But the trade agreements we sign and discuss – like the proposed Trans-Pacific Partnership – have almost nothing to do with free trade. These agreements are really just selective protectionism. Some participants will be exposed to the full burden of global competition, such as U.S. factory workers. But some will make the rules that protect them from competition, like some pharmaceutical companies. They use these agreements to force governments in developing countries to use account collectors to enforce their patents, driving up drug costs. For many countries, unilateral reforms are the only effective way to reduce barriers to internal trade. However, multilateral and bilateral approaches – removing trade barriers in coordination with other countries – have two advantages over unilateral approaches. First, the economic benefits of international trade will be strengthened and strengthened if many countries or regions agree to remove trade barriers. By expanding markets, concerted trade liberalization enhances competition and specialization between countries, increasing efficiency and consumer incomes.
While free trade is generally beneficial, removing a trade barrier to a given asset harms shareholders and workers in the domestic industry that produces that good. Some groups that are aggrieved by foreign competition have sufficient political power to protect themselves from imports. As a result, despite their considerable economic costs, trade barriers continue to exist. For example, according to the U.S. International Trade Commission, the U.S. benefit from lifting trade restrictions on textiles and clothing would have been nearly $12 billion in 2002. This is a net economic benefit after deducting losses suffered by businesses and workers in the domestic industry. Nevertheless, local textile producers were able to convince Congress to maintain strict import restrictions. A definite prognosis is that international trade agreements will continue to be controversial. Free trade agreements are treaties that regulate the tariffs, taxes and tariffs that countries collect for their imports and exports. The most well-known regional trade agreement in the United States is the North American Free Trade Agreement. However, these advantages must be offset by a disadvantage: by excluding some countries, these agreements can transfer the composition of trade from low-cost countries that are not parties to the agreement to high-cost countries that are.
Although the WTO embodies the principle of non-discrimination in international trade, Article 24 of the GATT authorizes the creation of free trade zones and “customs unions” among WTO members. A free trade area is a group of countries that remove all tariffs on trade with each other, but retain their autonomy in setting their tariffs with non-members. A customs union is a group of countries that remove all tariffs on trade between them, while maintaining a common external tariff for trade with countries outside the EU (which is technically contrary to the MFN). We have experimented with many variations of this approach, but the results are still very similar: trade agreements increase quality, but they do not have a significant impact on prices and diversity. Our baseline results indicate that EU trade agreements have increased the quality of products imported by trading partners by around 7% in five years. Second, the multilateral removal of trade barriers can reduce political opposition to free trade in each of the countries concerned. This is because groups that otherwise oppose or are indifferent to trade policy reforms could join the free trade campaign if they see the trade agreement as export opportunities to other countries.