Questions and Answers on International Trade

Question 1. Why would a country enter into an international trade agreement?

There are various reasons that make countries enter into international trade agreements. First, trade agreements are an expression of intergovernmental cooperation. This cooperation is in the form of economic, political, as well as the legal aspects all which are geared towards maximizing individual country's benefits. One of the primary reasons why countries enter into international trade agreements is for economic gain. A strong economic argument for such an engagement is that international trade agreements reinforce and enhance the economic gains for individual countries when many of them come together under mutually beneficial trade terms. This is achieved by removing trade barriers such as tariffs imposed by individual countries, reducing market fluctuations, opening a market for production surpluses, and lowering costs. The regulation is attained through the formulation of policies that monitor the markets and which are followed by all members in the trade agreement.

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Countries enter into trade agreements with a political agenda as well. The agreements involve governments who are seeking cooperation. A political argument for entering into an international trade agreement would be that countries seek to establish diplomacy and peace with its trade counterparts. Countries with strong international trade agreements rarely go to war with each other since such a decision exposes their economic and political arenas to devastating costs. Rather, such countries explore diplomatic means of resolving conflicts once they arise. From a legal perspective, international trade agreements are binding to the countries that get into them. The treaties, agreements, and conventions are legally conducted. There are also legal terms that countries have to abide by if they were to remain in the agreement. Additionally, there are terms that are considered when determining whether a country is eligible for a certain trade agreement. One of these factors is the country's Gross Domestic Product (GDP). Although big and small economies can come together under a trade agreement, the contribution of each will be highly influenced by its GDP. This explains why countries with bigger economies have more influence on trade terms than those with ailing economies.

Question 2. Regional and Bi-lateral Trade Agreements and impact on WTO

Many trade experts have regarded the recent proliferation of regional and bilateral trade agreements such as CETA and the current Canada-China bilateral trade talks as being as bad development for the World Trade Organization regime and its principles. CETA is being viewed as a threat rather than a trade solution. According to protestors to this agreement, CETA is a threat to democracy, public services, and action on climate change. CETA is considered as being much more than a trade deal, a sweeping constitution-style document likely to restrict public policy options in such areas as diverse as intellectual property rights, food safety and environmental protection, government procurement, regulation of finances, the movement of workers temporarily, and public services. The investor-state dispute settlement process employed by CETA is highly flawed and has caused more harm than good to members such as Canada under NAFTA. European labor unions, human rights advocates, and environmentalists question why Canada and the EU would proceed with expanding this anti-democratic process through CETA. Despite being rebranded as an "investment court system" (ICS) with pretenses to judicial independence, the substantive protections afforded to foreign investors remain largely intact. This is going to expose taxpayers in both Canada and the EU to big financial liabilities and have a freezing effect on public policy future progressive.

A similar situation is being witnessed with the recent attempts by Canada and China to have talks over free trade. The talks had been taking place for months, and they were exploring to include matters about human rights, environment, labor, and gender issues. However, the deal has been criticized and feared by many. According to a report released by the Canadian government of over 600 consultations they made concerning the deal, most expressed fear. The people see the deal as a threat which is likely to wipe away Canadian jobs and minimize their ability to effectively compete against China's lax labor standards, lower environmental requirements, and state subsidies.

Question 3. Reasons for the increase in disputes under WTO system.

The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement which was used a regulator of international trade. It was used since its creation in 1948 until 1993. The World Trade Organization (WTO) was formed to replace GAAT in 1995 with the objective of supervising and liberalizing international trade. The reasons cited for the removal of GAAT included the presence of legal problems specifically in the areas of textiles and agriculture. A notable example was when the United States was not able to convince Japan and China within the framework of the GAAT to open up their markets to goods from the U.S. Compared to GAAT, WTO has been viewed as a completely different character with more advantages. For instance, under WTO system, settlement of disputes is more automatic, and faster, and thus less susceptible to blockages compared to the former GATT system. Implementation of the decisions resulting from the WTO settlement of disputes will, therefore, be better assured. Also, the GATT rules were applied only to trade in goods while the WTO covers not just goods, but trade in services and trade-related aspects of intellectual property rights as well.

