INTERNATIONAL TRADE AND AGREEMENTS

By: ATTY. JASPER ADRIAN P. CADELIÑA

Saint Francis College
Guihulngan City, Province of Negros Oriental
SY 2021-2022
By: Atty. Jasper Adrian P. Cadeliña
Tel No. 0917-722-6972
Jasperadriancadelina79@gmail.com

Good day, the last module talks about the state interference in international trade. We
learn that there are several ways that the state can interfere the free flow of trade between
states. The website also talks about the arguments for and against interference which was
discuss as stated below by the Britannica website which hereto reproduce for your readings:

Arguments for and against interference

Revenue

Developing nations in particular often lack the institutional machinery needed for
effective imposition of income or corporation taxes ( see income tax). The governments of such
nations may then finance their activity by resorting to tariffs on imported goods, since such
levies are relatively easy to administer. The amount of tax revenue obtainable through tariffs,
however, is always limited. If the government tries to increase its tariff income by imposing
higher duty rates, this may choke off the flow of imports and so reduce tariff revenue instead of
increasing it.

Economic development

Protection of domestic industry

Probably the most common argument for tariff imposition is that particular domestic
industries need tariff protection for survival. Comparative-advantage theorists will naturally
argue that the industry in need of such protection ought not to survive and that the resources
so employed ought to be transferred to occupations having greater comparative efficiency. The
welfare gain of citizens taken as a whole would more than offset the welfare loss of those
groups affected by import competition; that is, total real national income would increase. An
opposing argument would be, however, that this welfare gain would be widely diffused, so that
the individual beneficiaries might not be conscious of any great improvement. The welfare loss,
in contrast, would be narrowly and acutely felt. Although resources can be transferred to other
occupations, just as comparative-advantage theory says, the transfer process is sometimes slow
and painful for those being transferred. For such reasons, comparative-advantage theorists
rarely advocate the immediate removal of all existing tariffs. They argue instead against further
tariff increases—since increases, if effective, attract still more resources into the wrong
occupation—and they press for gradual reduction of import barriers.

Romney Robinson

The infant-industry argument

Advocates of protection often argue that new and growing industries, particularly in less-
developed countries, need to be shielded from foreign competition. They contend that costs
decline with growth and that some industries must reach a minimum size before they are able to
compete with well-established industries abroad. Tariffs can protect the domestic market until
the industry becomes internationally competitive and, it is often argued, the costs of protection
can be recouped after the industry has reached maturity. In short, the infant-industry argument
is based principally on the idea that there are economies of large-scale production in many
industries and that developing countries have difficulty in establishing such industries.

00:0203:45

Advocates of such protection, however, can have their arguments turned against them.
While an individual country can, in some circumstances, gain from protecting its infant
industries, this protection is particularly costly for the international community as a whole.
Where there are major advantages in large-scale production, there are also large advantages in
relatively free international trade. By closing off markets, protection reduces the ability of firms
to gain large-scale economies by exporting. If a group of countries imposes infant-industry
protection, it will split up the market; each country may end up with small-scale, localized,
inefficient production, thus reducing the prosperity of all of the countries. One way in which
less-developed nations have tried to deal with this problem has been through the establishment
of customs unions or other regional groupings (see International trade arrangements).

Infant-industry tariffs have been disappointing in other ways; the infant-industry

argument is often abused in practice. In many developing countries, industries have failed to
attain international competitiveness even after 15 or 20 years of operation and might not survive
if protective tariffs were removed. The infant industry is probably better aided by
production subsidies than by tariffs. Production subsidies do not raise prices and therefore do
not curtail domestic demand, and the cost of the protection is not concealed in higher prices to
consumers. Production subsidies, however, have the disadvantage of drawing upon government
revenue rather than adding to it, which may be a serious consideration in countries at lower
levels of development. (See also economic development.)

