6.3 Trade Facilitation and Promotion

Learning Objective

2. Assess the importance of economic integration in international trade.

Trade Facilitation and Promotion

The American statesman Benjamin Franklin (1706–1790) once wrote: “No nation was ever ruined by trade.” Many economists would express their attitudes toward international trade in an even more positive manner (Greenlaw & Shapiro, 2017). The evidence that international trade confers overall benefits on economies is pretty strong. Trade has accompanied economic growth in the United States and around the world. Many of the national economies that have shown the most rapid growth in the last several decades — for example, Japan, South Korea, China, and India — have done so by dramatically orienting their economies toward international trade. There is no modern example of a country that has shut itself off from world trade and yet prospered.

Video: Why do Countries Trade? | Introduction & Overview | IB International Economics | The Global Economy (12:27)

Countries participate in trade activities and facilitate exchange through trade agreements and trade programs to gain from trade. Let’s watch this video to understand how countries gain from trade.

“Trade facilitation looks at how procedures and controls governing the movement of goods across national borders can be improved to reduce associated cost burdens and maximize efficiency while safeguarding legitimate regulatory objectives” (Wikipedia, 2021) .

As per OECD Trade Facilitation and the Global Economy Report, 2018 :

Trade facilitation benefits exporters and importers alike by allowing better access to inputs for production and enhancing participation in Global Value Chains. On the supply side, trade facilitation helps reduce business losses resulting from delays of goods at the border. Delays in delivery increase firms’ costs for managing inventory and undermine their ability to respond rapidly to changes in consumer preferences. On the demand side, faster and more predictable delivery of intermediate goods through the supply chain can reduce firms costs (p. 16, para 5).

Economic Integration

For a variety of reasons, it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. If countries cooperate and set zero tariffs against each other, then both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs. Benefits may also accrue to countries that liberalize labour and capital movements across borders, that coordinate fiscal policies and resource allocation toward agriculture and other sectors, and that coordinate their monetary policies (Saylor Academy, 2012).

Any type of arrangement in which countries agree to coordinate their trade, fiscal, or monetary policies is referred to as economic integration. There are different degrees of integration:

  • Preferential Trade Agreement (PTA)
  • Free Trade Area (FTA)
  • Customs Union
  • Common Market
  • Economic Union
  • Monetary Union

Let’s discuss these in detail.

Preferential Trade Agreement

A preferential trade agreement (PTA) is perhaps the weakest form of economic integration (Saylor Academy, 2012). In a PTA, countries would offer tariff reductions and not eliminations, to a set of partner countries in some product categories. Higher tariffs would remain in all other product categories. This type of trade agreement is not allowed among World Trade Organization (WTO) members, who are obligated to grant most-favored nation (MFN) status to all other WTO members. Under the MFN rule, countries agree not to discriminate against other WTO member countries. Thus, if a country’s low tariff on bicycle imports, for example, is 5 percent, then it must charge 5 percent on imports from all other WTO members. Discrimination or preferential treatment for some countries is not allowed. The country is free to charge a higher tariff on imports from non-WTO members, however. In 1998, the United States proposed legislation to eliminate tariffs on imports from the nations in sub-Saharan Africa. This action represents a unilateral preferential trade agreement since tariffs would be reduced in one direction but not the other.

Free Trade Area

A free trade area (FTA) occurs when a group of countries agrees to eliminate tariffs among themselves but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Agreement (NAFTA), now USMCA is an example of an FTA. When NAFTA/USMCA is fully implemented, tariffs of automobile imports between the United States and Mexico will be zero. However, Mexico may continue to set a different tariff than the United States on automobile imports from non-NAFTA countries. Because of the different external tariffs, FTAs generally develop elaborate “rules of origin.” These rules are designed to prevent goods from being imported into the FTA member country with the lowest tariff and then transshipped to the country with higher tariffs.

Customs Union

A customs union occurs when a group of countries agrees to eliminate tariffs among themselves and set a common external tariff on imports from the rest of the world. The European Union (EU) represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin but introduces the problem of policy coordination. With a customs union, all member countries must agree on tariff rates across many different import industries.

Common Market

A common market establishes free trade in goods and services, sets common external tariffs among members, and also allows for the free mobility of capital and labour across countries. The EU was established as a common market by the Treaty of Rome in 1957, although it took a long time for the transition to take place. Today, EU citizens have a common passport, can work in any EU member country, and can invest throughout the union without restriction.

Economic Union

An economic union typically will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labor, and also relegate some fiscal spending responsibilities to a supranational agency. The EU’s Common Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic union.

Monetary Union

A monetary union establishes a common currency among a group of countries. This involves the formation of a central monetary authority that will determine monetary policy for the entire group. The Maastricht treaty, signed by EU members in 1992, proposed the implementation of a single European currency (the Euro) by 1999.

Perhaps the best example of an economic and monetary union is the United States. Each U.S. state has its own government that sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor, and capital can all move freely, without restrictions among the U.S. states, and the nation sets a common external trade policy.

Visualizing Trade Data

Visit World Integrated Trade Solutions for examples of trade-related data visualizations.

Canada’s Trade Agreements

The trade agreements of Canada represents Canada’s cooperation in multinational trade pacts and plays a large role in the development of Canadian economy. Canada is regularly described as a trading nation, considering its total trade is worth more than two-thirds of its GDP (Hart, 2003). Of that total trade, roughly 75% is done with countries that are part of free-trade agreements with Canada—primarily the United States through the Canada–United States–Mexico Agreement (CUSMA), and its predecessor the North American Free Trade Agreement (NAFTA) (Coyne, 2012) . According to Global Affairs Canada, one in every five Canadian jobs is directly linked to exports (Kingston, 2017) .

