International agreements increasingly important in trade

Edward Lotterman | Agricultural Economist

Published October 1, 1993  | October 1993 issue

Bilateral agreements between countries concerning their mutual trade are almost as old as trade itself. But since World War II, multilateral agreements involving several nations have become more important. And in the 1990s, U.S. trade policy largely centers on the terms of such agreements. As both imports and exports become increasingly important to many firms in the Ninth District, it is important to know how such trade agreements and organizations define the boundaries of the playing field.


The General Agreement on Tariffs and Trade (GATT) is the world's most prominent international trade organization. As do other international economic institutions such as the International Monetary Fund and World Bank, the GATT grew from immediate post-World War II restructuring efforts.

Initially, planners envisioned the International Trade Organization (ITO) as a complement to the IMF and World Bank that would have broad powers to regulate international trade worldwide. As a preliminary step toward the ITO, a General Agreement on Tariffs and Trade was drafted in 1947. When the ITO failed to materialize, largely due to opposition by the US Congress, this draft agreement took on a life of its own.

After 45 years, the GATT is still more a set of agreements than an organization. From an initial set of 22 countries, it has grown to include 116 signatory countries. When a country joins the GATT, it agrees to abide by the rules initially drafted in Geneva in 1947, together with many additions and amendments adopted in a series of negotiating rounds over the years.

There are three basic principles that govern the GATT. The first is transparency, that is, nations are to limit imports only through tariffs and not through quotas or other non-tariff barriers. The second is multilaterally negotiated tariff reductions; once trade barriers are reduced to tariffs, such tariffs should be lowered in periodic rounds of multilateral negotiations. The final principle is that of the most-favored nation; GATT members agree that they will not treat imports from any other member nation any less favorably than imports from the country they treat most favorably. In other words, signatory countries agree not to discriminate between member states.

However, the GATT does not require all member nations to adopt one common set of tariff levels. Mexico, for example, can have higher tariff levels than does the United States, as long as Mexico applies these tariffs uniformly to imports from all other member states.

When a GATT member such as the United States agrees to extend most- favored-nation treatment to a non-member, such as China, it is simply saying that it will treat imports from China exactly as if they were imports from another GATT member. It does not mean that China will be treated better than any GATT member.

According to the economist Paul Samuelson, GATT "has proved one of the major successes in international economic cooperation." And economist Lester Thurow links the GATT trading system to worldwide growth: "In the forty years after it was adopted, the world economy grew faster than it had grown in all of human history." But over the last decade, GATT has also had serious problems. While it can issue rulings on trade disputes between member nations, GATT has no enforcement powers. Some members simply flout the rules and ignore any adverse rulings.

Trade in services and "intellectual property" such as computer software has grown much more rapidly than traditional merchandise exports, and has made rules designed for trade in manufactured goods obsolete. For example, while US merchandise exports grew by a factor of about 20 between 1960 and 1992, receipts from foreign travel to the United States grew nearly 60 times and exports of royalties, license fees and other services grew over 50 times. Finally, the enormous growth of agricultural output in the European Community and subsidized exports of agricultural products by many nations has led to demands that agricultural trade, previously exempt, be brought under GATT auspices.

The most recent round of GATT negotiations began in Punte del Este, Uruguay, in 1986. It has dragged on for more than seven contentious years, with deadlines for its completion repeatedly moved ahead. The current deadline is Dec. 15, 1993, but whether a successful agreement will be reached is still an open question. The troublesome issue is agriculture, with the United States and a coalition of non-subsidizing export nations arrayed on one side and the European Community, with France as its most recalcitrant member, on the other. Some observers predict that the GATT will fail at this juncture, and that multilateral world trade will dissolve into a set of regional trading blocs.

The European Community

The European Community (EC) is the oldest and most advanced such regional bloc. Established by the Treaty of Rome in 1957, it grew out of a post-war coal and steel community of six western European nations. Like the GATT, the EC was clearly founded as an institution to tie nations together economically and avoid future wars. By 1968, it had achieved a barrier-free common market for sales of goods coupled with a common tariff on imports from nonmember countries.

Membership has grown from six to 12 nations over the years, and community objectives have evolved toward full economic integration and eventual quasi-political union. In 1992, all border controls over the movement of goods and people were abolished, allowing any EC business or person to do business or work in any member country.

In spite of these successes, the EC is in great difficulty. When it agreed, in late 1991 at a meeting in Maastricht, the Netherlands, to work toward full economic and monetary union, it apparently overreached itself. Setbacks in ratification of this agreement by member countries and the breakdown of the European Exchange Rate Mechanism in September 1992 have dampened optimism about the rate of further integration. Tensions induced by the breakup of communist regimes in Eastern Europe, the reunification of Germany, requests for admission by other nonmember states such as Sweden and Turkey, and the persistent recession in most member countries have further exacerbated the EC's difficulties.


In North America, the Canadian-United States Trade Agreement (CUSTA) was signed in 1988 and ratified, after much difficulty in Canada, by the two countries. Although it is frequently referred to as the Free Trade Agreement or FTA, CUSTA is limited in scope compared to trade measures within the EC. CUSTA does remove, over periods of up to 10 years, most tariffs and other trade barriers between the two countries. But there are many qualifications. For example, trade barriers necessary to maintain agricultural price support programs, such as Canada's milk quota system, may be maintained indefinitely.


In response to Mexican overtures, the United States and Mexico negotiated and signed a similar trade agreement. Generally referred to as NAFTA, for the North American Free Trade Agreement, it is actually a set of bilateral agreements between Mexico and the United States, Mexico and Canada and modifications to CUSTA necessitated by the new relationships with Mexico.

As with CUSTA, the objective is eventual barrier-free trade in goods and most services as well as removal of restrictions on cross-border investment. But again, barriers will be removed gradually over time, and there are many exceptions for both sides. There is strong opposition to NAFTA, especially in the United States, but also in Mexico and Canada, and its full ratification and implementation is still much in question.

Some South American nations, with governments implementing market- oriented economic reform such as Chile, Bolivia and Argentina, seek to join NAFTA eventually, but such a move seems highly doubtful to most observers, given the political difficulties of implementing the current agreement.

Other trade blocs

Nations in other areas of the world are reacting to possible breakdown of the GATT system and rise of the EC and NAFTA by discussing creation of their own regional blocs. Asia, where the Association of Southeast Asian Nations (ASEAN) might serve as an initial core in conjunction with Japan, is, however, the only region where anything tangible may take place in the foreseeable future.

Latin America has had a series of free-trade pacts including the Central American Common Market, the Latin American Free Trade Area, the Andean Pact and, most recently, MERCOSUR (Common Market for the Southern Cone). But such agreements historically have resulted in little increased trade or economic integration between member states, and there are few indications that this situation will change drastically in the near future.

At present, there is no operative regional trade grouping in Africa. While there has been much discussion of trade partnerships among the ex-communist countries of Eastern Europe or the former Soviet Union, such arrangements are not yet operational in any substantial way.