Trade Agreement Definition Economics

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In most modern economies, there are many possible coalitions of interested groups and the diversity of possible unilateral barriers is important. In addition, some trade barriers are created for other non-economic reasons, such as national security or the desire to protect or isolate local culture from foreign influences. It is therefore not surprising that successful trade agreements are very complicated. Some commonalities of trade agreements are (1) reciprocity, (2) a clause of the most favoured nation (MFN) and (3) the use of non-tariff barriers. The world`s major countries introduced the GATT in response to the waves of protectionism that paralyzed and contributed to world trade during the Great Depression of the 1930s. Successive GATT “cycles” have significantly reduced customs barriers on industrial products in industrialized countries. Since the beginning of the GATT in 1947, the average tariffs set by industrialized countries have increased from about 40% to about 5% today. These tariff reductions helped to promote both the considerable expansion of world trade after the Second World War and the resulting increase in real per capita income between developed and developing countries. The annual benefit of the elimination of tariff and non-tariff barriers resulting from the Uruguay Round agreement (negotiated between 1986 and 1993 under the aegis of GATT) was estimated at about $96 billion, or 0.4% of global GDP. The WTO continues to classify these agreements according to the following types: for most countries, international trade is governed by unilateral trade barriers of different species, including tariffs, non-tariff barriers and absolute bans. Trade agreements are a way to reduce these barriers and thus open up the benefits of enhanced trade to all parties. There are pros and cons of trade agreements.

By removing tariffs, they reduce import prices and consumers benefit from them. However, some domestic industries are suffering. They cannot compete with countries with lower standards of living. This allows them to leave the store and make their employees suffer. Trade agreements often require a trade-off between businesses and consumers. As a multilateral trade agreement, GATT calls on its signatories to extend the status of the Most Preferred Nation (MFN) to other trading partners participating in the WTO. MFN status means that each WTO member enjoys the same tariff treatment of its products in foreign markets as the “preferred” country that competes in the same market, thus excluding preferences or discrimination from a Member State. Even in the absence of the constraints imposed by the most favoured nation and national treatment clauses, it is sometimes easier to obtain general multilateral agreements than separate bilateral agreements. In many cases, the potential loss resulting from a concession to a country is almost as great as that which would result from a similar concession to many countries.

The benefits to the most efficient producers from global tariff reductions are significant enough to warrant substantial concessions. Since the implementation of the General Agreement on Tariffs and Trade (GATT, 1948) and its successor, the World Trade Organization (WTO, 1995), global tariffs have declined considerably and world trade has increased.