4.7: Reducing International Trade Barriers

Many organizations work to remove barriers to trade, and an increasing number of countries are coming together to foster trade and shared economic benefits. Lowering trade barriers helps businesses source materials and products from more affordable international suppliers, reducing production costs and boosting competitiveness. For example, when China lowered its trade barriers, it made cheaper goods available to businesses worldwide, resulting in lower prices for consumers globally. Additionally, the reduction of tariffs and quotas allows businesses to tap into larger markets, creating more sales opportunities and higher profits. A case in point is the European Union, where the removal of trade barriers among member countries enables businesses to sell products across all EU nations without incurring extra costs.

Let’s review some of the important initiatives in reducing international trade barriers.

Trade Agreements and Organizations

Free trade is encouraged by a number of agreements and organizations set up to monitor trade policies. The two most important are the General Agreement on Tariffs and Trade and the World Trade Organization.

General Agreement on Tariffs and Trade

After the Great Depression and World War II, most countries focused on protecting home industries, so international trade was hindered by rigid trade restrictions. To rectify this situation, twenty-three nations joined together in 1947 and signed the General Agreement on Tariffs and Trade (GATT), which encouraged free trade by regulating and reducing tariffs and by providing a forum for resolving trade disputes. The highly successful initiative achieved substantial reductions in tariffs and quotas, and in 1995, its members founded the World Trade Organization to continue the work of GATT in overseeing global trade.

World Trade Organization

Based in Geneva, Switzerland, with nearly 150 members, the World Trade Organization (WTO) encourages global commerce and lower trade barriers, enforces international rules of trade, and provides a forum for resolving disputes. It is empowered, for instance, to determine whether a member nation’s trade policies have violated the organization’s rules, and it can direct “guilty” countries to remove disputed barriers (though it has no legal power to force any country to do anything it doesn’t want to do). If the guilty party refuses to comply, the WTO may authorize the plaintiff nation to erect trade barriers of its own, generally in the form of tariffs.

Affected members aren’t always happy with WTO actions. In 2002, for example, President George W. Bush’s administration imposed a three-year tariff on imported steel. In ruling against this tariff, the WTO allowed the aggrieved nations to impose counter-tariffs on some politically sensitive American products, such as Florida oranges, Texas grapefruits, computers, and Wisconsin cheese. Reluctantly, the administration lifted its tariff on steel.^[1]

Financial Support for Emerging Economies: The IMF and the World Bank

A key to helping developing countries become active participants in the global marketplace is providing financial assistance. Offering monetary assistance to some of the poorest nations in the world is the shared goal of two organizations: the International Monetary Fund and the World Bank. These organizations, to which most countries belong, were established in 1944 to accomplish different but complementary purposes.

The International Monetary Fund

The International Monetary Fund (IMF) is governed by and accountable to its 191 member countries. It has three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity. It loans money to countries with troubled economies, such as Mexico in the 1980s and mid-1990s and Russia and Argentina in the late 1990s. There are, however, strings attached to IMF loans: in exchange for relief in times of financial crisis, borrower countries must institute sometimes painful financial and economic reforms. In the 1980s, for example, Mexico received financial relief from the IMF on the condition that it privatize and deregulate certain industries and liberalize trade policies. The government was also required to cut back expenditures for such services as education, health care, and workers’ benefits.^[2]

The World Bank

The World Bank is an important source of economic assistance for poor and developing countries. With backing from wealthy donor countries (such as Canada, the United States, Japan, Germany, and the United Kingdom), the World Bank has committed $128.3 billion in loans, grants, and guarantees to partner countries and private businesses.^[3] Loans are made to help countries improve the lives of the poor through community-support programs designed to provide health, nutrition, education, infrastructure, and other social services.

Trading Blocs: CUSMA and the European Union

So far, our discussion has suggested that global trade would be strengthened if there were no restrictions on it—if countries didn’t put up barriers to trade or perform special favours for domestic industries. The complete absence of barriers is an ideal situation that we haven’t yet attained. In the meantime, economists and policymakers tend to focus on a more practical question: Can we achieve the goal of free trade on the regional level? To an extent, the answer is yes. In certain parts of the world, groups of countries have joined together to allow goods and services to flow without restrictions across their mutual borders. Such groups are called trading blocs. Let’s examine two of the most powerful trading blocs—CUSMA and the European Union.

CUSMA

CUSMA is a free trade agreement between Canada, the United States, and Mexico, which replaced the NAFTA free trade agreement. In April 2020, Canada and Mexico notified the U.S. that they were ready to implement the agreement. The CUSMA took effect on July 1, 2020, replacing NAFTA.^[4] Each country benefits from the comparative advantages of its partners: each nation is free to produce what it does best and to trade its goods and services without restrictions.

