FREE TRADE

free trade on the international level is no different from trade between

neighbors, towns, or states. However, it allows businesses in each country
to focus on producing and selling the goods that best use their resources
while other businesses import goods that are scarce or unavailable
domestically.
free trade expands the diversity and lowers the prices of goods available in
a nation while better exploiting its homegrown resources, knowledge, and
specialized skills.1

Free Trade Models

Mercantilism

Prior to the 1800s, global trade was dominated by the theory of

mercantilism. This theory placed priority on having a favorable balance of
trade relative to other countries, and accumulating more gold and silver.

In order to attain a favorable balance of trade, countries would often place

trade barriers like taxes and tariffs to discourage their residents from
purchasing foreign goods. This incentivized consumers to purchase locally-
made products, thereby supporting domestic industries.

Comparative Advantage

Ricardo introduced the law comparative advantage, which states that

countries can attain the maximum benefits through free trade. Ricardo
demonstrated that if countries prioritize producing the goods that they
can produce more cheaply than other countries (i.e., where they have a
comparative advantage) they will be able to produce more goods in total
than they would by limiting trade.
free trade is now an integral part of the financial system and the investing
world. American investors now have access to most foreign financial
markets and to a wider range of securities, currencies, and other financial
products.

The United States currently has a number of free trade agreements in

place. These include multi-nation agreements such as the North American
Free Trade Agreement (NAFTA), which covers the U.S., Canada, and
Mexico, and the Central American Free Trade Agreement (CAFTA), which
includes most of the nations of Central America. There are also separate
trade agreements with nations from Australia to Peru.3

Collectively, these agreements mean that about half of all goods entering
the U.S. come in free of tariffs, according to government figures. The
average import tariff on industrial goods is 2%.

What Is a Free Trade Area?

A free trade area is a group of countries that have agreed to mutually
lower or eliminate trade barriers for trade within the area. This allows
participating countries to benefit from reduced tariffs, while maintaining
their existing protections for trade with countries outside of the area.

The Bottom Line

Free trade refers to policies that allow permit inexpensive imports and
exports, without tariffs or other trade barriers. In a free trade agreement,
a group of countries agrees to lower their tariffs or other barriers to
facilitate more exchanges with their trading partners.

MOST FAVOURED NATION TREATMENT

A most-favored-nation (MFN) clause requires a country providing a trade
concession to one trading partner to extend the same treatment to
all.1 Used in trade treaties for hundreds of years, the MFN clause and its
principle of universal equal treatment underpin the World Trade
Organization.234

In U.S. trade legislation, most-favored-nation treatment is now described

as "permanent normal trade relations" to avoid the implication it confers
preferential status.

KEY TAKEAWAYS

 The most-favored-nation clause requires a country to extend the

same trade terms to all trading partners.
 The MFN clause is the founding principle of the World Trade
Organization, with notable exceptions under WTO rules.
 The U.S. denies MFN trade status only to Cuba and North Korea
 The loss of MFN status exposes a country to discriminatory import
tariffs on its products
In international trade, MFN treatment is synonymous with non-
discriminatory trade policy. For example, if a country belonging to the
WTO reduces or eliminates a tariff on a particular product for one trading
partner, the treaty's MFN clause obligates it to extend the same treatment
to all members of the organization.

Note that there is no requirement under MFN that the trade concession be
reciprocal: countries benefiting from a lower tariff are not required to
automatically drop theirs in return (though that can certainly happen
under trade agreements).

Most-Favored-Nation Benefits and Drawbacks

In global trade, the non-discriminatory principle enshrined in the most-
favored-nation clause extends the benefits of trade liberalization
measures as widely as possible, while protecting smaller exporters against
preferential terms secured by larger ones.

