Impact of Free Trade Agreements on Global Economics

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International Business
Law Assignment Paper
Assignment topic
“Free trade agreements and their role in modern
economy”
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Table of Contents
Introduction................................................................................................................................3
History of International Trade....................................................................................................4
Journey to Multilateral Trade Business Liberalization..........................................................4
The Decline in Multilateral Trade..........................................................................................4
Non-Tariff Barriers (NTBs) to International Trade Agreements...............................................5
NTBs List...............................................................................................................................5
Table 1: List of NTBs............................................................................................................6
Effect of NTBs on trade agreements with UK.......................................................................6
Status-quo of EU and FTAs.......................................................................................................6
Impact of FTA on the UK......................................................................................................7
Figure 1: FTA’s Economic Impact........................................................................................7
The practice of free trade agreement..........................................................................................8
Economic aspects of free trade..............................................................................................8
FTAs and World Economy......................................................................................................10
WTO’s Role in Free Trade Agreements..............................................................................10
Figure 2: Largest FTAs around the globe............................................................................11
NAFTA....................................................................................................................................11
NAFTA and its effect on economy of US............................................................................11
NAFTA’s effect on Mexican economy................................................................................12
CFTA-DR.................................................................................................................................12
Free trade practices of different countries................................................................................13
Figure 3: UK’s top 10 trading partners................................................................................14
Trade and globalisation............................................................................................................14
Pros and cons of free trade agreements....................................................................................15
Advantages...........................................................................................................................15
Disadvantages......................................................................................................................16
Conclusion................................................................................................................................19
References................................................................................................................................20
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Introduction
The purpose of introducing the subject of business law is to give an outline regarding the
legal environment engaged in foreign trade practice. There has been increased complexities
and volumes in international trade and hence there has been a need felt for a uniform code for
the purpose of regulating business transactions. The importance of international trade laws is
also important in today’s economy as there has been influencing role played by the domestic
and foreign politics in business transactions. One of the important aspects on which business
transaction depends is the enforcement of the free trade agreements concluded by various
nations whether bilateral or multi-lateral. The international laws and regulations are important
in the execution of the business transactions which takes place between two or more nations
and it also regulates the enforcement of these agreements entered by the nations. Hence, this
paper is presented in order to give an overview regarding the legal system of different
countries along with an history of free trade agreement and shall provide aid for a good
comparative study. It provides the trade agreement being entered by various nations in order
to facilitate its economic interaction. It further deals with non-tariff barriers and its remedies
in international trade. The paper also discusses the two major free trade agreement of the
world which has impacted the global economy at large which is NAFTA and CFTA-DR. The
paper finally provides for the role and impact of free trade practice in the international
economy highlighting the trade practices of major economies like UK and US. It also
provides for a discussion regarding the impact of globalisation in the concluding of free trade
agreements within nations. The paper at last discusses the pros and cons of free trade and
related agreements and how free trade practices affects the global economy.
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History of International Trade
As explained by Adam Smith and David Ricardo, the expansion of trade in number of nations
shall help the businesses in gaining the competitive advantage. Since then, the trade
agreements between the nations have been increased comprehensively. After the introduction
to the covenant of General Agreement on Tariffs and Trade, known as GATT generally,
there have been several multilateral agreements for trade. Number of nations are part of such
agreements, in addition these agreement as benefited the local and regional traders.
Journey to Multilateral Trade Business Liberalization
Mercantilism connotes to the business trends followed by the mercantilists to achieve
adequate balance between the export and imports and add value to the same. However, this
doctrine of Mercantilism was remotely discouraging the trade system within the nations. The
government had been unsupportive with the traders as they applied quite a lot of taxes and
tariffs on the imports and exports of equipment and goods. In addition, the government
prohibited the trade of tools and capital equipment or anything that might result in reduction
of domestic production. One such example is the policy formulated in 1651, known as British
Navigation Act, as per which the alien ships were restricted to be part in coastal trade in the
UK. However, the doctrine was dominated by theories of Adam Smith and David Ricardo.
Their theories influenced the trade theories of several nations including Great Britain. With
the enactment of the Reciprocity Duties Act 1823, the British government abolished import
duties on imports from the nations with which the Great Britain has signed bilateral trade
treaties. Moreover, the treaty between the Great Britain and France, known as Cobden
Chevalier Treaty resulted in reduction of reciprocal tariffs. With the introduction of the
treaties, many nations signed treaty, which enabled the growth of multinational trades
(Lawless and Morgenroth, 2016).
