TRADE AGREEMENT

any contractual arrangement between states concerning their trade relationships. Trade agreements may be bilateral or multilateral, that is, between two states or more than two states. For most countries international trade is regulated by unilateral barriers of several types, including tariffs, nontariff barriers, and outright prohibitions. Trade agreements are one way to reduce these barriers, thereby opening all parties to the benefits of increased trade. In most modern economies the possible coalitions of interested groups are extremely numerous. Additionally, the variety of possible unilateral barriers is great. Further, there are other, noneconomic reasons for some observed trade barriers, such as national security or the desire to preserve or insulate local culture from foreign influences. Thus, it is not surprising that successful trade agreements are very complicated. Some common features of trade agreements are: (1) reciprocity, (2) a most-favoured-nation clause, and (3) national treatment of nontariff barriers. Reciprocity is a necessary feature of any agreement. If each required party does not gain by the agreement as a whole, it has no incentive to agree to it. If agreement takes place, it may be assumed that each party to the agreement expects to gain at least as much as it loses. Thus, for example, Country A, in exchange for reducing barriers to Country B's products, thereby benefitting A's consumers and B's producers, will insist that Country B reduce barriers to Country A's products, benefitting Country A's producers and perhaps B's consumers. The most-favoured-nation clause protects against the possibility that one of the parties to the current agreement will subsequently selectively lower barriers further to another country. For example, Country A might agree to reduce tariffs on some goods from Country B in exchange for reciprocal concessions and then further reduce tariffs for the same goods from Country C in exchange for other concessions. But if A's consumers can get the goods in question more cheaply from C because of the tariff difference, B gets nothing for its concessions. Most-favoured-nation status means that A is required to extend the lowest existing tariff on specified goods to all its trading partners having such status. Thus, if A agrees to a lower tariff later with C, B automatically gets the same lower tariff. A national treatment of nontariff restrictions clause is necessary because most of the properties of tariffs can be easily duplicated with an appropriately designed set of nontariff restrictions. These can include discriminatory regulations, selective excise or sales taxes, special health requirements, quotas, voluntary restraints on importing, special licensing requirements, etc., not to mention outright prohibitions. Instead of trying to list and disallow all of the possible types of nontariff restrictions, signatories to an agreement insist on similar treatment to that given to domestically produced goods of the same type. Even without the constraints imposed by most-favoured-nation and national treatment clauses, sometimes general multilateral agreements are easier to reach than separate bilateral agreements. In many cases the possible loss from a concession to one country is almost as great as that which would result from a similar concession to all or many countries. The gains to efficient producers from worldwide tariff reductions are large enough to warrant substantial concessions. The most successful and important multilateral trade agreement in modern times is the General Agreement on Tariffs and Trade (GATT). It includes provisions for reciprocity, most-favoured-nation status, and national treatment of nontariff restrictions. Since GATT took effect in 1948, world tariff levels have dropped substantially and world trade has rapidly expanded.