Why Are Trade Agreement Important

diciembre 21, 2020 Agustin

The United States has more than a dozen free trade agreements and the World Economic Forum has 420 regional trade agreements in place worldwide, others estimated at more than 500. Not all of them are free trade agreements, but together they shape international trade and pose a challenge for shippers, importers, exporters and global supply chain managers to navigate. 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. We note that the cumulative decline in IPV over the 1993-2013 period, due to trade agreements, was 0.24% in our baseline estimate. Of this overall effect, we account for about 55% of the direct impact on the prices and quality of imported products. The remaining 45% is due to lower input prices, adjusted for quality, which reduces the prices of domestic products. Although this is not a major effect, it represents a considerable saving for EU consumers, around EUR 24 billion per year. But trade agreements are necessary because they protect mutually U.S.-based exporting companies and their workers from outside politicians who would otherwise do the same.

One of the motivations for these standards is the fear that unrestricted trade will lead to a «race to the bottom» in labour and environmental standards, as multinationals around the world seek low wages and lax environmental legislation to reduce costs. Yet there is no empirical evidence of such a race. In fact, trade generally involves the transfer of technology to developing countries, which allows for an increase in wage rates, as the Korean economy – among many others – has demonstrated since the 1960s. In addition, increased revenues allow cleaner production technologies to become affordable. Replacing scooters made on Indian territory in India with scooters imported from Japan, for example, would improve air quality in India. But no solution will be found in a trade agreement. Nor should they, because that is not what trade agreements do. We start with the development of price scales, quality and varieties. Prices and the number of countries of origin for each product (our variety level) are easily observed in international trade data.