Pros and Cons of Multilateral Trade Agreements

How do the world's largest trade agreements work?

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Multilateral trade agreements are commerce treaties among 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.

Key Takeaways

  • Multilateral trade agreements strengthen the global economy by making developing countries competitive. 
  • They standardize import and export procedures, giving economic benefits to all member nations. 
  • Their complexity helps those that can take advantage of globalization, while those who cannot often face hardships.

5 Advantages

Multilateral agreements make all signatories treat each other equally. 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.

4 Disadvantages

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.

Pros
  • Treats all member nations equally

  • Makes international trading easier

  • Trade regulations are the same for everyone

  • Helps emerging markets

  • Multiple nations are covered by one treaty

Cons
  • Negotiations can be lengthy, risk breaking down

  • Easily misunderstood by the public

  • Removing trade borders affects businesses

  • Benefits large corporations, but not small businesses

Examples

Some regional trade agreements are multilateral. The largest had been the North American Free Trade Agreement (NAFTA), which was ratified on January 1, 1994. NAFTA quadrupled trade between the United States, Canada, and Mexico from its 1993 level to 2018. On July 1, 2020, the U.S.-Mexico-Canada Agreement (USMCA) went into effect. The USMCA was a new trade agreement between the three countries that was negotiated under President Donald Trump.

The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) was signed on August 5, 2004. CAFTA-DR eliminated tariffs on more than 80% of U.S. exports to six countries: Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador. As of November 2019, it had increased trade by 104%, from $2.44 billion in January 2005 to $4.97 billion.

The Trans-Pacific Partnership (TPP) 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 (GATT). Twenty-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. The Uruguay Round led to the creation of the World Trade Organization. On April 15, 1994, the 123 participating governments signed the agreement creating the WTO in Marrakesh, Morocco. The WTO 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 among all 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.

Farm lobbies in the United States and the European Union doomed the Doha negotiations. They refused to agree to lower subsidies or accept increased foreign competition. The WTO abandoned the Doha round in July 2008.

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.