The Decline in Multilateral Trade
Nevertheless, the free and fair-trade agreements were adopted by the nations but the regime
was slowed down from 1870s. The international economy faced major depression in the year
of 1873 and by the end of 1877; the pressure was imposed on protecting domestic production.
In 1887, Italy imposed more strict tariffs on export and import and Germany retrieved its
protectionist policies. Nevertheless, out of all the European nations, only the Great Britain
maintained its adherence to fair trade policies. The free trade policies were then supported by
the USA, who was earlier not the part of multilateral covenants related to trade. Finally, in
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1947 with the establishment of GATT there has been reduction of tariffs with the objective of
expanding trade practices within member nations. With the evolution of GATT, Europe
initiated a program of economic integration with the enactment of a community in 1951,
called European Coal and Steel, now known as European Union. Further, in 1995, GATT
was taken over by World Trade Organisation that became a global supervisor by covering
the areas, which were not covered by GATT, such as goods and services, investments and IP
(Intellectual Property).
Hence, countries now realize the importance of free trade agreements and its contribution to
the economic growth of any nation.
Non-Tariff Barriers (NTBs) to International Trade Agreements
After Brexit, the UK is no longer obligated to adhere the rules of EU standards framed for
conducting; however, this has reduced the trades of the UK with the EU member nations.
Moreover, there has been observance of delay in the procedures of exports and imports of the
UK as, as per the EU regulations, the member nations have to go through a lengthy procedure
of paper-work, etc. while dealing with the nations that are not member of the EU. The section
of research paper emphasizes on influence of NTBs on trade agreements with the UK.
Nevertheless, before discussing the influence of NTBs on fair trade agreements, it is
important to understand if non-tariff barriers are similar to non-tariff measures. The measures
result in increment of trade volume. For example, a nation imports food product from a
foreign country and ask them to obligate the standards of the nation that is importing the
goods, this might result in increment of cost but this would generate confidence in the
consumers that the foreign food products have met the local standards. Hence, the terms
although used interchangeably but are different from each other (Instituteforgovernment,
2019).
NTBs List
The United Nations have drawn out 16 non-tariff barriers in the Trade and Development
Conference. Few of such barriers are as follows:
NTB Meaning
Inspection pre-shipment and
other regulations.
Checking of goods and licensing, before goods are
imported.
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Measures of Price control Charges or levitation of taxes that may affect the price
of the products imported.
Finance Measures Policies that are govern right of entry to foreign
exchange.
Restrictions to distribution Policies or regulations that makes harder the
distribution in all areas by imposing restriction that the
goods can be distributed in the certain area and not
beyond that.
Restrictions imposed on the
government procurements
That government has to use domestic products.
Subsidies It gives competitive advantage to domestic producers.
Table 1: List of NTBs
Besides the barriers mentioned in the table there are several other barriers on varying from
intellectual property to domestic industries.
Effect of NTBs on trade agreements with UK
After Brexit, there have been delays in the procedures of import and export between the
member nations of EU and the UK. The delay in the supply chain leads to damage the goods,
specifically those that are perishable in nature. The bottom line is that the economic output of
the UK has been lower under Free Trade Agreements with the loss of GDP (Gross Domestic
Product) varying from 0.6% to 7.8% by the end of year 2030 (Byrne and Rice 2018).
Status-quo of EU and FTAs
Several numbers of economists claim that after the Brexit, the UK may face barriers while
trading with the largest markets of the EU, as the consequence of being the part of FTA
instead of EU status quo. However, the UK being one of the signatories of the FTA shall be
able to trade seamlessly with the other parts of the world. The FTAs makes sure that there is
no levitation of tariffs and taxes on the goods being traded to cross borders, nevertheless the
agreements cover the services superficially. Moreover, the differentiation in the regulations
of the countries make it harder to estimate whether or not the nations are going to stuck with
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the pact. As compared to the EU members, which are bound to follow the common law by
the European Court of Justice. The FTAs follow the system of Arbitration, according to
which the sanction is applicable on the side that breaks the deal but there is no provision of
taking a strict action against the nation that commits the breach of the deal. Besides this, the
members of the EU are also the members of WTO. The international trade agreements
between the EU and other nations are categorized into three types:
 Customs Unions
 Free Trade Agreements and Economic Partnership Agreements
 Partnership and cooperation agreements
Impact of FTA on the UK
The researches have shown that the FTAs are likely to affect majorly the Northeast part of
England, where the business are most concentrated. The FTAs has increased the non-tariff
barriers indeed but the business that have low exports are likely to gain. However, high tech
industries that are export-intensive are expected to mitigate. With the rise in non-tariff
barriers, FTAs might hit hard the financial status of the UK (Dhingra and Sampson, 2016).
