Trade pact
Encyclopedia
A trade pact is a wide ranging tax, tariff and trade
pact that often includes investment
guarantees. The most common trade pacts are of the preferential and free trade
types are concluded in order to reduce (or eliminate) tariff
s, quotas
and other trade restrictions
on items trade
d between the signatories.
), a trade bloc
or an informal group of countries (or other customs territories). A trade agreement signed between more than two sides (typically neighboring or in the same region) is classified as multilateral.
), while others are less intensive (North American Free Trade Agreement
). The resulting level of economic integration
depends on the specific type of trade pacts and policies adopted by the trade bloc
:
In the framework of the World Trade Organization
a different agreement types are concluded (mostly during new member accessions), 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.
All 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) are called preferential by the WTO. 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) where 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.
The trade agreements called preferential by the WTO are also known as regional (RTA), despite not necessarily concluded by countries within a certain region. There are currently 205 agreements in force as of July 2007. Over 300 have been reported to the WTO. The number of FTA has increased significantly over the last decade. Between 1948 to 1994, the General Agreement on Tariffs and Trade
(GATT), the predecessor to the WTO, received 124 notifications. Since 1995 over 300 trade agreements have been enacted.
The WTO is further classifying these agreements in the following types:
" is a common goal. For the most part, governments are supportive of further trade agreements.
There have been however some concerns expressed by the WTO
. According to Pascal Lamy
, Director-General of the WTO, the proliferation of RTA “...is breeding concern — concern about incoherence, confusion, exponential increase of costs for business, unpredictability and even unfairness in trade relations.” The position of the WTO is that while the typical trade agreements (called preferential or regional by the WTO) are useful to a degree, it is much more beneficial to focus on global agreements in the WTO framework such as the negotiations of the current Doha round
.
The anti-globalization movement
opposes such agreements almost by definition, but some groups normally allied within that movement, e.g. green parties, seek fair trade
or safe trade
provisions that moderate what they perceive to be the ill effects of globalization
.
Lists:
Tax, tariff and trade
The tax, tariff and trade laws of a political region, state or trade bloc determine which form of consumption and production tend to be encouraged or discouraged...
pact that often includes investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
guarantees. The most common trade pacts are of the preferential and free trade
Free trade area
A free trade area is a trade bloc whose member countries have signed a free trade agreement , which eliminates tariffs, import quotas, and preferences on most goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be...
types are concluded in order to reduce (or eliminate) tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s, quotas
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
and other trade restrictions
Trade barrier
Trade barriers are government-induced restrictions on international trade. The barriers can take many forms, including the following:* Tariffs* Non-tariff barriers to trade** Import licenses** Export licenses** Import quotas** Subsidies...
on items trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
d between the signatories.
By number and type of signatories
A trade agreement is classified as bilateral (BTA) when signed between two sides, where each side could be a country (or other customs territoryCustoms territory
A customs territory is a territory with individual customs regulations.The most common type of customs territory is the sovereign state and the others are the Trade bloc that has a customs union; and the autonomous or dependent territory that has independence in foreign trade and customs...
), a trade bloc
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
or an informal group of countries (or other customs territories). A trade agreement signed between more than two sides (typically neighboring or in the same region) is classified as multilateral.
By sophistication
There are a variety of trade agreements; with some being quite complex (European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
), while others are less intensive (North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...
). The resulting level of economic integration
Economic integration
Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state...
depends on the specific type of trade pacts and policies adopted by the trade bloc
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
:
- Separate
- Trade and Investment Framework AgreementTrade and Investment Framework AgreementA Trade and Investment Framework Agreement is a trade pact which establishes a framework for expanding trade and resolving outstanding disputes between countries....
(TIFA) - Bilateral Investment TreatyBilateral Investment TreatyA bilateral investment treaty is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment . BITs are established through trade pacts...
(BIT) - Preferential Trade Arrangement (PTA) - limited scope and depth of tariffs reduction between the customs territoriesCustoms territoryA customs territory is a territory with individual customs regulations.The most common type of customs territory is the sovereign state and the others are the Trade bloc that has a customs union; and the autonomous or dependent territory that has independence in foreign trade and customs...
.- 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 investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
and establishment allowing for the free movement of capitalCapital (economics)In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
and free movement of services- Common market - FTA with significantly reduced or eliminated restrictions on the freedom of movementFreedom of movementFreedom of movement, mobility rights or the right to travel is a human right concept that the constitutions of numerous states respect...
of all factors of productionFactors of productionIn economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, including free movement of labour and of enterpriseCapitalismCapitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
; and coordination in economic policyEconomic policyEconomic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
- Common market - FTA with significantly reduced or eliminated restrictions on the freedom of movement
- 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
- Currency unionCurrency unionA currency union is where two or more states share the same currency, though without there necessarily having any further integration such as an Economic and Monetary Union, which has in addition a customs union and a single market.There are three types of currency unions:#Informal - unilateral...
- sharing the same currencyCurrencyIn economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
- Trade and Investment Framework Agreement
- Composite
-
- Customs unionCustoms unionA customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas...
- FTA with common external tariffCommon external tariffWhen a group of countries form a customs union they must introduce a common external tariff. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which country within the area they are entering...
s of all signatories in respect to non-signatory countries- Customs and monetary unionCustoms and Monetary UnionAn customs and monetary union is a type of trade bloc which is composed of a customs union and a currency union. The participant countries have both common external trade policy and share a single currency....