In practice, the WTO enforcement mechanism can only authorize that an

injured party, not the organization collectively, impose retaliatory tariffs
when discriminated against. That leaves smaller countries depending on
larger ones to comply with rulings voluntarily.12

Some have suggested the WTO's ineffective enforcement mechanism

actually helps shield countries that violate MFN principles from
punishment.13

The proliferation of regional trade blocs and unilateral sanctions for

"unfair trade" have also eroded the principle of universality enshrined in
the most-favored-nation clause.14

In December 2019, the Trump administration sidelined the WTO's

appellate body by blocking all appointments to the seven-member panel.
It claimed the panel had overstepped its mandate. In October 2021, the
Biden administration's nominee to the WTO appeals panel said she would
work to restore WTO rules enforcement.15

REMEDIES AGAINST DUMPING

If a company exports a product at a price lower than the price it normally charges on its own
home market, it is said to be “dumping” the product. Is this unfair competition? Opinions differ,
but many governments take action against dumping in order to defend their domestic industries

WTO agreement disciplines anti-dumping actions, and it is often called the “Anti-Dumping
Agreement. WTO agreement allows governments to act against dumping where there is genuine
(“material”) injury to the competing domestic industry. In order to do that the government has
to be able to show that dumping is taking place, calculate the extent of dumping (how much
lower the export price is compared to the exporter’s home market price), and show that the
dumping is causing injury or threatening to do so.

GATT (Article 6) allows countries to take action against dumping. Typically anti-dumping action
means charging extra import duty on the particular product from the particular exporting
country in order to bring its price closer to the “normal value” or to remove the injury to
domestic industry in the importing country.

There are many different ways of calculating whether a particular product is being dumped
heavily or only lightly. The agreement narrows down the range of possible options. It provides
three methods to calculate a product’s “normal value”. The main one is based on the price in the
exporter’s domestic market. When this cannot be used, two alternatives are available — the
price charged by the exporter in another country, or a calculation based on the combination of
the exporter’s production costs, other expenses and normal profit margins. And the agreement
also specifies how a fair comparison can be made between the export price and what would be a
normal price.
Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only
be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed
investigation has to be conducted according to specified rules first. The investigation must
evaluate all relevant economic factors that have a bearing on the state of the industry in
question. If the investigation shows dumping is taking place and domestic industry is being hurt,
the exporting company can undertake to raise its price to an agreed level in order to avoid anti-
dumping import duty.
Detailed procedures are set out on how anti-dumping cases are to be initiated, how the
investigations are to be conducted, and the conditions for ensuring that all interested parties are
given an opportunity to present evidence. Anti-dumping measures must expire five years after
the date of imposition, unless an investigation shows that ending the measure would lead to
injury.

REGIONAL TRADE AGREEMENTS

What’s it: Regional trade agreement is a trade agreement between various

countries in a specific geographic area. The agreement is usually about the
elimination of trade barriers between these countries.

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Such agreements can take various forms, ranging from the simplest such as
the free trade area to the most complex, an economic union, or a monetary
union.

The agreements usually include various internal rules, which apply only to
member countries. When dealing with non-member countries, they may
apply uniform rules. Or, members may have different trade policies with non-
member countries, as in free trade area agreements. It depends on what
stage they reach an agreement.

Importance of regional trade agreements

Trade agreements are important because they generally seek to reduce trade
barriers between member countries. It allows for more significant trade
flows, provides business growth opportunities, and increases consumer
choice.

In many regional trade agreements, the agreement not only removes barriers
to trade in goods and services but also factors of production. Labor and
capital are free to flow to member countries.
So, if designed efficiently, the agreement can increase trade traffic,
investment, promote economic growth, and social welfare. World Bank
research shows that regional trade agreements increase trade in goods by
more than 35% and trade in services by more than 15%.

What’s it: Regional trade agreement is a trade agreement between various

countries in a specific geographic area. The agreement is usually about the
elimination of trade barriers between these countries.

ADVERTISEMENT

Such agreements can take various forms, ranging from the simplest such as
the free trade area to the most complex, an economic union, or a monetary
union.

The agreements usually include various internal rules, which apply only to
member countries. When dealing with non-member countries, they may
apply uniform rules. Or, members may have different trade policies with non-
member countries, as in free trade area agreements. It depends on what
stage they reach an agreement.