Bela BalassaTrent J. BertrandPaul Wonnacott

Unemployment

Tariffs or quotas are also sometimes proposed as a way to maintain domestic

employment—particularly in times of recession. There is, however, near-unanimity among
modern-day economists that proposals to remedy unemployment by means of tariff increases
are misguided. Insofar as a higher tariff is effective for this purpose, it simply “exports
unemployment”; that is, the rise in domestic employment is matched by a drop in production in
some foreign country. That other country, moreover, is likely to impose a retaliatory tariff
increase. Finally, the tariff remedy for unemployment is a poor one because it is usually
ineffective and because more suitable remedies are available. It has come to be generally
recognized that unemployment is far more efficiently dealt with by the implementation of
proper fiscal and monetary policies.

National defense

A common appeal made by an industry seeking tariff or quota protection is that its
survival is essential for the national interest: its product would be needed in wartime, when the
supply of imports might well be cut off. The verdict of economists on this argument is fairly
clear: the national-defense argument is frequently a red herring, an attempt to “wrap oneself in
the flag,” and insofar as an industry is essential, the tariff is a dubious means of ensuring its
survival. Economists say instead that essential industries ought to be given a direct subsidy to
enable them to meet foreign competition, with explicit recognition of the fact that the subsidy is
a price paid by the nation in order to maintain the industry for defense purposes.

Autarky

Many demands for protection, whatever their surface argument may be, are really
appeals to the autarkic feelings that prompted mercantilist reasoning. (Autarky is defined as the
state of being self-sufficient at the level of the nation.) A proposal for the restriction of free
international trade can be described as autarkic if it appeals to those half-submerged feelings
that the citizens of the nation share a common welfare and common interests, whereas
foreigners have no regard for such welfare and interests and might even be actively opposed to
them. And it is quite true that a country that has become heavily involved in international trade
has given hostages to fortune: a part of its industry has become dependent upon export
markets for income and for employment. Any cutoff of these foreign markets (brought about by
recession abroad, by the imposition of new tariffs by some foreign country, or by numerous
other possible changes, such as the outbreak of war) would be acutely serious; and yet it would
be a situation largely beyond the power of the domestic government involved to alter. Similarly,
another part of domestic industry may rely on an inflow of imported raw materials, such as oil
for fuel and power. Any restriction of these imports could have the most serious consequences.
The vague threat implicit in such possibilities often results in a yearning for autarky, for national
self-sufficiency, for a life free of dependence on the hazards of the outside world.

There is general agreement that no modern nation, regardless of how rich and varied its
resources, could really practice self-sufficiency, and attempts in that direction could produce
sharp drops in real income. Nevertheless, protectionist arguments—particularly those made “in
the interests of national defense”—often draw heavily on the strength of such
autarkic sentiments.

The terms-of-trade argument

When a country imposes a tariff, foreign exporters have greater difficulty in selling their
products. As their exports decline, they may cut prices in order to keep their sales from falling
drastically. Thus, for example, when a tariff of $10.00 is imposed, foreign exporters may cut their
price by, say, $6.00. The foreign exporter is being “taxed” when the tariff is imposed; the other
$4.00 is reflected in a higher price to the consumer. The use of tariffs to tax foreign exporters in
this way is known as the terms-of-trade argument for protection. The terms of trade represent
the relative price of what a nation is exporting, compared with the price paid to foreigners for
imported goods. When the price of what is being exported rises, or when the price paid to
foreigners for imported goods falls (as it may when a nation imposes a tariff), terms of trade
improve.

Balance-of-payments difficulties

Governments may interfere with the processes of foreign trade for a reason quite
different from those thus far discussed: shortage of foreign exchange (see international payment
and exchange). Under the international monetary system established after World War II and in
effect until the 1970s, most governments tried to maintain fixed exchange rates between their
own currencies and those of other countries. Even if not absolutely fixed, the exchange rate was
ordinarily allowed to fluctuate only within a narrow range of values.

If balance-of-payments difficulties arise and persist, a nation’s foreign exchange reserve

runs low. In a crisis, the government may be forced to devalue the nation’s currency. But before
being driven to this, it may try to redress the balance by restricting imports or encouraging
exports, in much the old mercantilist fashion.

The problem of reserve shortages became acute for many countries during the 1960s.
Although the total volume of international transactions had risen steadily, there was not a
corresponding increase in the supply of international reserves. By 1973 payment imbalances led
to an end of the system of fixed, or pegged, exchange rates and to a “floating” of most
currencies. (See also gold standard; gold-exchange standard.)

