Trade Pact

A trade pact eliminates trade restrictions among its member countries while discriminating against third parties. Trade pacts can be constructed as preferential trade agreements (arrangements with a limited degree of tariff preferences) or as free trade areas (FTA) where tariffs on trade among member countries are removed, while tariffs for imports of nonmembers are not changed. Customs unions (CUs) additionally equalize the members' trade with nonmembers. Common markets (CMs), furthermore, allow for the free movement of factors. Countries in an economic union, moreover, harmonize their fiscal, monetary, and socioeconomic policies.

The World Trade Organization (WTO) permits trade pacts under General Agreement on Tariffs and Trade (GATT) article XXIV and General Agreement on Trade in Services (GATS) article V: Countries may conclude trade pacts if “substantially all the trade” in products between them is liberalized. Exceptions to article XXIV are possible for developing countries. The generalized system of preferences permits industrialized countries to grant developing countries oneway trade preferences, and the enabling clause allows developing countries to exchange any trade preference with each other to which they can agree.

History of Trade Pacts

Identifying the earliest trade pact is difficult: as long as nations have traded with each other, they have discriminated in favor of some neighbors. The Great Depression in 1929 led to a particularly strong disintegration of trade into regional clusters. Trade blocs were formed along the lines of colonial regimes and political affiliations. After the dismantling of existing trade regimes with World War II and the end of colonialism, states started to put effort into concluding trade agreements again at the end of the 1950s and in the 1960s. The most prominent example is the European Community established in 1957 under the Treaty of Rome. However, the number of trade pacts concluded during this period remained quite low and the scope of most of them was limited.

Often, they were aimed at extending import substitution regimes from the national to the regional level instead of focusing on market liberalization as, for instance, the Central American Common Market (CACM) or the Andean Group founded in 1960 and 1969, respectively. Since the 1980s and particularly in the 1990s, trade pacts have been rapidly proliferating. The WTO cites as many as 205 agreements (including enlargements of existing treaties) that were notified to it by May 2008. These trade pacts include both bilateral and plurilateral agreements as well as regional and cross-regional ones. Today, most countries and all WTO member countries belong to at least one trade pact.

The rise in number can be explained by several factors: The success of the European Union (EU) encouraged other country groupings to follow its example; the United States took a positive stance toward trade pacts when European countries started to show resistance toward U.S. proposals in multilateral forums. Moreover, developing countries changed their position toward trade, replacing their import substitution with market liberalization policies seeking agreements, not only with neighboring countries, but also their largest trading partners. The dissolution of the former Soviet Union led to new trade pacts among transition economies and between transition economies and other countries. Sluggish progress in multilateral trade negotiations during the Doha Round has accelerated growth of trade pacts.

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