Public SectorAugust 19, 2022by fiecon

Introduction To Trade Agreements: A Simplified Business Guide

Trade agreement

According to the World Bank there were fifty regional trade agreements in force by 1990; with recent data from the World Trade Organization (WTO) putting the number of regional trade agreements in force at 354 as at March 2022. One such major trade agreement signed recently is The Africa Free Trade Agreement (AfCFTA). This continental trade agreement was entered into by African countries in order to promote trade among African states by reducing barriers to trade; for example by implementing and enforcing a unified intellectual property system across Africa and hence encouraging the free movement of goods and people across the borders.

The AfCFTA borrows its working principles from already existing regional trade agreements that exist between African states. Such trade agreements are not new in the world and vary in nature from region to region. Countries agree to enter into such agreements for the benefit of both or one party. These agreements are structured in different ways and have evolved from when international trade was guided by the General Agreement of Tariffs and Trade (GATT); until now with the World Trade Organization (WTO); a successor to GATT. There are basic principles that these trade agreements must cover and different countries enter into such agreements for different reasons.

Trade Agreements Basics

A trade agreement is a contractual agreement between countries that guides the trade conditions for movement of goods and services between the parties to the agreement. These agreements can be bilateral (between two countries). For example, Kenya has bilateral trade agreements with China and with the United Kingdom. On the other hand, trade agreements can be multilateral (between more than two countries).

Most multilateral agreements exist among countries that are geographically close to one another due to their similarities in economic goals, culture and historic origins. These multilateral trade agreements are structured as regional economic communities (RECs). The East African Community (EAC) under article 75 of the treaty establishing it allows the partner states to carry out free trade amongst themselves without any duties being imposed. However, goods and services coming from outside the EAC bloc have a similar tariff imposed when sold to any partner state. AfCFTA can also be categorized as a multilateral trade agreement covering 54 African states for them to be able to trade freely. Outside Africa, the largest multilateral trade agreement is the North American Free Trade Agreement (NAFTA) that is between US, Mexico and Canada.

Other categorizations of trade agreements are plurilateral and unilateral trade agreements. Plurilateral trade agreements under the WTO date as far back as 1970; and they have the characteristics of a multilateral agreements in that they may involve many nations, however they are not legally binding to all partner states of the WTO. All WTO agreements are legally binding to the partner states, however plurilateral agreements allow for the states to agree to new or certain rules on a voluntary basis. Basically, such an agreement under the WTO is not enforceable among all the WTO member states as the states can chose to participate in one or not; for example the Agreement on Government Procurement.

On the other hand, unilateral trade agreements also known as preferential trade agreements under the WTO are non-reciprocal. These are agreements extended to a developing or least developed country (beneficiary country) by a developed country (granting country); in order to promote trade at the beneficiary country hence boosting their economic development. Generalized System of Preferences (GSPs) are types of unilateral trade agreements granted to developing and least developed nations; whereby they are granted duty-free and quota-free market access on their exports as long as they meet some of the requirements of the granting countries such as rules of origin. The granting countries can classify the beneficiary country either as developed or developing. For example, according to the GSP for Norway, Kenya is considered a least developed country but in Australia it is considered as a developing country. One such GSP system is the Africa Growth and Opportunity Act (AGOA) – a United States trade act that extends duty free market access to the US on select products from Sub-Saharan countries that are eligible to be under AGOA.

Trade agreements can also be categorized based on being shallow or deep. Under the GATT, most trade agreements used to be shallow covering only tariffs and other boarder measures such as tariff reductions. Deep trade agreements go beyond the boarder and touch on issues such as competition policy, intellectual property rights and government procurement rules. The number of such agreements increased when GATT morphed into WTO with the impact of such agreements being seen in the global value chains.

WTO Trade Agreements Principles

Trade agreements under the WTO have three key principles within them. One feature is reciprocity. This is situation whereby the parties agree to enter into the agreement for both to benefit in one way or another. One party does not benefit to the detriment of another. Even unilateral trade agreements have reciprocity. The beneficiary country is able to access a market with limited tariff barriers to entry. The granting country on the other hand has access to cheaper imports and these cost benefits are extend to its citizens or other businesses within the economy that gain access to cheap raw materials.

Another principle of trade agreements is the most favored nation principle. Trade agreements are expected to extend trade benefits to all trading partners equally. Ideally countries should not favor goods or services from one country over and above to other countries. If a granting country grants reduced tariffs to goods and services from one country it is expected to extend the same benefits to other trading partners. WTO has made the most favored nation principle part of its rules therefore if a country reduces tariffs on imports from country A it is expected to extend the same benefit to all other WTO member states.

The third principle of trade agreements is national treatment of nontariff restrictions. The benefits to be derived from reduced tariffs can be reversed using nontariff barriers such as special licensing requirements and selective sales taxes. This may be done by a country to the detriment of the imports that are coming in. It may be difficult to predict which nontariff barriers may be imposed on a countries’ imports to reverse the gains from reduced tariffs; and hence this principle demands that the treatment accorded to domestically produced goods be extended as well to imports.

Author: David Kageenu