Figure 1: FTA’s Economic Impact
(Source: Ft.com, 2019)
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The trade blocs for the UK might decrease if the UK enters into FTAs with the EU and
several evidences have affirmed it. Although, there will be both negative and positive impacts
on the economy of UK. The GDP of the UK is likely to increase with the rate of 0.7% if it
enters into FTAs with non-EU member nations. In addition, the GDP is estimated to increase
with 2 to 4 percent if the UK enters into FTAs with members of EU.
The practice of free trade agreement
A free trade agreement (FTA) is a multinational agreement or treaty formed under the
international law in order to liberalise the nation’s trade practices and save trade tariffs. Every
nation drafts its own laws for the regulations of business transactions with other nations that
is domestic as well as international laws. It is important for the nations to abide by the laws
and regulations of both the nations. There also has been treaties entered by nations in order to
regulate business transactions among them.
A free trade agreement is a trade bloc which has been signed by countries in order to reduce
their trade barriers and tariffs and to enhance trade practice among each other. These
agreements are formed with the aim of enhancing economic integration. The regions for
which the free trade agreement is formed is called a free trade area. Article XXIV of the
General agreement on Tariffs and Trade provides provisions for the members nations of the
World Trade Organisation to make free trade areas and form interim agreements necessary
for the formulation of the free trade agreements (Krueger, 2012).
The provisions prescribed in the article of the agreement provides for the requirement that the
signatory parties to the agreement shall not treat the non-parties in a less favourable manner
than before the area was formed. A second requirement by the agreement is that the costs and
tariffs of the trade shall be eliminated to trade taking place between the free trade areas.
In terms of the free trade area, the GATT generally means the trade in goods only. An
agreement formed for similar purpose and aim for example trade and enhance liberalisation
in services, is termed under Article V of the GATT as an “agreement for economic
integration.” But in modern times practice the term is used not only for goods but also for
services.
Economic aspects of free trade
The business practice or transaction within the provisions of free trade agreement is done in
two ways. They are:
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 Trade deviation
 Trade conception
Trade deviation means that the free trade agreement would side-track trade from a supplier
outside the trade area to a supplier within the trade area (Dur, et. al., 2014).
Whereas trade conception is done for the area of promoting trade practice within the area
which may not be otherwise in existence. But in comparison to diversion, trade conception
proves to be more contributory in the nation’s welfare.
There are mainly three types of free trade agreements. They are:
 Unilateral trade agreements
 Bilateral trade agreements
 Multi-lateral trade agreements
Unilateral:
These are the simplest trade agreements as in this practice the trade restriction is removed by
one nation without being reciprocated by the other.
Bilateral:
These trade agreements are between two nations where both the nations agree to remove
trade barriers, restrictions and tariffs from their boundaries. They lower their tariffs of trade
and prefer their own trade status and practice between them. For example, United States has
entered into 14 bilateral agreements (Baier, et. al., 2014).
Multi-lateral:
 A multi-lateral agreement is one which is entered by more than two nations. These are
the most difficult ones to negotiate. The reason behind its complexity is every nation
try to impose its own needs and requests.
 But once the multi-lateral agreements are entered and enforced, they serve as a
powerful tool as they cover a large geographical area.
 The largest multi-lateral agreements entered upon by nations is the North American
Free Trade Agreement. The participatory parties in this agreement is the United
States, Canada and Mexico. The combined economic output of the three nations is
$20 trillion.
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 Other examples of multi-lateral agreements are:
o European Free Trade Association (EFTA) consisting of Norway, Iceland,
Switzerland and Liechtenstein.
o South Asian Free Trade Area (SAFTA) which consists of Bangladesh, Bhutan,
Afghanistan, India, Nepal, Pakistan, Sri Lanka and Maldives.
o The Pacific Alliance which consists of Colombia, Chile, Peru and Mexico.
FTAs and World Economy
In general, there are three types of trade agreements, i.e. Unilateral, bilateral and multilateral.