By 2030, two-thirds of middle – class consumers will be in Asia, which can create new trade opportunities for Canadian companies (Kingston, 2017). In 2020, merchandise trade between Canada and ASEAN reached $26.7 billion, making it evident that a free trade agreement would boost GDP and exports to ASEAN countries, create new market opportunities for Canadian goods and services, and support a more predictable environment for trade and investment. As a result, in November 2021, Canada and ASEAN nations agreed to proceed with Free Trade Agreement negotiations (Government of Canada, 2022).

Canada’s Free Trade Agreement – Interactive

Scroll down the article ‘What are the Benefits of Canada’s Trade Agreements’ to view interactive map titled ‘Canada’s Free Trade Agreement’. Click on each country for more details.

Trade Programs

There is another way to facilitate and promote trade: Trade Security Programs. Participation in these programs helps make the customs clearance process easier and quicker. Each country has its own international trade security program; this section will discuss trade security programs in Canada and the US.

  • PIP (Partners in Protection)
  • Customs Self Assessment (CSA)
  • FAST (Free and Secure Trade)
  • Single Window Initiative
  • Custom Trade – Partnership Against Terrorism (CT-PAT)

Let’s discuss each of these in detail.

Partners in Protection (PIP)

According to the Government of Canada (2014), “Partners in Protection (PIP) is a cooperative program between private industry and the CBSA (Canada Border Services Agency) aimed at enhancing border and trade chain security” (para. 1). Partners in Protection program:

  • does not cost anything if an organization decides to participate in the program as a member
  • is designed for business that have been identified as “trusted traders”
  • outlines responsibility for these traders in PIP Terms and Conditions of Use.
  • improves the efficiency of trading across the border
  • allows your organization’s trading processes to be evaluated by the CBSA (Government of Canada, 2014)

To learn more, visit Partners in Protection by the Canadian Border Services Agency.

Customs Self Assessment (CSA)

According to Government of Canada (2008), “The Customs Self Assessment (CSA) program is designed for low-risk, pre-approved importers, carriers and registered drivers. To take advantage of the program, CSA-approved importers and carriers must use a registered driver to carry CSA-eligible goods into Canada in the highway mode.” The CSA program:

  • makes imports of low-risk products, quick and easy, and
  • helping CBSA to focus only on high-risk shipments.

To learn more, visit Customs Self Assessment Program by the Canadian Border Services Agency.

Free and Secure Trade (FAST)

The Free and Secure Trade (FAST) program is a joint United States – Canadian program between the Canada Border Services Agency and the U.S. Customs and Border Protection. The FAST initiative offers pre-authorized importers, carriers and drivers expedited clearance for eligible goods, building on what Canada previously implemented under their Customs Self Assessment (CSA) program (Government of Canada, 2021).

The program aims to clear shipments faster and more cheaply by:

  • Reducing the information needed for border/customs clearance
  • Eliminating the need for importers to transmit data for each transaction
  • Dedicating lanes for FAST clearances at border crossings (Wikipedia, 2021).
  • Reducing the rate of border examinations
  • Verifying trade compliance away from the border
  • Streamlining accounting and payment for all goods imported by approved importers (Canada only)

The FAST Card is available to drivers who Canada and the United States have jointly approved. Each country must approve carriers and importers separately. As a result, a FAST importer and/or carrier can choose to be approved only in Canada or only in the United States (Office of Press Secretary, 2002).

Video: Trusted Traders (3:30)

Watch this video that summarizes PIP, CSA and FAST trade security programs.

Media 6.4. Trusted Traders [Video]. Canada Border Services Agency.

Single Window Initiative

The single-window system is a trade facilitation concept that allows an international (cross-border) trader to submit information to a single agency, rather than dealing with multiple agencies in multiple locations to obtain the necessary papers, permits, and clearances to complete their import or export processes.

“A single window is defined as a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export, and transit related-related regulatory requirements” (World Custom Organization, n.d.).

Figure 6.2 and 6.3 in the interactive below explain change in trade processes pre and post single window initiative respectively. Complete image descriptions available here.

In Canada, the Single Window Initiative is managed by Canada Border Services Agency (CBSA) and simplifies sharing of commercial data between importing countries and the government of Canada (Government of Canada, 2020).

Custom Trade – Partnership Against Terrorism (CT-PAT)

The Customs-Trade Partnership Against Terrorism (C-TPAT) is a voluntary supply-chain security program led by U.S. Customs and Border Protection (CBP) focused on improving the security of private companies’ supply chains concerning terrorism. The program was launched in November 2001 with seven initial participants, all large U.S. companies. As of December 1, 2014, the program had 10,854 members. The 4,315 importers in the program account for approximately 54% of the value of all merchandise imported into the U.S (Wikipedia, 2022) .

Check Your Understanding

Answer the question(s) below to see how well you understand the topics covered above. You can retake it an unlimited number of times.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

Check Your Understanding: Trade Facilitation and Promotion

Text-based alternative.

Media Attributions and References

Brad Cartwright. (n.d.). 3 Why do countries trade? | Introduction & overview | IB international economics | The global economy [Video]. YouTube. https://youtu.be/Jyw5p1EEZNM.

Canada Border Services Agency. (2015, July 20). Trusted traders [Video]. YouTube. https://youtu.be/SVxRtifbQuY.

Jieholee. (2016). [Trade processes pre-single window initiative] [Flowchart]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:BeforeSW.jpg#/media/File:BeforeSW.jpg.

Jieholee. (2016). [Trade processes post single window initiative] [Flowchart]. Wikimedia Commons. https://upload.wikimedia.org/wikipedia/commons/5/54/AfterSW.jpg.





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