International Trade Policies and Agreements

Trade Policies

• are decided keeping in mind healthy competition between

producers that would also not make the market lacklustre

üCommercial Policy
üFree Trade
üDumping (Pricing Policy)
üGree Box Policies
Commercial Policy

• also referred to as a trade policy or international trade policy

• is a set of rules and regulations that are intended to change
international trade flows, particularly to restrict imports
• The purpose of trade policy is to help a nation’s international trade
run more smoothly, by setting clear standards and goals which
can be understood by potential trading partners.
• In many regions, groups of nations work together to create
mutually beneficial trade policies.
• Trade policy can involve various types of actions, such as:

üelimination of quantitative restrictions

üreduction of tariffs
üunilateral, bilateral, regional, and multilateral liberalization
Objectives of Commercial Policy
• appreciate trade with other nations
• protect domestic market prevailing in the country
• increase the export of a particular product which will help in expanding
domestic market
• prevent the imports of particular goods for giving protection to infant
industries or developing key industry or saving foreign exchange, etc.
• encourage the imports of capital goods for speeding up the economic
development of the country
• restrict the imports of goods which create unfavorable balance of payments
• assist or prevent the export or import of goods and services for achieving the
desired rate of exchange
• enter into trade agreements with foreign nations for stabilizing the foreign
trade
Why Nations Adopt Commercial Policies

• Advantage
– National Defense Theory
– Infant Industry Theory
– Antidumping Theory

• Disadvantage
– Increased cost to consumers
– Increased cost to domestic suppliers
– Less competition, leading to fewer product choices for consumers
– Escalations: trade policies may lead to similar measures taken by foreign
governments
• When nations trade with each other regularly, they often establish
trade agreements. Trade agreements smooth the way for trading,
spelling out the desires of both sides to create a stronger, more
effective trading relationship.
• Many trade agreements are designed to accommodate a desire
for free trade.
• Different nations have different regulations about product safety.
• Security is also an issue, with nations wanting to protect
themselves from potential threats while maintaining good foreign
relations with frequent trading partners
Free Trade

• is a policy followed by some international markets in which

countries’ governments do not restrict imports from, or exports to,
other countries
• Free trade is exemplified by the European Economic Area and the
North American Free Trade Agreement, which have established
open markets.
• Most governments still impose some protectionist policies that are
intended to support local employment, such as applying tariffs to
imports or subsidies to exports. Governments may also restrict
free trade to limit exports of natural resources.
Features of Free Trade

• trade of goods without taxes (including tariffs) or other trade

barriers (e.g.quotas on imports or subsidies for producers)
• trade in services without taxes or other trade barriers
• the absence of “trade-distorting” policies (such as taxes, subsidies,
regulations, or laws) that give some firms, households, or factors
of production an advantage over others
• unregulated access to market information
• inability of firms to distort markets through government-imposed
monopoly or oligopoly power
• trade agreements which encourage free trade
Dumping (Pricing Policy)

• is a kind of predatory pricing, especially in the context of

international trade
• it occurs when manufacturers export a product to another
country at a price either below the price charged in its
home market or below its cost of production
• the purpose of this act is sometimes to increase market
share in a foreign market or to drive out competition
Green Box Policies

• refer to domestic or trade policies that are deemed to be minimally

trade-distorting and that are excluded from reduction
commitments in the Uruguay Round Agreement on Agriculture
• examples are domestic policies dealing with research, extension,
inspection and grading, environmental and conservation programs,
disaster relief, crop insurance, domestic food assistance, food
security stocks, structural adjustment programs, and direct
payments not linked to production.
• trade measures or policies such as export market promotion (but
not export subsidies or foreign food aid) are also exempt
International Trade Agreement

• International trade agreements can be defined as treaties

that affect the functioning of production and consumption
of a region.
• These policies are aimed at mutual benefit and the
stimulation of the national economy.
Trade Agreement

• also known as trade pact, is a wide ranging tax, tariff and

trade treaty that often includes investment guarantees
• the most common trade agreements are of the
preferential and free trade types are concluded in order to
reduce (or eliminate) tariffs, quotas, and other trade
restrictions on items traded between the signatories
Classification of Trade Pacts