The European Union

The forty-plus countries of Europe have long shown an interest in integrating their economies. The first organized effort to integrate a segment of Europe’s economic entities began in the late 1950s, when six countries joined together to form the European Economic Community (EEC). Over the next four decades, membership grew, and in the late 1990s, the EEC became the European Union. Today, the European Union (EU) is a unique economic and political union between 27 countries that have eliminated trade barriers among themselves (Refer to the map in Figure 7.4).

The EU is more than a trading organization: it also enhances political and social cooperation and binds its members into a single entity with the authority to require them to follow common rules and regulations. It is much like a federation of states with a weak central government, with the effect not only of eliminating internal barriers but also of enforcing common tariffs on trade from outside the EU. In addition, the EU also allows people to come and go freely: if you possess an EU passport, you can work in any EU nation.

The Euro

A key step toward unification occurred in 1999, when most (but not all) EU members agreed to abandon their own currencies and adopt a joint currency. The actual conversion occurred in 2002, when a common currency called the euro replaced the separate currencies of participating EU countries. The common currency facilitates trade and finance because exchange-rate differences no longer complicate transactions.^[5]

The formation of the European Union (EU) paved the way for a unified, multi-country financial system under a single currency: the euro. Most EU member nations agreed to adopt the euro, but a few have decided to stick with their legacy currencies. There are 27 member countries in the European Union, but six of them are not in the Eurozone and therefore don’t use the euro. Denmark is a member country but has negotiated an opt-out with the Union, and it has kept its own currency. The six countries that are not in the Eurozone choose to use their own currencies as a way to maintain financial independence on certain key issues. These issues include setting monetary policy, dealing with issues specific to each country, handling national debt, modulating inflation, and choosing to devalue the currency in certain circumstances. The Euro enables trade to operate far quicker by removing the need and risk of currency exchanges when operating across Eurozone countries. Currency exchanges cost money to complete and are a risk to businesses as fluctuations in rates lead to uncertainty about the cost of the exchange. Therefore, by removing this barrier, trade has flowed more easily between countries.^[6]

Only time will tell whether the trend toward regional trade agreements is good for the world economy. Clearly, they’re beneficial to their respective participants; for one thing, they get preferential treatment from other members. But certain questions still need to be answered more fully. Are regional agreements, for example, moving the world closer to free trade on a global scale, toward a marketplace in which goods and services can be traded anywhere without barriers?

CPTPP and CETA Agreements

Canada is engaged in other more recently negotiated trade agreements, including the following:

• The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) took effect in January 2019 and is a comprehensive and progressive agreement that is made up of 11 member countries. TPP will increase Canada’s foothold in the Asia Pacific and create opportunities to open new markets, such as Canadian beef and pork producers gaining access to the Japanese market. Opponents of the TPP agreement highlight the impact on the dairy industry, the auto sector, and other groups.^[7]
• The Canadian-European Union Comprehensive Economic and Trade Agreement (CETA), through which 98% of Canadian goods are now duty-free, and eventually, 99% of tariffs will be eliminated.^[8]
• Canada started negotiations with Mercosur (a regional trade bloc in South America made up of the following countries: Argentina, Brazil, Uruguay, Paraguay and Venezuela) in 2018, but had to pause when other priorities took over. As of 2023, Canada resumed negotiations for a free trade agreement (FTA) with Mercosur, a trading bloc and customs union consisting of Argentina, Brazil, Paraguay, and Uruguay.^[9]

Other Free Trade Agreements and Blocs

Nations have grouped together to form regional trade associations for their own benefits, including the following:

• ASEAN Free Trade Area;
• The Asia-Pacific Economic Cooperation (APEC);
• The Economic Community of Central African States;
• The Gulf Cooperation Council; and
• BRICS – Brazil, Russia, India, China and South Africa.

Media Attributions

“Figure 4.3: Map of European Countries in the European Union” is is reused from Members of the European Union, © 2022 by Kindred Grey, licensed CC BY 4.0, which includes “Special member state territories in Europe and the European Union” from Wikimedia Commons.

Image Descriptions

Figure 4.3

A map of Europe, with countries within the European Union highlighted in burnt orange. These countries include Austria, Italy, Belgium, Latvia, Bulgaria, Lithuania, Croatia, Luxembourg, Cyprus, Malta, Czechia, Netherlands, Denmark, Poland, Estonia, Portugal, Finland, Romania, France, Slovakia, Germany, Slovenia, Greece, Spain, Hungary, Sweden, and Ireland.

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