Trade Agreements: Why Are They Important?
Trade Agreements are important at all levels because they help commerce flow, excite competition which keeps world economies circulating and growing. Many times these agreements begun, but then halted because one country decides that it needs to protect one or more industries from harm by other nation’s imports.
When imports enter a country they normally have a tariff or a tax. So for example: when you are purchasing an item from France it’s more expensive because of a duty that the importer had to pay for it to come in. When a Trade Agreement is negotiated there is an elimination of that tax then the import comes in freely and the item may be less expensive than one you could purchase in the United States. If too many of those items are coming in then there may be concerns that there needs to be protection of that industry.
The US, and all countries, want to sell to consumers outside of the country; therefore they want businesses to export and increase their trade deficits. Exports are goods and services that are made in a country and sold outside its borders. There is a balance because as the export sends a product to another country it too will be taxed. In that foreign country so that that national can protect its domestic residents and industries.
There are 3 different types of Trade Agreements
1. Unilateral trade agreement. A country can tighten or loosen trade restrictions. When they tighten, a country imposes trade restrictions on one country and no other country reciprocates. When they loosen trade restrictions, which is where one country would give another country a competitive advantage. For instance, one country might see a developing national economy that is non-threatening and seek to help, like foreign aid. They help strengthen that market or a certain industry in that nation. The foreign industry is too small to be a threat. Normally there is an incentive, to create a new export market for the more developed country’s businesses.
2. Bilateral trade agreements are agreements between two countries or regions where they agree to expand business opportunities and lower tariffs. They will offer “Preferred Trade Partner Status” to each other. This is a strategic alliance between the partners for a common purpose. So this status means they agree to help each other. However, there is normally an argument around key protected or subsidized domestic industries, like automotive, oil or food production industries.
The US currently has 16 bilateral agreements. The Obama administration was negotiating the world's largest bilateral agreement, the Transatlantic Trade and Investment Partnership with the European Union during his term.
3. Multilateral trade agreements are complex and the most difficult to negotiate because of all the moving parts. They involve 3 countries. With many participants the competitive advantages take center. The negotiators are larger, and there is more to lose or so they believe. In this situation all countries give each other “Most Favored Nation Status.” This is a higher standard than that “preferred trade partner status.” It means they agree to treat each other equally.
The largest multilateral agreement was NAFTA, the North American Free Trade Agreement negotiated between the United States, Canada and Mexico. It was a great success and is now at risk of dilution or ending. The countries combined economic output is $20 trillion. NAFTA quadrupled trade to $1.14 trillion in 2015. However, the other side of this coin is the concern that the US lost jobs int he manufacturing industries because of it. This is not what governments want, but it is a trade-off.
Bilateral agreements that did not get off the ground, but were in negotiation; The Central American-Dominican Republic Free Trade Agreement was negotiated by the US with Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua and El Salvador to eliminated tariffs on more than 80 percent of U.S. exports and; The Trans-Pacific Partnership would have replaced NAFTA as the world's largest agreement, however in 2017; President Trump withdrew the United States from it.
Whatever we think of international trade, which really depends on what side of the world you are on, whether you are an importer or exporter, employer or employee you stand there are advantages and disadvantages, give and take, put ego and power to play - and they are difficult to pull off. There must be a delicate balance, but when they work and there is properly negation and mechanisms for quarrels play by the rules kids, cultures merge, industries rise and jobs are created.