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Prior to the world war II, there existed a tug of war between the
economic benefits of free trade & the political appeal of protection
By and large trade remained protected.
The trade barriers were deepened during the Great Depression
with the aim to raise output and employment
Consequences were mostly higher prices and further aggravated
economic distress
This led to negotiations of free trade the world over, particularly
among developed countries

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 One of the most successful multilateral agreements was the General
Agreement on Tariffs & Trade (GATT)
This was signed in 1947 and was in place till 1993
Its provisions were incorporated in the World Trade Organization
(WTO) in 1995
The charter speaks of raising the living standards of nations through
substantial reduction in tariffs & other barriers to trade & the
elimination of discriminatory treatment in international commerce
As of November 30, 2015, WTO has 162 member countries, which
accounted for 95% of international trade of the World

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 Countries should work to lower trade barriers
All trade barriers should be applied on a nondiscriminatory basis
across nations- all nations should enjoy most-favoured-nation
(MFN) status
When a country increases its tariffs above agreed-upon levels, it
must compensate its trading partner for the economic injury
Trade conflicts should be settled by consultation and arbitration

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 Multilateral trade negotiations successfully lowered trade barriers in the
half-century following World War II
The latest successful negotiations were the Uruguay round, which included
123 countries and was completed in 1994.
In 2001, countries launched a new round in Doha, Qatar. The items in the
agenda are agriculture, IPR & the environment. This round has been
controversial both among developing countries which believe that rich
countries are protecting agriculture too heavily & among anti-globalization
groups, which argue that growing trade is hurting the environment. Due
such controversies, the Doha round has not made much progress as of
2008

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 In the last few years, governments across the world have taken
steps to promote free trade or to broaden regional markets
This had led to the signing of Regional Trade Agreements (RTAs )
across different countries of the World

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 Regional trade agreements (RTAs) have proliferated since the
1990s, particularly after the completion of the Uruguay Round.
Such agreements have been concluded among high-income
countries, low-income countries and more recently starting with
the North American Free Trade Agreement ((NAFTA) involving USA,
Canada and Mexico) between high-income and developing
countries.

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 reducing barriers to trade between member countries.

may go beyond to cover non-tariff barriers and to extend

liberalization to trade and investment.

large number of agreements now also cover the services

sector.

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 Nondiscrimination among trading partners who are contracting
parties/members of GATT/WTO is the foundation of GATT/WTO.
Article I, on most-favored nation (MFN) treatment, requires that members
of the WTO (Contracting Parties in GATT terminology) shall extend
unconditionally to all other members any advantage, favor, privilege or
community affecting customs duties, charges, rules and procedures that
they give to members.
Customs unions (CUs) and Free Trade areas (FTAs) are exceptions to this
MFN treatment permitted by articles of GATT/WTO

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 Three routes:
a. By conforming to provisions of Article XXIV- Paragraphs 4 to 10 of
Article XXIV of GATT provide for the formation and operation of customs
unions and free trade areas covering trade in goods.

b. The Enabling Clause of the Tokyo Round Agreement invoked in 1979.

This talks about differential and more favorable treatment, reciprocity and
fuller participation of developing countries. In particular, its paragraph 2(c)
permits preferential arrangements among developing countries in goods
trade. Under this provision, developing countries have exchanged partial
tariff preferences within arrangements such as the ASEAN Preferential
Trading Area (AFTA) and South Asian Free Trading Area (SAFTA).

c. The third route is Article V of the General Agreement on Trade in

Services (GATS), which governs the conclusion of RTAs in the area of trade
in services, for both developed and developing countries.

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 WTO provision Number of RTAs

GATT Art. XXIV (FTA) 428

Enabling Clause 41

GATS Art. V 150

Total 619

Note: At that same date, 413 agreements were in force

Source: http://www.wto.org

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 A trade bloc can have several effects on the well-being of its member
countries and the world overall.

If forming or joining the trade bloc results in lower prices in the importing
member country, the country and the world gain as additional trade is
created trade creation

If forming or joining the trade bloc results in shifting the source of imports
into the country from low-priced suppliers from countries outside the trade
bloc to higher-priced partner suppliers, the country and the world lose as
trade is diverted from low-cost to higher-cost producers trade diversion

The net effect depends on whether the gains from trade creation are larger
than the losses from trade diversion.

There are also possible dynamic gains from forming or joining a trade bloc,
including gains if extra competition within the larger, bloc-wide market area
leads to lower prices, lower costs, or greater innovation, and gains if
economies of scale are achieved within the larger area.

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 Figure A illustrates the case where trade diversion dominates.
The Britain could buy Japanese cars at 5,000 pounds if there were no tariff.
The next cheapest alternative is to buy German cars at 5500 pounds. If there
was free trade at point C, Britain would import only Japanese cars.
Before entering the trade bloc, however, Britain did not have free trade in
automobiles. It had a uniform tariff = 1000 pounds which increases the price
of Japanese cars from 5000 pounds to 6000 pounds. Britain did not buy the
German cars because they would cost (5500+1000 = 6500) pounds. The
starting point of our discussion is thus the tariff ridden point A, with British
government collecting 1000 pounds times 10000 = 10 million pounds of
tariff revenue.
Now Britain joins EU, removing all tariffs on goods from EU while leaving
same tariffs on goods outside EU. So German cars are now only 5500 pounds
while Japanese cars in Britain are now 6000 pounds as before. Thus, British
purchase of imported cars now switch to Germany. In fact, with price falling
to 5500 pounds, Britain now buy more of German cars as given by point B.
The British buyers are happy as consumer surplus increases by the areas a
and b. but British government loses all its pervious tariff revenue, the area a
+ c (10 million pounds). So after we cancel out the gain and loss of a, Britain
ends up with two effects on its well-being

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 A gain from trade creation = extra 5000 cars and
A loss from trade diversion = the 10,000 cars
The net effect on wellbeing, the trade creation gain minus the
trade diversion loss on trade
In figure A, loss on trade diversion dominates bringing net loss
from Britain's joining the trade bloc
In figure B, gain from trade creation dominates bringing in net
gain from Britain's joining the trade bloc

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 A nation or group of nations can keep ordinary barriers on its
trade with most countries, but insist on making trade with a
particular country or countries difficult or impossible
To wage economic warfare, nations have often imposed economic
sanctions or embargoes, which refer to discriminatory restrictions
or bans on economic exchange.
Eg: China under embargo by EU and US; its arms embargo,
enacted in response to the Tiananmen Square protests of 1989

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