Contemporary trade policies

There are many ways of controlling and promoting international trade today. The
methods range from agreements among governments—whether bilateral or multilateral—to
more ambitious attempts at economic integration through supranational organizations, such as
the European Union (EU).

Trade agreements

The term trade agreement or commercial agreement can be used to describe any

contractual arrangement between states concerning their trade relationships. Trade agreements
may be bilateral or multilateral—that is, between two states or between more than two states.

Bilateral trade agreements

A bilateral trade agreement usually includes a broad range of provisions regulating the
conditions of trade between the contracting parties. These include stipulations governing
customs duties and other levies on imports and exports, commercial and fiscal regulations,
transit arrangements for merchandise, customs valuation bases, administrative formalities,
quotas, and various legal provisions. Most bilateral trade agreements, either explicitly or
implicitly, provide for (1) reciprocity, (2) most-favoured-nation treatment, and (3) “national
treatment” of nontariff restrictions on trade.

Reciprocity

In a trade agreement, the parties make reciprocal concessions to put their trade

relationships on a basis deemed equitable by each. The principle of reciprocity is extremely old,
and in one form or another it is to be found, implicitly at least, in all trade agreements. The
concessions may, however, be in different areas. In the Anglo-French Agreement of 1860, for
example, France pledged itself to reduce its duties to 20 percent by 1864. In
return, Britain granted duty-free imports of all French products except wines and spirits. The
principle of reciprocity implies only that the gains arising out of foreign trade are distributed
fairly.

The most-favoured-nation clause

The most-favoured-nation (MFN) clause binds a country to apply to its partner country

any lower rate of import duties that it may later grant to imports from some other country. The
clause may cover a list of specified products only, or specific concessions yielded to certain
foreign countries. Alternatively, it may cover all advantages, privileges, immunities, or other
favourable treatment granted to any third country whatever. The clause is intended to provide
each signatory with the assurance that the advantages obtained will not be attenuated or wiped
out by a subsequent agreement concluded between one of the partners and a third country. It
guarantees the parties against discriminatory treatment in favour of a competitor.

The effect of the MFN clause on customs duties is to amalgamate the successive trade
agreements concluded by a state. If the rates in different agreements are fixed at varying levels,
the clause reduces them to the lowest rate specified in any agreement. Thus, goods imported
from a country benefiting from MFN treatment are charged the rate of duty applicable to
imports from another country which, in a subsequent trade agreement, has negotiated a lower
rate of duty.

The coverage of the MFN clause can be considerably reduced by a minute definition of a
particular item so that a concession, while general in form, applies in practice to only one
country. A historical illustration of this technique can be found in the German Tariff of 1902,
which admitted at a special rate

The advantages granted under the MFN clause may be conditional or unconditional. If
unconditional, the clause operates automatically whenever appropriate circumstances arise. The
country drawing benefit from it is not called on to make any fresh concession. By contrast, the
partner invoking a conditional MFN clause must make concessions equivalent to those extended
by the third country. A typical wording was that of the 1911 treaty between the United States
and Japan, which stated that

The conditional form of the clause may at first sight seem more equitable. But it has the
major drawback of being liable to raise a dispute each time it is invoked, for it is by no means
easy for a country to evaluate the compensation it is being offered as in fact being equivalent to
the concession made by the third country.

The effect of the unconditional form of the MFN clause is, finally, to wipe out any
relevance that the principle of reciprocity may have had to the purely bilateral preoccupations of
the negotiating parties, since the results of the bargaining process, instead of being limited to
the participants, influence their relationships with other states. In practice, therefore, a country
negotiating a trade agreement must measure the advantages it is willing to concede in terms of
the benefits these concessions will provide collaterally to that third country which is the most
competitive. In other words, the concessions that may be granted are determined by the
minimum protection that the negotiating state deems indispensable to protect its home
producers. This sets a major limitation on the scope of bilateral negotiations.

