Trade can be used as a tool to encourage economic growth in developing countries, but it is also a way for developed countries to become even more wealthy. Photo Credit: stock.xchng.com

Trade policies in particular can be complicated and confusing. In this section we attempt to give you simple definitions for terms that are central to understanding international trade and trade policy. Short descriptions of several trade agreements provide insight into the inner workings of the global economic structure and outline different regional agreements. Many of these trade policies can be controversial, and we have attempted to present a balanced perspective and further analysis through links to articles.

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Fair Trade:

"Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade."¹ Supporters of fair trade advocate for a partnership between trading countries. For example, the membership criteria for the Fair Trade Federation includes "respecting cultural identity, encouraging environmental sustainability and commitment to paying a fair wage in local contexts. Fair trade activists believe that free trade has been ineffective in addressing the needs of the world's poor."

Companies selling fair trade products often communicate directly with growers and producers of goods to determine a fair price, even if that price is above the world market price. The hope is that they can meet the needs of small growers, so they commit to buy certain items such as coffee at a set price.² Most companies and consumers that buy these fair trade goods are less concerned with price and more concerned with the producer of what they are purchasing.

Links to Articles on Fair Trade:

How "Fair" is Fair Trade?

United States Must Redefine Fair Trade

Free Trade Versus Fair Trade

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Free Trade:

Technically, free trade is trade without subsidies, tariffs and import taxes between nations. These mechanisms allow goods produced within a country to be sold cheaper than those exported from outside of the country. Subsidies and tariffs are mechanisms that protect domestic industry and markets from competition. For example, susidizing the steel industry in the U.S. allows domestic steel companies to sell their goods for less than the price of foreign steel despite the fact that it costs more to produce it. Tariffs on foreign steel would increase the price of that steel and domestic steel would still be priced competitively. When free trade policies and treaties work effectively, subsidies and tariffs are eliminated and nations specialize in goods that they can produce most efficiently. They then trade with other countries for goods produced more efficiently in that country. This practice can create lower prices and access to a greater variety of goods for consumers. Theoretically living standards for all parties would increase globally. This is called gains from specialization. Economists generally agree that free trade would benefit the international economy as a whole.³

One problem with free trade is that often trade practices that are not completely unrestricted are promoted as free. Many times a nation slightly reduces trade barriers and calls it free trade, when in reality the barriers that remain are still significant. One major barrier to free trade has been agricultural subsidies in both Europe and the United States. These subsidies protect farmers in both the European Union and the United States but make it more difficult for developing nations to be able to compete in these markets where they would normally have the greatest production advantage. It also means that consumers are paying more than a fair market price for many agricultural goods. The Doha round of the Word Trade Organization has experienced significant difficulties because of these subsidies.

In addition, free trade policies have been connected with job loss as labor intensive industries such as manufacturing move where labor is cheapest. However, free trade advocates point out that this movement provides jobs overseas and raises the standard of living worldwide. This practice has led to painful market shifts in many developed economies and backlash from labor unions, but the unemployment can be temporary with individual workers moving into different sectors of the economy.

Links to Articles on Free Trade:

Protectionism - Tariffs, Subsidies, and Trade Policy

Freer Trade Would Benefit U.S. the Most

Dying for Free Trade

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Multinational Corporations:

Multinational corporations (MNCs) are defined as corporations that operate in multiple countries. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. These companies can move their products, personnel, and even factories to the location that would be the most profitable.⁴

Nearly all major multinationals are American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. Advocates of multinationals say they create jobs and wealth and improve technology in countries that are in need of such development. On the other hand, critics say multinationals can have undue political influence over governments, can exploit developing nations as well as create job losses in their own home countries. ⁵

Links to Articles on MNCs:

Multinational Corporations: A Key to Global Poverty Reduction - Part I

Multinational Corporations: A Key to Global Poverty Reduction - Part II

The Testing Ground of Tax

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Asia-Pacific Economic Cooperation (APEC):

The Asia-Pacific Economic Cooperation (APEC) is the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region. APEC, founded in 1989, has 21 member economies including the United States, China, Indonesia and Australia. APEC is not bound by treaties or rules, and all agreements are built through consensus and voluntary commitments. Each member economy is given the opportunity to have a voice within the group. Since its inception, APEC has worked to reduce tariffs and other trade barriers across the Asia-Pacific region, creating efficient domestic economies and dramatically increasing exports.⁶

Links to Articles on APEC:

APEC

Vietnam Plays Wary Host to APEC

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Central American Free Trade Agreememt (CAFTA):

CAFTA was originally an agreement between the United States, Costa Rica, Guatemala, El Salvador, Honduras and Nicaragua. In 2004, the Dominican Republic joined the negotiations, and the agreement was renamed DR-CAFTA. DR-CAFTA was implemented in most partner countries in 2006, by the Dominican Republic in 2007, and is pending approval in Costa Rica. CAFTA-DR aims to create a free trade zone between partner countries eliminating tariffs on basic grains, such as rice, beans and corn both immediately and gradually depending on country and product specific agreements.