- Customs union with Currency union - Economic unionEconomic unionAn economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production and a common external trade policy.The countries...
- Customs union with Common market- Economic and monetary unionEconomic and monetary unionAn economic and monetary union is a type of trade bloc which is composed of an economic union with a monetary union. It is to be distinguished from a mere monetary union , which does not involve a common market. This is the fifth stage of economic integration...
(EMU) - Economic union with Currency Union- Fiscal UnionFiscal unionFiscal union is the integration of the fiscal policy of nations or states. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments...
- common coordination of substantial parts of the fiscal policiesFiscal policyIn economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
(proposed step between EMU and Complete economic integrationComplete economic integrationComplete economic integration is the final stage of economic integration. After complete economic integration, the integrated units have no or negligible control of economic policy, including full monetary union and complete or near-complete fiscal policy harmonisation.Complete economic...
)
- Fiscal Union
- Economic and monetary union
- Customs and monetary union
- Customs union
-
Special agreements
- World Trade OrganizationWorld Trade OrganizationThe World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
treaty- agreements in the WTO framework (Textile Agreement and others)
- the now defunct Multilateral Agreement on InvestmentMultilateral Agreement on InvestmentThe Multilateral Agreement on Investment was a draft agreement negotiated between members of the Organisation for Economic Co-operation and Development in 1995–1998. Its ostensible purpose was to develop multilateral rules that would ensure international investment was governed in a more...
(in the OECDOrganisation for Economic Co-operation and DevelopmentThe Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
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 World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
a different agreement types are concluded (mostly during new member accessions), whose terms apply to all WTO members
WTO accession and membership
All World Trade Organization members have joined the organization as a result of negotiation, and membership consists of a balance of rights and obligations. The process of becoming a World Trade Organization member is unique to each applicant country, and the terms of accession are dependent upon...
on the so-called most-favored
Most favoured nation
In international economic relations and international politics, most favoured nation is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the...
basis (MFN), which means that beneficial terms agreed bilaterally with one trading partner will apply also to the rest of the WTO members.
All 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) are called preferential by the WTO. 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) where 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.
The trade agreements called preferential by the WTO are also known as regional (RTA), despite not necessarily concluded by countries within a certain region. There are currently 205 agreements in force as of July 2007. Over 300 have been reported to the WTO. The number of FTA has increased significantly over the last decade. Between 1948 to 1994, the General Agreement on Tariffs and Trade
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
(GATT), the predecessor to the WTO, received 124 notifications. Since 1995 over 300 trade agreements have been enacted.
The WTO is further classifying these agreements in the following types:
- Goods covering:
- basic preferential trade agreement (a.k.a. partial scope agreement)
- free trade agreement
- customs union
- Services covering:
- Economic Integration Agreement - any agreement, including a basic PTA, that covers also services
Reaction
Trade pacts are frequently politically contentious since they may change economic customs and deepen interdependence with trade partners. Increasing efficiency through "free tradeFree trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
" is a common goal. For the most part, governments are supportive of further trade agreements.
There have been however some concerns expressed by the WTO
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
. According to Pascal Lamy
Pascal Lamy
Pascal Lamy is the Director-General of the World Trade Organization, a French political advisor, a businessman, and a former European Commissioner for Trade...
, Director-General of the WTO, the proliferation of RTA “...is breeding concern — concern about incoherence, confusion, exponential increase of costs for business, unpredictability and even unfairness in trade relations.” The position of the WTO is that while the typical trade agreements (called preferential or regional by the WTO) are useful to a degree, it is much more beneficial to focus on global agreements in the WTO framework such as the negotiations of the current Doha round
Doha round
The Doha Development Round or Doha Development Agenda is the current trade-negotiation round of the World Trade Organization which commenced in November 2001. Its objective is to lower trade barriers around the world, which will help facilitate the increase of global trade...
.
The anti-globalization movement
Anti-globalization movement
The anti-globalization movement, or counter-globalisation movement, is critical of the globalization of corporate capitalism. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist movement, anti-corporate globalization movement, or...
opposes such agreements almost by definition, but some groups normally allied within that movement, e.g. green parties, seek fair trade
Fair trade
Fair trade is an organized social movement and market-based approach that aims to help producers in developing countries make better trading conditions and promote sustainability. The movement advocates the payment of a higher price to producers as well as higher social and environmental standards...
or safe trade
Safe trade
Safe trade is a slogan advocated by Greenpeace in its desire to "green" the World Trade Organisation and the Doha Development Round. It is designed to compete with "free trade" as a concept....
provisions that moderate what they perceive to be the ill effects of globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
.
See also
- Trade and developmentTrade and developmentTrade is a key factor in economic development. A successful use of trade can boost a country's development. On the other hand, opening up markets to international trade may leave local producers swamped by more competitive foreign producers.-Overview:...
- Trade creationTrade creationTrade creation is an economic term related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union. The issue was firstly brought into discussion by Jacob Viner , together with the trade diversion effect...
- Permanent Normal Trade Relations (PNTR)
Lists:
- List of international trade topics
- List of free trade agreements
- List of trade blocs