Trade Agreements

What It Is and How It Works

The main idea of trade agreements is that a group of countries -generally with similar demographics and/or economic structure- associate in order to eliminate possible barriers to the exchange of goods between them. The different types of agreements include free trade areas, customs unions and common markets. In any case, all treaties may have specific and differentiated conditions for different sectors and activities.

The Policy Impact

By establishing preferential conditions for certain nations (those that participate in the treaty), trade with their respective economies is encouraged. This occurs because it is cheaper to import from them, since they are exempted from paying taxes that would have to be paid if those same goods were imported from other origins. The same is true for exports. 

In practice, this type of agreement allows the creation of a larger and more dynamic domestic market, also favoring those industries with economies of scale. 

The most efficient agreements in economic terms are those between nations that are similar in terms of development and productive complementarities. If this type of agreement is made between states with substitute economies (i.e. that produce similar goods), what will end up happening is that the more competitive nation will completely displace the production of the less efficient nation, generating higher unemployment in the latter.

Stakeholders and Political Implications

In this instance we must separate the different types of treaties. 

Free trade agreements are characterized by having no internal tariffs, while their members are free to establish the tariffs they wish with respect to the rest of the world. 

Customs unions share a common tariff with respect to the rest of the world and have no customs. 

Common markets are customs unions which, in addition to generating a common trade legislation aimed at ensuring total freedom of movement of goods, services, capital and labor (people). 

In general, all of these tend to lower the cost of goods for consumers, although they could have a negative impact on employment. Thus, it is better to talk about the impact of each industry in particular rather than of a country in general. For example, if country A, which is very productive in meat production but less efficient in the production of T-shirts, proposes to make an agreement with country B, which has the opposite conditions, the T-shirt industry of country A will probably fall significantly, leaving many textile workers unemployed. However, this should not lead us to infer that everything is ideal for country B. Have you thought about what will happen to agricultural workers? The opposite will happen. While country A will now be able to export more meat to country B, these workers could become unemployed.

Some Debates Among Economists

For centuries, economics has been discussing the benefits of free trade in relation to the barriers that may exist for trade between countries. Although there are elements to sustain that from a global point of view a free trade system may be more efficient, there are also elements that lead countries to sustain protectionist policies. In the particular case of Trade Agreements, it is difficult to demonstrate a priori how beneficial it may be for a country to enter into an agreement with another country or countries. In any case, they depend on each industry and the level of development in relation to the analogous ones of the rest of the countries. 

Real-World Examples

From 1994 until the early years of the 21st century, american countries discussed the possibility of moving forward with a Free Trade Agreement that would include all nations (except Cuba). Finally, in 2005, it was submitted to a vote at the Summit of the Americas and was rejected. Here is an opinion piece on the matter in 2001.https://www.washingtonpost.com/archive/opinions/2001/05/17/free-trades-few-beneficiaries/f2e8965c-1971-4844-85fc-af873ef0a0d1/ 

North American Free Trade Agreement (N.A.F.T.A) explained https://www.washingtonpost.com/video/business/the-north-american-free-trade-agreement-nafta-explained/2017/01/27/0b9e5b94-e4d5-11e6-a419-eefe8eff0835_video.html