The agreement particularly affects the rural sector throughout Latin America. Small farmers are unable to compete with imports from corporations in the US that can sell goods at artificially low prices supported by US government subsidies. This has very troubling implications for poverty and development in a region that is predominantly rural and agriculture based. These indicators and potential impacts have not been fully analyzed and participating countries have only the ten-year impact of NAFTA on Mexico to look to as an indicator of future economic impacts on their economies.⁷

Links to Articles on CAFTA:

The Ins and Outs of the Central American Free Trade Agreement

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The European Union (EU):

The European Union (EU) is a unique area of political cooperation and also a free trade area established in 1992 with the Treaty on European Union (The Maastricht Treaty). The EU is the successor to the European Economic Community (ECC) which was founded in 1957 to enhance political, economic and social cooperation in Europe after World War II. The ECC originally had only six members, but over the years cooperation has expanded and currently, the EU has twenty-seven member states. Twelve of these states also have a monetary union and use the same currency, the euro. In these countries monetary policy is contolled by the European Central Bank. In addition, the union has a common trade policy with set tariff and subsidy schedules for imports and participates in World Trade Organization negotiations as a single entity. Trade in goods and services between member states is unrestricted by tariffs and import or export taxes. Immigration of citizens between member states is generally unrestricted also, with a few exceptions. In late 2004 and early 2005 EU officials attempted to draft a constitution, but it failed when France and the Netherlands did not gain approval for the document in referendums. Major treaties adopted by the EU are required to have unamimous member state ratification.

Links to Articles on the European Union:

Europa

European Integration and the Proposed EU Constitution

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Mercosur:

Mercosur began as a trade agreement between Argentina, Brazil, Uruguay and Paraguay with a formal launching in May of 1991 with the Asunción Treaty. Venezuela joined the group in 2006 and Chile and Bolivia are now associate members. Mercosur has several ambitious goals to enhance competitiveness in the global market including opening markets, using resources effectively and building a better infrastructure and network of communication. The group is also concerned with environmental protection. Mercosur has a common external trade tariff. ⁸

Link to Article on Mercosur:

Mercosur—Common Market of the South—Demystified

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North American Free Trade Agreement (NAFTA):

The North American Free Trade Agreement was implemented on January 1, 1994 and removes most barriers to trade and investment among the United States, Canada, and Mexico. The agreement removed many trade protections immediately but phased others out slowly over a period of five to fifteen years. ⁹

The intent of the agreement was to help the region compete with the European Union trading block more efficiently. The effects of the agreement have been both positive and negative. The United States is now dealing with a trade deficit with Mexico as opposed to a trade surplus, but some industries in the US such as telecommunications and high tech manufacturing have benefited from NAFTA. Mexico's rural sector has been dealt a significant blow by increased imports of subsidized corn from the US and income disparities have also increased significantly.

Links to Articles on NAFTA:

North American Free Trade Agreement

NAFTA: A Cautionary Tale

Mexico's Economic Progress Can Ease Migration Woes

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Organization of the Petroleum Exporting Countries (OPEC):

OPEC is an intergovernmental organization of twelve developing nations that export oil and use production levels to influence the market price. These countries are Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venzuela. These twelve nations cooperate and decide how much oil to produce, influencing prices of oil world-wide. Their mission states that this practice is used to, "achieve stable oil prices, which are fair and reasonable for producers and consumers".¹⁰

OPEC produces 40 percent of the world's oil and holds 80 percent of global reserves.¹¹ One organization controlling such a large supply of oil can have an enormous amount of influence on the global market. They may claim to work for fair, stable prices, but many have accused the organization of inflating oil prices to much higher than competitive market levels. However, because fossil fuels, specifically crude oil, are a limited resource OPEC may argue that limiting production also ensures that the world supply will last longer and benefit more people.

Links to Articles on OPEC:

International Oil Markets and the Global Economy

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World Trade Organization:

The World Trade Organization (WTO) was conceived at the Bretton Woods Conference in 1944 At that time the institution lacked the necessary support and a substitute was used instead. This substitute was called the General Agreement on Trades and Tariffs and functioned until the WTO gained enough support from the economic powers in 1995. The WTO is an international organization dealing with the rules of trade nations. It is a treaty organization, which means that each member nation voluntarily signed a treaty in order to participate in international trade. The WTO intends to help producers and consumers export and import goods more easily.

The WTO is also a space where member nations can settle disputes. If one nation believes that another is not abiding by the treaty agreements, they can take the dispute to the WTO to be settled. If the WTO rules that a trade practice is unfair, the offending nation must correct the practice or face sanctioned retaliations.

Nations in the WTO also participate in rounds of negotiations attempting to further break down trade barriers. Currently, nations are debating in the Doha Round negotiations. This round has been relatively unsuccessful to date because of agricultural subsidies in the United States and Europe. Each nation wants to continue protecting farmers but also has an interest in letting trade become freer with the removal of subsidies and import taxes.¹²

Many individuals are skeptical of the WTO because the organization can be overpowered by the strength of interests in developed countries. Developing countries suffer the most from trade barriers (especially agricultural) and the WTO has not been very successful in eliminating or reducing these practices.

Links to Articles on the WTO:

Don't Give Up on WTO, Fix It

The United States Must Rethink Doha Demands

World Trade Organzation Head Sees Progress on Trade Issues

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Footnotes:

¹ International Federation of Alternative Trade

² American Friends Service Committee, Glossary of International Trade Terms

³ The Concise Encyclopedia of Economics, Free Trade Agreements and Customs Unions, By Douglas A. Irwin

⁴ American Friends Service Committee, Glossary if International Trade Terms

⁵ Answers.com, Investment Dictionary

⁶ Asia-Pacifc Economic Cooperation

⁷ Washington Office on Latin America

⁸ MercoPress

⁹ North American Free Trade Agreement

¹⁰ Organization of the Petroleum Exporting Countries

¹¹ Institute for the Analysis of Global Security, The Geopolitics of Oil

¹² World Trade Organization




Contributed by Rachelle Vanderzanden, Project Intern at GlobalEnvision. Rachelle is an undergraduate student at Portland State University where she is currently studying political science. She comes to GlobalEnvision and Mercy Corps through a community-based learning program at her university called Student Leaders for Service. Upon completing her degree, Rachelle hopes to pursue a career in international development.

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