Doing Business with International Agreements

Trading Agreements and Organizations

Types of Trade Agreements:

 BILATERAL
 MULTILATERAL
 REGIONAL

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 not to dump products at a cheap cost. Their companies might do that to
gain unfair market share. They drop prices below what something 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. Fewer regulations act like a subsidy. It gives the country's exporters a competitive
advantage over its foreign competitors.

 Fifth, they agree to not steal the other's innovative products.

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 become 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.

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. It's
especially critical for emerging market countries. Many of them are smaller in size, making them
less competitive. The Most Favored Nation Status confers the best trading terms a nation can
get from a trading partner. Developing countries benefit the most from this trading status.

 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.
  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. They lay off workers to cut costs.
Others move their factories to countries with a lower standard of living. If a region depended on
that industry, it would experience high unemployment rates. That makes multilateral
agreements unpopular.

REGIONAL TRADE AGREEMENTS

Regional trading agreements refer to a treaty that is signed by two or more countries to encourage the
free movement of goods and services across the borders of its members. The agreement comes with
internal rules that member countries follow among themselves. When dealing with non-member
countries, there are external rules in place that the members adhere to.

Quotas, tariffs, and other forms of trade barriers restrict the transport of manufactured goods and
services. Regional trading agreements help reduce or remove the barriers to trade.

Types of Regional Trading Agreements

Regional trading agreements vary depending on the level of commitment and the arrangement among
the member countries.

1. Preferential Trade Areas

The preferential trading agreement requires the lowest level of commitment to reducing trade barriers,
though member countries do not eliminate the barriers among themselves. Also, preferential trade
areas do not share common external trade barriers.

2. Free Trade Area

In a free trade agreement, all trade barriers among members are eliminated, which means that they can
freely move goods and services among themselves. When it comes to dealing with non-members, the
trade policies of each member still take effect.

3. Customs Union
Member countries of a customs union remove trade barriers among themselves and adopt common
external trade barriers.

4. Common Market
A common market is a type of trading agreement wherein members remove internal trade barriers,
adopt common policies when it comes to dealing with non-members, and allow members to move
resources among themselves freely.

5. Economic Union
An economic union is a trading agreement wherein members eliminate trade barriers among
themselves, adopt common external barriers, allow free import and export of resources, adopt a set of
economic policies, and use one currency.

6. Full Integration
The full integration of member countries is the final level of trading agreements.

Benefits of Regional Trading Agreements

Regional trading agreements offer the following benefits:

1. Boosts Economic Growth

Member countries benefit from trade agreements, particularly in the form of generation of more job
opportunities, lower unemployment rates, and market expansions. Also, since trade agreements usually
come with investment guarantees, investors who want to invest in developing countries are protected
against political risk.

2. Volume of Trade
Businesses in member countries enjoy greater incentives to trade in new markets, thanks to attractive
trading conditions due to the policies included in the agreements.

3. Quality and Variety of Goods

Trade agreements open a lot of doors for businesses. As they gain access to new markets, the
competition becomes more intense. The increased competition compels businesses to produce higher-
quality products. It also leads to more variety for consumers. When there is a wide variety of high-
quality products, businesses can improve customer satisfaction.

Disadvantages of Regional Trading:

Trade deflection. If the agreement reached only the free trade area stage, non-member countries would
take advantage of the tariff differences for their own benefit.

Increase economic dependence. When a member country goes into recession, it can quickly spread to
other member countries. The Eurozone debt crisis in late 2009 is an example. The crisis started in
Greece and then immediately spread to countries such as Italy and Spain.

Reduction of economic sovereignty and independence of economic policies. Under economic unions,
member states adopt joint economic policies. It may be unsuitable to the economic interests of
individual member countries. Policies may favor member countries with large economies and tend to
ignore the interests of other members.

Domestic industry bankruptcy. Increased competition kills the domestic industry due to inefficiency and
low competitiveness. The pressure is getting heavier if the industry absorbs a significant workforce.
Labor mobility is also low if regional trade agreements are only at the free trade area stage.