Importance of regional trade agreements

Trade agreements are important because they generally seek to reduce trade
barriers between member countries. It allows for more significant trade
flows, provides business growth opportunities, and increases consumer
choice.

In many regional trade agreements, the agreement not only removes barriers
to trade in goods and services but also factors of production. Labor and
capital are free to flow to member countries.

So, if designed efficiently, the agreement can increase trade traffic,

investment, promote economic growth, and social welfare. World Bank
research shows that regional trade agreements increase trade in goods by
more than 35% and trade in services by more than 15%.

Benefits of regional trade agreements

In general, the benefits of regional trade agreements are:
 Wider market access. Companies can more easily sell to member countries
and compete fairly with others because there is no trade protection.

 Encouraging economic growth. Member countries take advantage of the

free flow of goods and services to increase exports and domestic production.
 Creating more jobs. The wider market encourages businesses to increase
production. They end up creating more jobs and income in the domestic
economy. When free flow includes production factors, workers can find work
in other member countries, increasing their mobility.
 Better access to cheaper and more abundant capital. If capital flows freely
between member countries, it makes it easier for companies to raise cheaper
funds to finance investments.
 Stronger position in international treaty negotiations. The formation of an
economic union, for example, increases the size and strength of the
European Union economy. It increases its bargaining power in non-member
country trade agreements.
 More choices. Consumers benefit from the free flow of trade. They have
more access to higher quality and cheaper products. The elimination of trade
barriers increases not only the supply and variety of products but also lower
prices.
 Quality improvement and innovation. Trade agreements open up
competition. Increased competition forces businesses to remain competitive
to survive in the market. That leads to innovation, a variety of quality, or less
expensive products.

SUSTANABLE DEVELOPMENT GOALS

The Sustainable Development Goals agenda was accepted by all members of the
United Nations in 2012 at the Rio De Janeiro Council Meet with an aim to promote a
healthy and developed future of the planet and its people. It was in 2015 when the
Sustainable Development Goals were implemented after a successful fifteen-year
plan of development called the Millennium Development Goals.

The Sustainable Development Goals are a set of seventeen pointer targets that all
the countries which are members of the UN agreed to work upon for the better
future of the country

The 17 goals under the Sustainable Development Goals are as mentioned below:

1. End poverty in all its forms everywhere

2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture
 3. Ensure healthy lives and promote well being for all at all stages
4. Ensure inclusive and equitable quality education and promote lifelong learning
opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all
9. Built resilient infrastructure, promote inclusive and sustainable industrialisation and
foster innovation
10. Reduce inequalities within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production pattern
13. Take urgent actions to combat climate change and its impact
14. Conserve and sustainably use the oceans, seas and marine resources
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably
managed forests, combat desertification and halt and reverse land degradation and halt
biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide access to
justice for all and build effective, accountable and inclusive institutions at all levels
17. Strengthen the means of implementation and revitalise the global partnership for
sustainable development

Sustainable Development Goals in India

India’s record in implementing Sustainable Development Goals

 Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is being

implemented to provide jobs to unskilled labourers and improve their living standards.
 National Food Security Act is being enforced to provide subsidized food grains.
 The government of India aims to make India open defecation free under its flagship
programme Swachh Bharat Abhiyan.
 Renewable energy generation targets have been set at 175 GW by 2022 to exploit solar
energy, wind energy and other such renewable sources of energy efficiency and reduce
the dependence on fossil fuels. (Read about International Solar Alliance in the linked
article.)
 Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Heritage City
Development and Augmentation Yojana (HRIDAY) schemes have been launched for
improving the infrastructure aspects.
 India has expressed its intent to combat climate change by ratifying the Paris
Agreement.

MARRAKESH AGREEMENT
The Marrakesh Agreement of 1994 is the culmination of the GATT’s Uruguay Round
that was introduced in 1986 and led to the establishment of the World Trade
Organisation (WTO). The Marrakesh Declaration was signed by 123 nations on 15th
April 1994 and WTO came into being on 1st January 1995.
GATT stood for, ‘General Agreement on Tariffs and Trade’. It was an international
trade agreement that was signed in 1947 in a bid to reduce trade barriers among
world nations. It was superseded by the WTO in 1994 when Uruguay Round of Trade
Negotiations, after eight years of talks, signed the Marrakesh Declaration/
Marrakesh Agreement.

