3.2: Trade Facilitation and Promotion

The American statesman Benjamin Franklin (1706–1790) once wrote: “No nation was ever ruined by trade.” Provincial and federal governments work to build stronger ties with trading partners and remove barriers to international trade and foreign investment. Procurement obligations in international trade agreements ensure that suppliers are treated in an open, fair and transparent manner. Trade has accompanied economic growth in Canada and around the world. Many 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. No modern example exists of a country that has shut itself off from world trade and yet prospered.

“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 the OECD’s Trade Facilitation and the Global Economy Report of 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 various reasons, it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. Suppose countries cooperate and set zero tariffs for each other. In that case, both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs. Liberalization in economic policy encourages capital movements across borders, greater market flexibility and fewer restrictions on domestic and foreign capital.

Any 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 must grant most-favoured 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 in some countries is not allowed. However, the country is free to charge a higher tariff on imports from non-WTO members. In 1998, the United States proposed legislation to eliminate import tariffs from sub-Saharan African nations. 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 external tariff on imports from the rest of the world. The North American Free Trade Agreement (NAFTA), now the Canada-United States-Mexico Agreement (CUSMA), is an example of an FTA. Under CUSMA, there are zero tariffs on automobile imports between Canada and Mexico, provided the vehicle meets the agreement’s rule of origin, which means that cars must have at least 75% North American content. However, Mexico may continue to set a tariff different from Canada’s 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 allows for the free mobility of capital and labour across countries. The Treaty of Rome established the EU as a common market 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 maintains free trade in goods and services, sets common external tariffs among members, allows the free mobility of capital and labour, and relegates some fiscal spending responsibilities to a supranational agency. The EU’s Common Agriculture Policy (CAP) is an example 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 United States is the best example of an economic and monetary union. Each U.S. state has a government that sets policies and laws for its 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, labour, and capital can all move freely, without restrictions among the U.S. states, and the nation sets a common external trade policy.

Attributions

“3.2: Trade Facilitation and Promotion” is adapted from “Chapter 6: Facilitating International Freight Flows” from Global Value Chain copyright © 2022 by Kiranjot Kaur and Iuliia Kau, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

The multiple choice questions in the Checkpoint boxes were created using the output from the Arizona State University Question Generator tool and are shared under the Creative Commons – CC0 1.0 Universal License.