Proponents of free trade consider that the unconditional MFN clause is the only practical
way by which to obtain the progressive reduction of customs duties. Those who
favour protectionism are resolutely against it, preferring the conditional form of the clause or
some equivalent mechanism.
 The conditional MFN clause was generally in use in Europe until 1860, when the so-
called Cobden-Chevalier Treaty between Great Britain and France established the unconditional
form as the pattern for most European treaties ( see Richard Cobden). The United States used the
conditional MFN clause from its first trade agreement, signed with France in 1778, until the
passage of the Tariff Act of 1922, which terminated the practice. (The Trade Reform Bill of 1974,
however, in effect restored to the U.S. president the authority to designate preferential tariff
treatment, subject to approval by Congress.)

The Conference of Genoa, Italy, in May 1922 and the World Economic Conference in May
1927 both recommended that trade agreements include the MFN clause whenever possible. But
the Great Depression of the 1930s led instead to a rise of restrictions in world trade. Imperial or
regional systems of preference came into being: the Ottawa Agreements of 1932 for the British
Commonwealth, similar arrangements for the French empire, and a series of tariff and
preference agreements negotiated in eastern and central Europe from 1931 on.

The “national treatment” clause

The “national treatment” clause in trade agreements was designed to ensure that internal
fiscal or administrative regulations would not introduce discrimination of a nontariff nature. It
forbids discriminatory use of the following: taxes or other internal levies; laws, regulations, and
decrees affecting the sale, offer for sale, purchase, transport, distribution, or use of products on
the domestic market; valuation of products for purposes of assessment of duty; legislation on
prices of imported goods; warehousing and transit regulations; and the organization and
operation of state trading corporations.

Multilateral agreements after World War II

The conclusion of World War II spurred efforts to correct the problems stemming from
protectionism, which had increased since 1871, and trade restrictions, which had been imposed
between World Wars I and II. The resulting multilateral trade agreements and other forms of
international economic cooperation led to the General Agreement on Tariffs and Trade (GATT)
and laid the foundation for the World Trade Organization (WTO).

The General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade was signed in Geneva on October 30, 1947,
by 23 countries, which accounted for four-fifths of world trade. On the same day, 10 of those
countries, including the United States, the United Kingdom, France, Belgium, and the
Netherlands, signed a protocol bringing the agreement into force on January 1, 1948.

GATT took the form of a multilateral trade agreement that set forth the principles under
which the signatories, on a basis of “reciprocity and mutual advantage,” would negotiate “a
substantial reduction in customs tariffs and other impediments to trade, and the elimination of
discriminatory practices in international trade.” As more countries joined, GATT became a
charter governing almost all world trade except for that of the communist countries.

The agreement also contained a variety of clauses providing exceptions to the rules in
special situations. These included balance-of-payments disequilibrium; serious and unexpected
damage to domestic production; the requirements of economic development or, subject to very
broad reservations, of agricultural policy; the need to protect domestic raw material production;
and the interests of national security. In addition, GATT rules permitted various departures from
the MFN principle. For example, within the former EEC, France could permit duty-free entry of
goods from its fellow members—such as Germany and Italy—without extending such duty-free
treatment to the products of non-EEC nations.
 Prior to the creation of GATT’s successor organization, the WTO, multilateral trade
conferences, called rounds, were held periodically by GATT countries to resolve trade problems.
Most of these took place in Geneva, former site of GATT headquarters and current site of the
WTO. At the time, the formula for multilateral tariff bargaining under GATT represented a
major innovation in intergovernmental cooperation. In appraising the concessions that they
could afford to make, this approach to GATT negotiations permitted governments to account
for the indirect advantages that they could expect from the full set of bilateral negotiations.
GATT made positive contributions to the growth of world trade, with three GATT sessions seen
as having particular historic importance—the so-called Kennedy, Tokyo, and Uruguay rounds.

As the economic integration of western Europe progressed, some Americans became

concerned at the prospect of being excluded from these advances in trade policy. Pres. John F.
Kennedy pursued the goal of an Atlantic partnership and secured special negotiating powers
under the Trade Expansion Act of 1962. The act authorized tariff reductions of up to 50 percent,
subject to reciprocal concessions from the European partners. This marked a fundamental shift
away from the traditional protectionist posture of the United States and led to the Kennedy
Round negotiations in GATT, held in Geneva from May 1964 to June 1967.

