LESSON SEVEN: INTERNATIONAL TRADE AGREEMENTS

DR. TIRIMBA

By the end of this topic the learner should be able to:

 Explain the various trade agreements
 Describe the rationale for trade agreements
 Assess the Role of the WTO in Trade Agreements
 Explain why it has not been possible to attain free trade despite numerous trade
agreements

Class Activity:

 Define the terms imports, exports, balance of Payment and terms of trade
 Outline the various trade agreements
 Discuss the effect of trade agreements (Positive & Negative)
 Explain why it is that free trade has remained impractical despite the
numerous trade agreements over the years and what can be done to make free
trade practical especially among the EAC Member states

 International 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.
 Imports are goods and services produced in a foreign country and bought by domestic
residents. That includes anything shipped into the country even if it by the foreign
subsidiary of a domestic firm. If the consumer is inside the country's boundaries and the
provider is outside, then the good or service is an import.
 Exports are goods and services that are made in a country and sold outside its borders.
That includes anything shipped from a domestic company to its foreign affiliate or
branch.
Types of Trade Agreements

1. Unilateral Trade Agreement

 It 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 many developed countries only do this as a type of foreign aid. They want to help
emerging markets strengthen certain industries. The foreign industry is too small to be a
threat. It helps the emerging market's economy grow, creating new markets for developed
countries’ exporters.

2. Bilateral Trade Agreements

 These 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 on key protected or subsidized domestic industries. For most countries,
these are in the automotive, oil or food production industries. The United States has 16
bilateral agreements. The Obama administration was negotiating the world's largest
bilateral agreement. E.g. Transatlantic Trade and Investment
Partnership with the European Union.

3. Multilateral Trade Agreements

 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, since 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. NAFTA quadrupled trade to $1.14 trillion in 2015.
 But it also cost between 500,000 to 750,000 American jobs. Most were in the
manufacturing industry in California, New York, Michigan and Texas.
 The United States has one other multilateral regional trade agreement.
 The United States negotiated the Central American-Dominican Republic Free Trade
Agreement. It was with Costa Rica, Dominican Republic, Guatemala, Honduras,
Nicaragua and El Salvador. It eliminated tariffs on more than 80 percent of U.S. exports.
 The Trans-Pacific Partnership would have replaced NAFTA as the world's largest
agreement. In 2017, President Trump withdrew the United States from it.

4. Regional Trade Agreements

These are trade agreements refer to a treaty that is signed by two or more countries to
encourage free movement of goods and services across the borders of its members.

Regional trade agreements (RTAs) have risen in number and reach over the years,
including a notable increase in large plurilateral agreements under negotiation. Non-
discrimination among trading partners is one of the core principles of the WTO; however,
RTAs, which are reciprocal preferential trade agreements between two or more partners,
constitute one of the exemptions and are authorized under the WTO, subject to a set of
rules.

Regional trade agreements are reciprocal trade agreements between two or more partners.

Their growth, expansion and deepening has been remarkable since the 1990s, going
beyond traditional trade liberalization, encompassing disciplines going beyond WTO
rules on issues such as services, investment, competition, government procurement
environment and labour.
 Challenges from the perspective of developing countries include:

a) Undertaking impact assessment to understand implications of new disciplines in

terms of national policy-making.
b) Ensuring that agreements lead to develop complementarities that favour economies of
scale and strengthening productive capacities, leading to enhance intra-regional trade
opportunities and development gains from trade.

Effects of International Trade Agreements

1. Lowered trade barriers

2. Enhances welfare gains to consumers from increases in variety of goods thereby
eliminating monopolies
3. Promotes access to better quality products
4. Promotes the lowering of prices
5. Some domestic industries may end up being negatively affected. They can't compete with
countries that have a lower standard of living. As a result, they can go out of business and
their employees end up losing employment.
6. Possible closure of infant industries might result in increased unemployment rates
7. There could be possibly low tax revenues to governments as the import barriers will be
relaxed
8. Infant industries might be exploited by already well developed multinational corporations
9. Might result in dumping of goods
10. Domestic industries will find new markets for their tariff-free products offshore
The Role of the WTO in Trade Agreements

1. Ensure Trade without discrimination

Under the WTO agreements, countries cannot normally discriminate between their trading
partners. Grant someone a special favour (such as a lower customs duty rate for one of their
products) and you have to do the same for all other WTO members

2. Ensure Freer trade: gradually, through negotiation

Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers
concerned include customs duties (or tariffs) and measures such as import bans or quotas that
restrict quantities selectively

3. Encourages Predictability: through binding and transparency

With stability and predictability, investment is encouraged, jobs are created and consumers
can fully enjoy the benefits of competition — choice and lower prices. The multilateral
trading system is an attempt by governments to make the business environment stable and
predictable.

4. Promoting fair competition

The WTO is sometimes described as a “free trade” institution, but that is not entirely
accurate. The system does allow tariffs and, in limited circumstances, other forms of
protection. More accurately, it is a system of rules dedicated to open, fair and undistorted
competition.

The rules on non-discrimination — MFN and national treatment — are designed to secure
fair conditions of trade.

5. Encouraging development and economic reform

The WTO system contributes to development. On the other hand, developing countries need
flexibility in the time they take to implement the system’s agreements