Freeing Free-trade

Posted on 26. May, 2015 by in Politics

It was once noted that a true free trade agreement should only be a couple of pages long. This is just enough space for a title page, the definitions, and then codifying that all trade is tariff-free. Unfortunately free trade agreements in practice never turn out to be quite that simple. The North American free trade agreement is close to 400 pages long, and still manages to make reference to other documents which outline further restrictions. The European free trade agreement that Canada signed with the EU in 2014 is also going to be over 100 pages long.

Neither of these are even truly free trade agreements. The idea of a free trade agreement is that of an agreement between countries or regions “where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances”. The extra length to these documents comes from making specific cases for different commodities, which then snowball into making individual rules for every form of good or service. This results in a hugely complex trade situation between countries.

The problem with these types of agreements is that member states want to “have their cake and to eat it too”. The individual countries want the advantage of being able to export their goods to other counties without facing tariffs, all the while trying to maintain a protectionist policy over imports into their own country.

Due to the effect that domestic business environments and economic policy have on international trade it is not reasonable to implement a free trade agreement in its simplest form as mentioned above. However, it is possible to create an agreement that applies generally to all trade while still accounting for differences in domestic conditions that would affect the fairness of the trade environment.

Purchasing Power Parity (PPP) is part of a technique used to determine the relative values of different currencies. This metric takes into account not only the exchange rate between countries, but also what one can purchase with that amount of money. These measurements also take into account things such as minimum wage, income, cost of living, and inflation. Differences in the PPP value can mean that consumers and businesses in different countries can be making/spending the same value, but not getting the same basket of goods. A base tariff on traded goods and services equal to the value of the PPP would create an equal playing field for all market participants.

 

When it comes to commerce and the trade of goods between countries there are few things that come close to effect on international trade as domestic subsidies. Governments at different levels frequently provide forms of financial support to different industries to promote economic activity. While these policies may work well within a specific country, they are counterproductive to implementing a fair trade deal. These differences in subsidies cause discrepancies in the fairness for companies doing business within the trade area. These subsidies result in a form of protectionism by pricing their international competitors out of the market. A tariff would be implemented to offset the advantage gained by domestic goods. This could be supported using fees from other tariffs, or by applying the domestic subsidy to imported products as well.

Countries that are entering into a free-trade agreement have to first recognize that they need to accept the advantages and disadvantage that come with fair and/or tariff-free trade. The idea of unrestricted free trade requrires a give and take on both sides. Countries have to be willing to relinquish some of their protectionism so that the agreement can benefit all parties involved. Countries that are unwilling to accept these conditions should feel free to continue making trade deals, but need to stop calling them “free-trade” agreements.

 

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