The Kennedy Round continued the process of tariff reduction begun two decades earlier
by the industrial countries. While developing countries drew little immediate advantage from
the Kennedy Round negotiations, they were able to obtain the addition of a new part titled
“Trade and Development” to the GATT charter, calling for stabilization, as far as possible, of raw
material prices; reduction or abolition of customs duties or other restrictions
that differentiate unreasonably between products in their primary state and the same products
in finished form; and renunciation by the advanced countries of the principle of reciprocity in
their relations with less-developed countries.

Maurice AllaisPaul Wonnacott

The next ministerial meeting of GATT opened in Tokyo on September 12, 1973, and was
attended by representatives of ministerial or comparable level from 102 countries. On
September 14 the meeting closed with the adoption of what came to be called the  Tokyo
Declaration.

The declaration differed markedly from previous GATT documents in the inordinately
large portion of its language devoted to strengthening the negotiating position of the less-
developed countries. Specifically, the trade negotiations would aim at improving the conditions
of access for products of interest to such countries while ensuring stable, equitable, and
remunerative prices for primary products. Tropical products would be given special and priority
treatment. The principle of nonreciprocity in negotiations between developed and less-
developed countries, an established principle in GATT, was reaffirmed: the importance of
maintaining and improving the Generalized System of Preferences (a provision for lower tariff
rates) granted by developed countries to less-developed countries, as well as the need for
special measures and the importance of providing special, differential, and more favourable
treatment for less-developed countries, were recognized. Special attention was to be given to
the trade interests of the least-developed countries.

The Tokyo Declaration was followed by several years of multinational trade negotiations
that came to be called the Tokyo Round, concluding in 1979 with the adoption of a series of
tariff reductions to be implemented generally over an eight-year period beginning in 1980.
Further progress was also made in dealing with nontariff issues. Most notably, a Code on
Subsidies and Countervailing Duties was negotiated. This code had two main features: it listed a
number of unacceptable subsidy practices, and it introduced a requirement that formal
procedures be followed before the imposition of countervailing duties on imports subsidized by
foreign nations. Specifically, before the imposition of a countervailing duty, an investigation had
to establish that competing domestic firms were being injured. The code was not signed by all
of the members, however, and the signing nations agreed only to follow the prescribed rules
before applying countervailing duties to the exports of other signatories. Thus, while the code
represented progress in dealing with a new topic, it also represented a departure from the MFN
principle: signatories were not required to extend the benefits of the code to GATT members
who did not sign the code.

A new set of negotiations was initiated at a conference in Uruguay in 1986. Because

traditional tariffs were becoming much less important, most of the attention was focused on
other impediments to international transactions, such as those affecting trade in services
or intellectual property. The Uruguay Round led to the replacement of GATT by the WTO in
1995. Whereas GATT focused almost exclusively on goods (though much of agriculture and
textiles were excluded), the WTO encompassed all goods, services, and intellectual property, as
well as some investment policies. The combined share of international trade of WTO members
came to exceed 90 percent of the global total.

Hello Class, so in this module you will learned the meaning of Trade Agreements which is
composed of Two things: No. 1 is Bilateral Trade Agreements which involves a two way process
and signify between a state and the other state as to the policy of how their trade will apply, and
there is 3 things to consider that governed the Bilateral Agreements which are part of your
assignment.

The 2nd is the Multilateral Agreements which was governed previously by the governing
body and its established rules and regulation which is the GATT or General Agreements of
Tariffs and Trade and this GATT is composed of Many States or countries in the world. Of the
many states or nations found in the world today not all are members of the GATT.

The new organization that takes over the GATT is the current organization of WTO or
World Trade Organization that still comprise the previous states or nations that composed the
GATT.

Aside from the WTO, the other area that it established is the World Bank or the WTO-
World Bank to where states or nations can borrow money but it has string attached or
conditions that the state will follow in order for it to secure a loan or a grant from the World
Bank.

Submit the following:

1. What is Reciprocity or reciprocal concessions?

2. What is the Most-Favoured-nation clause?

3. What is the National Treatment clause?

4. Bilateral Trade Agreements VS. Multilateral Trade Agreements

5. What is GATT and what is the purpose or coverage of GATT?

6. What is the World Trade Organization, how does it work? And what is its purpose?

7. What is the World Bank, how does it work?