Multilateral Trade Agreements With Their Pros, Cons and Examples
5 Pros and 4 Cons to the World's Largest Trade Agreements
Multilateral trade agreements are commerce treaties between three or more nations. The agreements reduce tariffs and make it easier for businesses to import and export. Since they are among many countries, they are difficult to negotiate.
That same broad scope makes them more robust than other types of trade agreements once all parties sign. Bilateral agreements are easier to negotiate but these are only between two countries.
They don't have as big an impact on economic growth as does a multilateral agreement.
Multilateral agreements make all signatories treat each other the same. No country can give better trade deals to one country than it does to another. That levels the playing field. It's especially critical for emerging market countries. Many of them are smaller in size, making them less competitive. The Most Favored Nation Status confers the best trading terms a nation can get from a trading partner. Developing countries benefit the most from this trading status.
The second benefit is that it increases trade for every participant. Their companies enjoy low tariffs. That makes their exports cheaper.
The third benefit is it standardizes commerce regulations for all the trade partners. Companies save legal costs since they follow the same rules for each country.
The fourth benefit is that countries can negotiate trade deals with more than one country at a time. Trade agreements undergo a detailed approval process. Most countries would prefer to get one agreement ratified covering many countries at once.
The fifth benefit applies to emerging markets. Bilateral trade agreements tend to favor the country with the best economy. That puts the weaker nation at a disadvantage. But making emerging markets stronger helps the developed economy over time.
As those emerging markets become developed, their middle class population increases. That creates new affluent customers for everyone.
The biggest disadvantage of multilateral agreements is that they are complex. That makes them difficult and time-consuming to negotiate. Sometimes the length of negotiation means it won't take place at all.
Second, the details of the negotiations are particular to trade and business practices. The public often misunderstands them. As a result, they receive lots of press, controversy, and protests.
The third disadvantage is common to any trade agreement. Some companies and regions of the country suffer when trade borders disappear.
The fourth disadvantage falls on a country's small businesses. A multilateral agreement gives a competitive advantage to giant multi-nationals. They are already familiar with operating in a global environment. As a result, the small firms can't compete. They lay off workers to cut costs. Others move their factories to countries with a lower standard of living. If a region depended on that industry, it would experience high unemployment rates. That makes multilateral agreements unpopular.
It increased trade 300 percent between its beginning and 2009. But President Donald Trump threatened to withdraw from NAFTA. If Trump dumps NAFTA, Canada and Mexico will simply revert to the bilateral trade agreement imposing the standard high tariffs. The volume of exports to Canada and Mexico will decrease and prices on imports from these countries will rise.
The Central American-Dominican Republic Free Trade Agreement was signed on August 5, 2004. CAFTA-DR eliminated tariffs on more than 80 percent of U.S. exports to six countries. These include Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador. By 2013, it increased trade by 71 percent or $60 billion.
The Trans-Pacific Partnership would have been bigger than NAFTA. Negotiations concluded on October 4, 2015. After becoming president, Donald Trump withdrew from the agreement. He promised to replace it with bilateral agreements. The TPP was between the United States and 11 other countries bordering the Pacific Ocean. It would have removed tariffs and standardized business practices.
All global trade agreements are multilateral. The most successful one is the General Agreement on Trade and Tariffs. One hundred fifty-three countries signed GATT in 1947. Its goal was to reduce tariffs and other trade barriers.
In September 1986, the Uruguay Round began in Punta del Este, Uruguay. It centered on extending trade agreements to several new areas. These included services and intellectual property. It also improved trade in agriculture and textiles. On 15 April 1994, the 123 participating governments signed the agreement in Marrakesh, Morocco. That created the World Trade Organization. It assumed management of future global multilateral negotiations.
The WTO's first project was the Doha round of trade agreements in 2001. That was a multilateral trade agreement between all 149 WTO members. Developing countries would allow imports of financial services, particularly banking. In so doing, they would have to modernize their markets. In return, the developed countries would reduce farm subsidies. That would boost the growth of developing countries that were good at producing food. But farm lobbies in the United States and the European Union stopped it. They refused to agree to lower subsidies or accept increased foreign competition. The WTO abandoned the Doha round in June 2006.
On December 7, 2013, WTO representatives agreed to the so-called Bali package. All countries agreed to streamline customs standards and reduce red tape to expedite trade flows. Food security is an issue. India wants to subsidize food so it could stockpile it to distribute in case of famine. Other countries worry that India may dump the cheap food in the global market to gain market share.