The effect of FTAs is that it has increased the standards of living by making feasible access
to the global markets but the disadvantage is that a domestic market of a country that has
standard of living cannot compete in the global market. Consequently, such domestic
industries exit from the market and employees suffer. FTAs generally strengthen a trade-off
among consumers and companies (Hakobyan and McLaren, 2016). However, the advantage
is that with the free trade agreements domestic industries are benefitted by attaining global
competitive advantage. As a result, job opportunities are increased and more workforce is
hired.
WTO’s Role in Free Trade Agreements
The World Trade Organization is an international body that facilitates negotiation between
the nations entering into trade agreements. Besides, facilitating the negotiation, WTO also
address the complaints related to trade and is responsible for enforcement of trade
agreements. WTO administers General Agreements on Tariffs and Trade currently. The
world economy expected reduced tariffs after the Doha Round Trade Agreement.
Unfortunately, it failed as two of the most powerful economies, i.e. the EU and the US
restricted themselves in lowering agriculture subsidies (Baldwin, 2016). The Doha round was
doomed by the refusal and the refusal is kind of thorn in world FTAs. However, the China
took advantage and gained trade foothold globally. Several countries of Africa, Latin and
Asia are now signatories with China in a bilateral trade agreement. These countries are
provided with technical support and loans by China and in return, China has the authority to
oils and commodities in such countries.
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Figure 2: Largest FTAs around the globe
(Source: The Balance, 2019)
The countries shown in the figure are groups as per the agreements within the nations. Such
as EU, NAFTA (North-American Free Trade Agreement), CFTA-DR (Dominican Republic-
Central America-United States Free Trade Agreement) and the last section is the countries
that are specifically in trade agreements with the USA (Shikher, 2012).
Nevertheless, FTAs has facilitated free trade around the globe, but several tax implications
are carried out substantially. The businesses dealing cross borders, needs to have thorough
knowledge of tax implications of the nation with which it is dealing. Failing to comply with
nations’ tax requirements for carrying out foreign trade activities may lead to severe
levitation of taxes.
NAFTA
North American Free Trade Agreement is a trilateral agreement between Mexico, United
States and Canada. The goal of the agreement is to eliminate the barriers among the three
nations in trading goods. The provisions covered by the agreement includes intellectual
property, agriculture, environment and infrastructure transportation by way of CANAMEX
Corridor by means of implementing transport through road between Canada and Mexico
(Villareal and Fergusson, 2017).
NAFTA and its effect on economy of US
In the report given in 2017 the Congressional Research Service presented that the economic
effect of NAFTA on the United States and its economy are modest that is the job loses were
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not as critic as pointed but the gains are also not huge as predicted by the supporters. As per
reports, this trade agreement has supported about 140,000 businesses including small and
medium size. After the enforcement of this agreement many small businesses have depend on
this agreement to export its products and goods to Mexico and Canada.
It is also reported that the free trade agreement of the US with Canada and Mexico has
concluded a positive impact on the US economy with addition of up to $80 billion dollars and
also the job relying on the agreement has increased reporting about 14 million jobs relying on
trade with Canada and Mexico.
But in addition to growth critics of the agreement have pointed that there is job loses and
wage inaction in the United States. There is low wage competition which has made the
companies to move to Mexico to lower its costs of manufacturing.
NAFTA’s effect on Mexican economy
NAFTA has been reported to give major improvement to Mexican farm exporters in trading
their goods to the United States. It has been reported that the export has been tripled since the
implementation of the agreement. There also has been an increase in jobs in Mexico and there
has been reported positive impact on the productivity and consumer prices of Mexico.
CFTA-DR
The Dominican-Republic Central America FTA is the first agreement of the United States
with developing nations which includes Costa Rica, El Salvador, Nicaragua, Honduras and
Dominion Republic. All combined together provides for the representation of the United
States as the 18th largest trading partner with approximately trade of worth $57.4 billion in the
year 2018. It has also been reported that the agreement of the US with these developing
countries have given 134 thousand job opportunities to the freshers in the year 2014 (Hicks,
et. al., 2014).
CFTA-DR have supported the rights of the labor in the region by enforcing job protection
laws at the national level. CFTA-DR and the implementation of rule of law along with fair
and transparent procedures in the actions of the government creates better opportunity for
investment and trading. There is creation of a better economic environment giving good
opportunities of employment after the enforcement of the agreement.
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