeAgreements.html>. [6 January 2015].

[13] ‘Key Statistics and Trends in Trade Policy 2014’, Trade Analysis Branch (TAB), Division on International Trade in Goods and Services, and Commodities (DITC), UNCTAD Secretariat, pp. 10-11.