TRADE AGREEMENTS A country can take one of two approaches to achieving free trade. It can take a…

| January 23, 2015

TRADE AGREEMENTS

A country can take one of two approaches to achieving free trade. It can take a unilateral approach and remove its trade restrictions on its own. This is the approach that Great Britain took in the nineteenth century and that Chile and South Korea have taken in recent years. Alternatively, a country can take a multilateral approach and reduce its trade restrictions while other countries do the same. In other words, it can bargain with its trading partners in an attempt to reduce trade restrictions around the world.

One important example of the multilateral approach is the North American Free Trade Agreement (NAFTA), which in 1993 lowered trade barriers among the United States, Mexico, and Canada. Another is the General Agreement on many of the world’s countries with the goal of promoting free trade. The United

States helped to found GATT after World War II in response to the high tariffs imposed during the Great Depression of the 1930s. Many economists believe that the high tariffs contributed to the economic hardship during that period.

GATT has successfully reduced the average tariff among member countries from about 40 percent after World War II to about 5 percent today. The rules established under GATT are now enforced by an international institution called the World Trade Organization (WTO).

What are the pros and cons of the multilateral approach to free trade? One advantage is that the multilateral approach has the potential to result in freer trade than a unilateral approach because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach.

In addition, the multilateral approach may have a political advantage. In most markets, producers are fewer and better organized than consumers—and thus wield greater political influence. Reducing the Isolandian tariff on steel, for example, may be politically difficult if considered by itself. The steel companies would oppose free trade, and the users of steel who would benefit are so numerous that organizing their support would be difficult. Yet suppose that Neighbor land promises to reduce its tariff on wheat at the same time that Isoland reduces its tariff on steel. In this case, the Isolandian wheat farmers, who are also politically powerful, would back the agreement. Thus, the multilateral approach to free trade can sometimes win political support when a unilateral reduction cannot.

QUICK QUIZ: The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make. Give a response to each of these arguments.

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International trade Questions (NAFTAA)
The world price of wine is below the price that would prevail in the United States in the absence of trade.

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