Trade
Agreements: What They Are and What They Do
By William H. Cooper, Specialist in International Trade and Finance at the
Congressional Research Service (CRS)*
Trade agreements are basic instruments by which countries conduct trade. Trade
agreements are legally binding arrangements between two or more governments
that stipulate rules, such as tariff levels, and other conditions for trade
and trade-related activities between their countries. Two types of trade agreements
figure prominently in contemporary U.S. trade policy: multilateral trade agreements
and bilateral or regional free trade agreements.
The Purpose of Trade
Agreements
Countries sign trade agreements, be they multilateral or bilateral/regional,
for a range of reasons. The most basic reason derives from economic theory:
that economies benefit most if they specialize and export that which they
produce relatively more efficiently and import the rest, allowing for a more
efficient use of land, labor, and capital. Trade agreements are designed in
principle to encourage countries to do that by eliminating or reducing trade
barriers and to resolve disputes that might lead to the re-establishment of
barriers. Nations also enter into trade agreements for foreign policy and
other non-commercial reasons, such as to establish or strengthen a presence
in a region and to deepen an important alliance. Read more…
Multilateral Agreements
and the WTO
Multilateral agreements are primarily those that are negotiated under and
administered by the World Trade Organization (WTO). The WTO, which was established
in 1995, has a membership of 151 countries and operates in Geneva with an
international staff.1 The WTO administers a set of more than 60 agreements
that contain principles and rules on trade in goods and services and on other
trade-related matters. From time-to-time WTO members have agreed to revise
and augment the rules and to reduce tariffs and non-tariff barriers in sets
or "rounds" of negotiations. To date, the General Agreement on Tariffs
and Trade and the WTO have conducted and completed eight rounds. The current
and ninth round, the Doha Development Agenda (DDA), was launched in November
2001 in Doha, Qatar. It is named the "development agenda" to encourage
members to focus on the challenges that developing countries encounter when
liberalizing their trade regimes. Progress on the DDA has been slow at best,
and at times, seems on the verge of collapsing. The impasse is caused by differences
largely between developing and developed countries on "modalities"
or approaches to reduce barriers in agricultural trade, trade in non-agricultural
goods, and trade in services.
However, through the history of multilateral negotiations, each successive round has been longer and more difficult than the previous rounds. This is quite understandable: the GATT/WTO membership has increased; it has become more diversified with countries representing all levels of development and diverse agendas; and the issues addressed have become more complicated making consensus more difficult to achieve.
The WTO operates under
two fundamental principles of non-discrimination in trade: most-favored-nation
(MFN) treatment- each WTO member will treat the imports from another member
no less favorably than imports from any other member- and "national treatment"-
each WTO member will treat the products of any WTO member at least as favorably
as it treats its own products.
Among the more than 60 agreements that the WTO administers, three may be considered
key agreements. The General Agreements on Tariffs and Trade (GATT) was first
negotiated in 1947. It contains the primary rules on trade in goods and was
the only multilateral set of trade rules prior to the Uruguay Round Agreements
and the establishment of the WTO in 1995. Among other things, the GATT contains
members' commitments to reduce tariffs and non-tariff barriers on trade in
goods and stipulates procedures members are to follow should they need to
remedy the adverse effects of unfair trade practices including imports that
are sold at unfairly low prices (dumped) or imports that have received proscribed
government subsidies. The General Agreement on Trade in Services (GATS), which
entered into force on January 1, 1995, provides the primary multilateral rules
on trade in services. It mirrors the GATT but is designed to take into account
some unique qualities of services, such as various modes by which services
delivered. The Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS) requires WTO members to respect the rights of IPR holders from
member countries as they would the rights IPR holders in their own country.
The WTO also adjudicates disputes that arise among its members through the
Dispute Settlement Understanding (DSU).
Bilateral and Regional
Free Trade Agreements (FTAs)
Free trade agreements (FTAs) are agreements under which two or more countries
commit to eliminate tariffs and non-tariff barriers in their mutual trade
and to establish other rules for conducting trade and foreign investment.
The FTA countries maintain their respective tariffs and other trade regulations
on trade with countries outside the arrangement. By definition, FTAs violate
the MFN principle of the WTO, although the WTO permits such agreements under
certain circumstances.
FTAs are springing up
worldwide. The WTO reports that more than 300 FTAs have been formed, most
of them since the mid-1990s. The United States has negotiated 14 FTAs, 11
of which Congress has already approved, while three others await congressional
approval.
The scope of FTAs vary widely. However, those that the United States negotiates
tend to be the most comprehensive and typically include:
FTAs have become somewhat controversial. Some critics of FTAs argue that they cost American jobs. In addition, some critics assert that FTAs undermine the multilateral trading system because they violate the MFN principle and act as "roadblocks" to the building of the WTO. They also argue that various FTAs throughout the world having sometimes conflicting types of arrangements that make trade less, rather than more, efficient and create a confusing "spaghetti bowl-like" trade system, rather than an orderly framework. Supporters of FTAs argue, that because they encompass far fewer countries than the WTO, it is easier to achieve consensus on difficult issues in FTAs, and the FTAs can serve as "building blocks" to multilateral agreements. Some critics of Bush Administration trade policy have argued that most of the countries with which the Administration has negotiated FTAs have small economies and have little commercial value. The Administration asserts, on the other hand, that countries are located in regions that are important to the United States and that the FTAs with the small countries would lead to larger, regional arrangements.
U.S. Stakeholders in
Trade Agreements
Trade theory suggests that liberalized trade increases a country's overall
economic welfare. But some sectors of the economy will likely benefit more
than others and some may actually have to make painful adjustments in the
face of increased competition.. The debate over trade liberalization and trade
agreements generally centers around the question of whether on balance the
benefits of increased outweigh the adjustment costs.
Trade affects a broad
range of groups in the United States. The interests among the groups of stakeholder
sometimes overlap and other times conflict. Even within a specific group or
community interests may not always coincide. The U.S. business community is
one major stakeholder in trade and trade agreements with diverse interests.
It consists of multinational companies (MNCs) with headquarters in the United
States but with a large global presence who tend to fully support trade liberalization
and trade agreements. Export-oriented companies are those that are primarily
located in the United States but produce goods that are able to sell abroad
and also tend to support trade agreements. However, the business community
also includes import-competing companies that face strong foreign competition
and tend to favor more restrictive trade policies.
The members of the agricultural community are another important group with
strong interests in trade in general and trade agreements in particular. It,
too, is sometimes divided on trade liberalization and trade agreements. Most
agriculture producers are successful exporters and have favored trade agreements
that increase access to foreign markets for their exports. For example, U.S.
grain and meat producers have largely been supportive of trade agreements.
Some producers, for example sugar-cane farmers and processors, are very sensitive
to import competition and have generally opposed trade agreements that would
provide foreign sugar producers greater access to the U.S. market.
Other U.S. stakeholders in trade agreements include the labor community who
are concerned about the impact of trade liberalization on domestic workers
and on workers' rights in trading partner-countries; consumers who tend to
benefit from the wider choice of products at lower pries that trade liberalization
provides; and non-government organizations (NGOs), for example private aid
groups and environmental organizations, that weigh in on the non-commercial
impact of trade agreements.
*The views expressed in this article are Mr. Cooper's own and do not necessarily reflect the view of CRS, the Library of Congress, on the U.S. Congress.