Trade Agreements
Many countries will form trade agreements between themselves, otherwise known as a trading bloc. There are several different types of agreements countries come to, each having different rules and regulations all members must adhere to.
🤝🏻 Different types of trading agreements
These are the most common types of trading agreements.
All these agreements are similar to the one before, apart from small changes between each, however, these are important details.
European Union
The European Union is an example of a Custom’s Union.
These are the 27 countries that currently members of the EU.
Watch this video for some more information on the European Union ⬇️
The United Kingdom officially withdrew from the European Union at the beginning of 2020, in a move we all know as Brexit.
✅ Trade and Cooperation Agreement (TCA)
- allows for zero tariffs and quotas on all qualifying goods trade between the UK and the EU
- ‘Qualifying goods’ are goods that are inline with the rules of origin defined in the agreement, for which there’s a length list of rules.
- The ‘origin’ of a good is where the last significant processing was undertaken, not where it was shipped from.
- A joint UK-EU council oversees the agreement. Disputes are settled by an independent specialist court, not EU courts.
- If one side thinks the other is changing rules in a way that gives their businesses an unfair advantage, they can take action. this might include putting tariffs on certain products, however, before doing this they need to prove their case to an independent judge.
- The TCA is reviewed every 5 years and can be terminated by either side with 12 months’ notice.
These videos better explains all aspect of the TCA in more detail:
ASEAN
- Indonesia
- Malaysia
- The Philippines
- Singapore
- Thailand
- Brunei
- Cambodia
- Laos
- Myanmar
- Vietnam
It was originally formed to ease regional tensions and counter communism, but since ASEAN’s focus has evolved. It now prioritises economic integration, having established a free trade agreement that has significantly boosted intra-regional trade. With a combined population of over 660 million and a total GDP of around $3 trillion as of 2020, ASEAN represents a significant economic bloc.
The group faces challenges in balancing relationships with global powers like China and the United States, while also addressing internal issues such as trade disputes and political differences among its meber
🆓 Advantages and disadvantages of trading freely
- Competition - Free trade exposes businesses and workers to global market demands. These adjustments are critical to remaining competitive, and competition is what fuels long-term growth.
- Growth - Free trade has been a catalyst for rapid economic growth in many countries. By leveraging their comparative advantages in exports and resources, nations have attracted foreign investment and created higher-paying local jobs. Since USMCA, (United States-Mexico-Canada Agreement), they’ve seen an increase in trade, helping these 3 countries collectively amount nearly 1/3 of global GDP, according to the Brooking Institution.
- Efficiency and innovation - Free trade promotes competition, which shifts industries to be more productive. This environment encourages the development of new skills and technologies, ultimately benefitting the economy through increased efficiency and resilience.
- Lower government spending - When trade agreements reduce or eliminate subsidies to local industries, governments can reallocate those funds to other areas.
- Fairness - Free trade agreements help create a level playing field for all participants by establishing common rules. This system reduces the chances of favouritism, where certain companies or industries might get unfair advantages through political connections.
- Crowding out domestic industries - When markets open up, local businesses, especially small-scale operations, may struggle to compete with larger, more efficient foreign companies. This is more common in mixed agreements (developed and developing countries) compared to agreements between countries with similar economies.
- Less tax revenue - Many smaller countries struggle to replace revenue lost from import tariffs and fees.
- Political considerations and negotiations - Free trade agreements often involves balancing diverse interests, including sensitive domestic sectors and national priorities, which can lead to lengthy negotiations and require significant compromises.
- Theft of intellectual property - In markets where imports flow freely, local producers may copy and sell foreign products as knock-offs, often without legal consequences. Therefore, unless the FTA includes intellectual property laws and enforcement mechanisms, there are no protections for exporting companies.
- Poor working conditions - Free trade can lead to multinational companies moving jobs to countries with less strict labour laws. This outsourcing can result in exploitative working conditions, particularly affecting vulnerable groups like women and children.
⛔ Advantages and disadvantages of being in a trading blocs
The advantages of being in a trading blocs are essentially the same as with free trade so you will be familiar with these, however there are a couple more specific advantages with trading blocs worth mentioning:
- Catch-up effects - When less developed countries join trade agreements with more advanced economies, they can experience “catch-up” growth. This occurs through increased foreign investment and expanded trade opportunities. For example, Eastern European countries have significantly narrowed the income gap with Western Europe after joining the European Union.
- Smaller countries get a greater say in global trade agreements.
- Increased interdependence - Economic challenges in one country can more easily spread to others within the trading bloc. For example, a recession in one part of the Eurozone can affect all member countries.
- Loss of sovereignty and independence - Member nations may need to adhere to collective policies that don’t always align with their individual preferences or national interests.
- Trade diversion - Trading blocs can lead to trade diversion, where countries prioritise trade with bloc members over potentially more efficient producers outside the bloc. As a result this could reduce overall economic efficiency and limits the benefits of international specialisation.
- Difficult to leave - Once in the trading bloc, it can be really hard for a country to leave.