Trade Agreements

The underlying framework for trade agreements resides in one of the multilateral institutions created under U.S. leadership after World War II. Those institutions include the International Monetary Fund (IMF), to help countries with temporary balance of payments problems; the World Bank, to provide support for reconstruction and economic development; and the General Agreement on Tariffs and Trade (GATT), to provide a framework for international trade-policy negotiations and a mechanism for settling trade disputes. A more comprehensive international trade organization was planned to facilitate liberalized trade among nations but was not ratified by the U.S. Congress for fear of yielding control over trade policy to an international entity. Much of the rationale for GATT was to harness mercantilist motives in the interest of trade liberalization.

Thus, GATT's articles of agreement codified behavioral principles for participating nations' trade in goods from 1947 to 1995, when the World Trade Organization (WTO) was founded. These behavioral principles included first and foremost a commitment to negotiating reduced tariffs, which, as tariff levels have been reduced over successive rounds of negotiations, has expanded to include a host of nontariff barriers to trade. A second principle is nondiscrimination in imports and exports, expressed in the form of mostfavored nation (MFN) treatment, now replaced by the term normal trade relations (NTR). This principle ensures that a tariff reduction made to one nation is extended to all nations to whom a country has extended MFN status, typically all GATT (now WTO) member nations. An exception to the MFN rule is established in GATT Article XXIV, which allows for the creation of preferential trade agreements (PTA) outside of the GATT framework, if they increase the domain of liberalized trade. Examples of this type of agreement would include a free trade area (FTA) and a customs union (CU). (In an FTA, there is free movement of goods originating from within the member countries, whereas in a customs union, internal free trade is accompanied by a common external tariff—on goods from outside the member nations.) Among the successful regional agreements that have been negotiated are the European Union (EU), North American Free Trade Agreement (NAFTA), Mercosur, the Andean Community (the latter two now merged to form the South American Community of Nations), the East African Community, and the Association of Southeast Asian Nations (ASEAN) Free Trade Area.

A second exception to MFN was envisioned for the developing countries and expressed in GATT Article XVIII, which gave them additional leeway in using tariffs and quantitative restrictions to achieve development objectives. These provisions came to be seen as inadequate, and in 1964 the first United Nations Conference on Trade and Development (UNCTAD), held in Geneva, put developing countries' demands for aid and preferential access to rich nations' markets on the multilateral negotiating menu. After initial reluctance, rich nations eventually implemented a preferential arrangement, the generalized system of preferences (GSP) for developing countries' manufactures, though the program was circumscribed by safeguard measures to limit market disruption.

A third principle is the prohibition of quantitative restrictions on trade, but GATT Article XI articulates that the principle had a long list of exceptions, such that one could say it began as a principle in principle. In GATT framework, no agreement governing trade in agriculture was put in place, and rules have only slowly been agreed to over the years. In the meantime, quantitative restrictions (quotas) were widely used to protect domestic agriculture. However, in the Uruguay Round of multilateral GATT negotiations that concluded in 1994, GATT member countries agreed to transform quantitative restrictions into tariff [Page 973]form, at least in part to provide a basis for comparison across countries and to facilitate negotiations to lower levels of protection. Despite that progress, the goal of reducing protection for domestic agriculture remains exceptionally challenging.

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