Why Some Countries Have Free Trade Agreements

| 0

While free trade is generally beneficial, removing a trade barrier to a given asset harms shareholders and workers in the domestic industry that produces that good. Some groups that are aggrieved by foreign competition have sufficient political power to protect themselves from imports. As a result, despite their considerable economic costs, trade barriers continue to exist. For example, according to the U.S. International Trade Commission, the U.S. benefit from lifting trade restrictions on textiles and clothing would have been nearly $12 billion in 2002. This is a net economic benefit after deducting losses suffered by businesses and workers in the domestic industry. Nevertheless, local textile producers were able to convince Congress to maintain strict import restrictions. As a result, many countries have shifted from the multilateral process to bilateral or regional trade agreements. Such an agreement is the North American Free Trade Agreement (NAFTA), which came into force in January 1994. Under NAFTA, the United States, Canada and Mexico agreed to eliminate all tariffs on merchandise trade and reduce restrictions on trade in services and foreign investment for more than a decade. The United States also has bilateral agreements with Israel, Jordan, Singapore and Australia and negotiates bilateral or regional trade agreements with countries in Latin America, Asia and the Pacific.

The European Union also has free trade agreements with other countries around the world. 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.