Free Trade Agreements

Trade agreements occur 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.

There are pros and cons to trade agreements. By removing tariffs, they lower prices of imports
and consumers benefit. However, some domestic industries suffer. 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 suffer. Trade agreements often force a trade-off between companies and consumers.

On the other hand, some domestic industries benefit. They find new markets for their tariff-free
products. Those industries grow and hire more workers. These trade-offs are the subject of
endless debate among economists.

Types of Trade Agreements

Trade agreements are unilateral, bilateral, or multilateral.

Unilateral Trade Agreements

A unilateral trade agreement is a commerce treaty that a nation imposes without regard to others.
It benefits that one country only. It is unilateral because other nations have no choice in the
matter. It is not open to negotiation.

The World Trade Organization defines a unilateral trade preference similarly. It occurs when one
nation adopts a trade policy that isn't reciprocated. For example, it happens when a country
imposes a trade restriction, such as a tariff, on all imports.

It also applies to a state that lifts a tariff on its partner's imports even that's not reciprocated. A
large country might do that to help out a small one.

Example: The United States has unilateral trade policies under the Generalized System of
Preferences. That's where developed countries grant preferential tariffs to imports from
developing countries. It was instituted on January 1, 1976, by the Trade Act of 1974.

Bilateral Trade Agreements

A bilateral trade agreement confers favored trading status between two nations. By giving them
access to each other's markets, it increases trade and economic growth. The terms of the
agreement standardize business operations and level the playing field.

Each agreement covers five areas-

First, it eliminates tariffs and other trade taxes. This gives companies within both countries a
price advantage. It works best when each country specializes in different industries.
Second, countries agree they won't dump products at a cheap cost. Their companies do this to
gain unfair market share. They drop prices below what it would sell for at home or even its cost
to produce. They raise prices once they've destroyed competitors.

Third, the governments refrain from using unfair subsidies. Many countries subsidize strategic
industries, such as energy and agriculture. This lowers the costs for those producers. It gives
them an unfair advantage when exporting to another nation.

Fourth, the agreement standardizes regulations, labor standards, and environmental protections.

Fifth, they agree to not steal the other's innovative products. They adopt each other's copyright
and intellectual property laws.

Example: On July 17, 2018, the world's largest bilateral agreement was signed between the EU
and Japan. It reduces or ends tariffs on most of the $152 billion in goods traded. It will come into
force in 2019 after ratification. The deal will hurt U.S. auto and agricultural exporters.

Advantages

Bilateral agreements increase trade between the two countries. They open markets to successful
industries. As companies benefit, they add jobs.

The country's consumers also benefit from lower costs. They can get exotic fruits and vegetables
that can get too expensive without the agreement.

They are easier to negotiate than multilateral trade agreements, since they only involve two
countries. This means they can go into effect faster, reaping trade benefits more quickly. If
negotiations for a multilateral trade agreement fail, many of the nations will negotiate a series of
bilateral agreements instead.

Disadvantages

Any trade agreement will cause less successful companies to go out of business. They can't
compete with a more powerful industry in the foreign country. When protective tariffs are
removed, they lose their price advantage. As they go out of business, workers lose jobs.

Bilateral agreements can often trigger competing bilateral agreements among other countries.
This can whittle away the advantages that the free trade agreement confers between the original
two nations.

Multilateral Trade Agreements

Multilateral trade agreements are commerce treaties among three or more nations. The
agreements reduce tariffs and make it easier for businesses to import and export. Since they are
among many countries, they are difficult to negotiate.
That same broad scope makes them more robust than other types of trade agreements once all
parties sign. Bilateral agreements are easier to negotiate but these are only between two
countries.

They don't have as big an impact on economic growth as does a multilateral agreement.

Example- The North American Free Trade Agreement which was ratified on January 1, 1994.
NAFTA is between the United States, Canada, and Mexico, is the largest free trade agreement in
the world.

Advantages

Multilateral agreements make all signatories treat each other equally. No country can give better
trade deals to one country than it does to another. That levels the playing field.

The second benefit is that it increases trade for every participant. Their companies enjoy low
tariffs. That makes their exports cheaper.

The third benefit is it standardizes commerce regulations for all the trade partners. Companies
save legal costs since they follow the same rules for each country.

The fourth benefit is that countries can negotiate trade deals with more than one country at a
time. Trade agreements undergo a detailed approval process. Most countries would prefer to get
one agreement ratified covering many countries at once.

The fifth benefit applies to emerging markets. Bilateral trade agreements tend to favor the
country with the best economy. That puts the weaker nation at a disadvantage. But making
emerging markets stronger helps the developed economy over time.

Disadvantages

The biggest disadvantage of multilateral agreements is that they are complex. That makes them
difficult and time consuming to negotiate. Sometimes the length of negotiation means it won't
take place at all.

Second, the details of the negotiations are particular to trade and business practices. The public
often misunderstands them. As a result, they receive lots of press, controversy, and protests.

The third disadvantage is common to any trade agreement. Some companies and regions of the
country suffer when trade borders disappear.

The fourth disadvantage falls on a country's small businesses. A multilateral agreement gives a
competitive advantage to giant multi-nationals. They are already familiar with operating in a
global environment. As a result, the small firms can't compete.