With the original agenda to wind up the trade negotiations in four years, Uruguay
Round of trade negotiations took seven and a half years to bring forward the final
agreement called the Marrakesh Agreement. The main points of the Uruguay Round
are given below:

1. All articles encompassed by GATT were put to review under Uruguay Round.
2. Some of the subjects that the Uruguay Round covered were:
1. Market Access for Tropical Products
2. Dispute Settlement System
3. Trade Policy Review Mechanism
4. Agriculture: services, market access, anti-dumping rules
5. Proposed creation of a new institution
3. Blair House Accord – A deal signed between the EU and the USA to settle their
differences on agriculture in November 1992.
4. Marrakesh Agreement – On 15 April 1994, the deal was signed by ministers from most
of the 123 participating governments at a meeting in Marrakesh, Morocco.

UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) is a body of
the UN that aims to develop opportunities, investments and trade in developing
countries

The United Nations General Assembly is the parent organisation of the United
Nations Conference on Trade and Development (UNCTAD). Moreover, UNCTAD is a
permanent body of the United Nations.

UNCTAD Objectives
Framing policies in various domains such as trade, technology, finance, aid, and
transport is the most important priority of UNCTAD. Geneva is the permanent
secretariat of UNCTAD and the conference ordinarily meets once in four years.

UNCTAD collects data and conducts research and analyses policies.

UNCTAD, with its work in the national and global levels, aims to help countries to:

1. Understand options to address macro-level development challenges.

 2. Acquire beneficial integration into the international trading system.
3. Reduce the dependency on commodities by diversifying the economies.
4. Decrease their exposure to debt and financial volatility.
5. Increase development-friendliness by attracting more investments.
6. Increase technologies related to the digital domain.
7. Give more thrust to innovation and entrepreneurship.
8. Aid local firms to move up value chains.
9. Facilitate the flow of goods across borders.
10. Prevent consumer abuse.
11. Competition should not be stifled, hence any concerned regulations would be cross-
checked.
12. Effectively utilise natural resources that would help in adapting to climate change.

LEX MERCATORIA
Lex mercatoria is generally defined as the body of rules of international commerce which have
been developed by the customs in the field of commerce and affirmed by the national courts.

The term lex mercatoria comes from Latin and means „merchant law“. This term had been used
during the medieval times by merchants in Europe to name the body of commercial law.

The Lex Mercatoria is not a legal system, but it will act as a binding law as there is no legislature
which can draft International Commercial Laws; there is also no International Commercial Court
which can give or develop any precedent for any dispute relating to trade or commercial laws.
The Lex Mercatoria may not work as a fully functional legal system but it can give the principles
on which a dispute can be resolved as there are no principles in any other law which deal with
this particular merchant law.

Arbitration is the most preferred way of dealing with disputes relating to international
transactions because it is cheap, quicker and easier as compared to the normal court disputes. It
has gained popularity among the whole world. For an Arbitration, a particular set of rules are
required for governing the resolution, these set of rules can be taken from Lex Mercatoria which
are there since the medieval time.

SAPTA

On April 11, 1993, the Council of Minister signed the SAPTA. Its
main objectives are:

1. Gradual liberalization of trade among the SAARC members.

2. Elimination of trade barriers among the SAARC nations.

Especially, Tariff reduction.
3. Promoting and sustaining trade and economic cooperation
among the member nations of SAARC.

SAPTA would be improved gradually for the mutual benefit of all

the practice in the product areas covering raw material., semi-
finished goods and finished goods for mutual convenience.

SAPTA makes provision for information, consultation and dispute

settlement. Least development countries such as Bhutan and
Nepal among the members are given extra concessions.
Members can withdraw from SAPTA by giving a 6 month notice.

India accorded the must favoured Nation (MFN) status to

Pakistan in the trade and economic multers.

SAARC members also united to fight against biases under the

WTO arrangements.