• by number and type of signatories

• by level of integration
• special agreements
• by the World Trade Organization
By Number and Type of Signatories
• bilateral (BTA) - signed between two sides, where each
side could be a country (or other customs territory),
• trade bloc - an informal group of countries (or other
customs territories)
• multilateral - signed between more than two sides
(typically neighboring or in the same region)
By Level of Integration
• Economic and Monetary Union
• Economic Union
• Customs and Monetary Union
• Common Market
• Customs Union
• Multilateral Free Trade Area
The resulting level of economic integration depends on the
specific type of trade pacts and policies adopted by the
trade bloc:
1. Separate
üTrade and Investment Framework Agreement (TIFA)
üBilateral Investment Treaty (BIT)
üPreferential Trade Arrangement (PTA) - limited scope and depth of
tariffs reduction between the customs territories
Ø Free Trade Agreement establishing a Free Trade Area (FTA) - extensive reduction
or elimination of tariffs on substantially all trade allowing for the free movement of
goods and in more advanced agreements also reduction of restrictions on
investment and establishment allowing for the free movement of capital and free
movement of services.
 o Common market - FTA with significantly reduced or eliminated
restrictions on the freedom of movement of all factors of production,
including free movement of labor and of enterprise; and coordination in
economic policy
üCurrency Union - sharing the same currency
2. Composite
üCustoms Union - FTA with common external tariffs of all signatories in
respect to non-signatory countries
Ø Customs and monetary union - Customs union with Currency union\
Ø Economic union - Customs union with Common market
Ø Economic and monetary union (EMU) - Economic union with Currency Union
Ø Fiscal Union - common coordination of substantial parts of the fiscal policies
(proposed step between EMU and Complete Economic Integration)
Special Agreements
• World Trade Organization treaty
Øagreements in the WTO framework (Textile Agreement and
others)
• the now defunct Multilateral Agreement on Investment (in
the OECD framework)
By the World Trade Organization
• Typically, the benefits and obligations of the trade agreements
apply only to their signatories.
• in the framework of the WTO, different agreement types are
concluded, whose terms apply to all WTO members on the so-
called most-favored basis (MFN), which means that beneficial
terms agreed bilaterally with one trading partner will apply also to
the rest of the WTO members
• preferential - agreements concluded outside of the WTO
framework (and granting additional benefits beyond the WTO
MFN level, but applicable only between the signatories and not to
the rest of the WTO members)
ü According to WTO rules, these agreements are subject to certain
requirements such as notification to the WTO and general reciprocity (the
preferences should apply equally to each of the signatories of the
agreement)
• unilateral preferences - (some of the signatories gain
preferential access to the market of the other signatories,
without lowering their own tariffs) are allowed only under
exceptional circumstances and as temporary measure.
Trade Bloc

• is a type of intergovernmental agreement, often part of a

regional intergovernmental organization, where regional
barriers to trade, tariff or non-tariff barriers, are reduced or
eliminated among the participating states
Advantages of Trade Blocs

• Foreign Direct Investment - FDIs are results of trade blocs and

benefits the economies of participating nations. Larger markets
are created, resulting in lower costs to manufacture products
locally.
• Economies of Scale - The average cost of production is
decreased because mass production is allowed.
• Competition - Trade blocs bring manufacturers in numerous
countries closer together, resulting in greater competition.
Increased competition promotes greater efficiency within firms.
• Trade Effects - Trade blocs eliminate tariffs, thus driving the cost
of imports down. As a result, demand changes and consumers
make purchases based on the lowest prices, allowing firms with a
competitive advantage in production to thrive.
• Market Efficiency - The increased consumption experienced with
changes in demand combines with a greater amount of products
being manufactured to result in an efficient market.
Disadvantages of Trade Blocs

• Regionalism vs. Multinationalism - Trading blocs bear an inherent

bias in favor of their participating countries. Trade agreements
have contributed to an increased flow of trade among countries.
• Loss of Sovereignty - A trading bloc is likely to lead to at least
partial loss of sovereignty for its participants. EU has transformed
itself into a far-reaching political organization that deals not only
with trade matters, but also with human rights, consumer
protection, greenhouse gas emissions and other issues only
marginally related with trade.
• Concessions - No country wants to let foreign firms gain domestic
market share at the expense of local companies without getting
something in return. MNCs may be allowed entry to home markets,
making some local firms uncompetitive.
• Interdependence - Because trading blocs increase trade among
participating countries, the countries become increasingly
dependent on each other. A disruption of trade within a trading
bloc as a result of a natural disaster, conflict or revolution may
have severe consequences for the economies of all participating
countries.
List of Trade Blocs
• European Union (EU)
• African Union (AU)
• Union of South American Nations (USAN)
• Caribbean Community (CARICOM)
• Central American Integration System (SICA)
• Arab League (AL)
• European Free Trade Association (EFTA)
• Eurasian Economic Community (EAEC)
• ASEAN Free Trade Area Agreement (AFTA)
• Central European Free Trade Agreement (CEFTA)
• North American Free Trade Agreement (NAFTA)
• South Asian Association for Regional Cooperation (SAARC)
• Pacific Islands Forum (PIF)
Reference:
Dawson, C. (2017). International Trade. Larsen and Keller
Education, New York, USA