However, under the WTO system, many disputes have emanated compared to those experienced during the GAAT system. Despite its notable objectives, the power play between strong and weak economies such as those present in bilateral trade relations prevail in WTO. Developing countries are thus marginalized. Tensions among members can appear and results in failure to settle a dispute, such as the World Trade Ministerial meeting in Cancun which took place in September 2003. Its main focus was on the disagreement of agricultural issues. During the negotiations, members of the developing countries refused to negotiate on the Singapore issues, citing the non-commitment of the developed countries in the reduction of agricultural subsidies and reducing import barriers on agricultural products. This failure exhibited the fragile nature of the WTO in settling disputes and promoting the expansion of world trade.

Question 4. NAFTA Treatment

It is evidently clear that the North American Free Trade Agreement boosted North American prosperity by increasing the size of the economic pie for all three countries involved. NAFTA also provided grounds for a free trade agreement by setting up strong investment rules under Chapter 11. The key rules are: most-favored-nation treatment, national treatment, minimum standard of treatment, and prohibition of investor performance requirements, a need for fair compensation in cases of direct or indirect expropriation, and a ban on limits to out-transfer of profits. The rules are enforced by way of government-to-government dispute settlement.

NAFTA has proved beneficial economically by allowing the participant countries to take advantage of niches and specialize in those areas. Ranging from raw materials to finished products, NAFTA is a door opener and allows the three nations remain competitive on the world scale. It has also created a dynamic employment marketplace that enables each country to use the strength of the agreement to bolster existing talent and set the stage for future job growth. Sharing of knowledge within the organization increases employment opportunities across the continent. Also, the creation of a single trade area makes it possible for companies to achieve much better economies of scale. Similarly, cross-border manufacturing also reduces the cost of a product, thus impacting directly on its price. Agriculture has seen massive gains for all parties under NAFTA, therefore resulting in an overall increase in exports from all three countries, with each gaining from increased exports of their primary agricultural products.

The criticism of NAFTA is based firstly on the argument that it leads to loss of jobs. Many manufacturing companies moved from America to Mexico due to cheap labor resulting in loss of jobs mostly in manufacturing industries in California, New York, Texas and Michigan. Secondly, job migration suppressed wages making companies give threats of moving to Mexico to keep workers from joining unions. Without unions, the workers could not bargain for better wages. Thirdly, NAFTA leads to Mexican farmers going out of business. This is as a result of allowing U.S. government-subsidized farm products into Mexico. Local farmers could not compete with the subsidized prices thereby pushing farmers out of business.

Question 5. Dumping and subsidization controversies

The practice of dumping and subsidization is controversial because it's very expensive and not sustainable to maintain. It can take years of dumping to kick the competitors out of business. Meanwhile, the cost of subsidies can add to the export country's debt, and in retaliation by the trade partner. Countries may impose trade restrictions and tariffs to counteract dumping. It is harmful to the importing country if it continues for a long period. This is because it takes time to change production in the importing country and its domestic industry may not have the capacity to bear the competition. If the dumped commodity is a consumer good, the demand of the people in the importing country will change for the cheap goods. When dumping stops, this demand will reverse, thereby changing the tastes of the people which will be harmful to the economy. If the dumped commodities are cheap capital goods, they will lead to the setting up of a new industry. But when the imports of such commodities stop, this industry will also be shut down; thus ultimately, the importing country will incur a loss.

Question 6. The role of Injury to the Domestic Industry.

The definition of injury brought by Anti-Dumping Agreement means material injury to a domestic industry, the threat of substantial damage to a local industry or material degradation of the establishment of such an industry. The material injury cannot be based on a mere allegation, statement or conjecture. Examining the volume of the dumped imports includes the level to which there has been or is likely to be a significant rise in the volume of dumped imports, either in absolute terms or concerning production or consumption and its effect on the domestic industry. The consequent economic and financial effect of the dumped imports on the concerned domestic industry can be demonstrated, by the decline in the output loss of sales, loss of market share, reduced profits, and decline in productivity. Injury analysis includes a detailed and intricate evaluation of all the relevant factors.

The injury tests used for anti-dumping and safeguard measures are different. Unlike in the case of anti-dumping measures, safeguard measures do not address a particular pricing behavior of exporting companies, but rather a more general increase in imports taking place under certain special circumstances. It is generally considered that safeguarding measures will consider the aspects of the so-called "fair trade", that is exports taking place under normal competitive conditions.

References

Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members' international trade?. Journal of international Economics, 71(1), 72-95....