A PRIMER ON FREE TRADE
By Steve Bina
My colleague, Jay Townley, has written extensively about the current state of tariffs and the (possible) lasting impact on our industry in the last few issues of Bicycle Business Reporter. There has been a lot of uncertainty about where everything will end up, which isn’t likely to change in the near term.
One way to try and understand why this is happening is to understand the concept of “free trade” and what it means to businesses overall. Free trade legislation refers to laws and agreements that aim to reduce or eliminate barriers to trade between countries, such as tariffs, quotas, and other restrictions. The idea behind free trade is to allow countries to specialize in producing goods and services in which they have a comparative advantage, leading to greater efficiency, economic growth, and lower prices for consumers.
In a perfect world, free trade would happen without any interference. Unfortunately, we don’t live in a perfect world. All of those things mentioned above would happen if there were a level playing field between countries and/or companies, and everyone respected the other. What happens is that parochial interests take over, and companies/industries petition their governments for protection and free trade legislation, which, in reality, has the opposite effect.
Free trade legislation can take various forms, from unilateral actions by a single country to multilateral agreements between several nations. Some of the key elements of free trade legislation and agreements include:
Elimination of Tariffs and Quotas
Tariffs: Taxes imposed on imports. Free trade legislation seeks to reduce or eliminate these taxes to make foreign goods less expensive
Quotas: Limits on the quantity of goods that can be imported. Free trade agreements typically seek to phase out these restrictions.
Trade Agreements
These are formal agreements between two or more countries to regulate trade in a way that benefits all parties. Examples include:
Bilateral Agreements: Trade agreements between two countries.
Multilateral Agreements: Agreements involving more than two countries such as:
World Trade Organization (WTO) agreements, which aim to establish a global trade framework
Regional Trade Agreements (RTAs) such as the North American Free Trade Agreement (NAFTA) (now replaced by the USMCA) or the European Union (EU) trade policies.
Trade Facilitation
Free trade laws often include provisions for improving customs procedures and reducing non-tariff barriers to trade, like excessive paperwork or complex standards, which can create barriers even without tariffs.
Intellectual Property (IP) Protections
Many free trade agreements include clauses related to intellectual property protection to ensure that creators, innovators, and businesses have their patents, trademarks, and copyrights respected internationally.
Investor Protection and Dispute Resolution
Free trade legislation often contains provisions for the protection of foreign investments and mechanisms for resolving trade disputes, such as arbitration or adjudication by international bodies.
Regulatory Cooperation
Countries may agree to harmonize or mutually recognize certain regulatory standards, such as safety or environmental regulations, to facilitate smoother trade.
Examples of Free Trade Legislation and Agreements:
General Agreement on Tariffs and Trade (GATT) – An international trade agreement that was in place from 1947 until the establishment of the WTO in 1995. GATT aimed to reduce tariffs and other trade barriers globally.
World Trade Organization (WTO) – The WTO, established in 1995, is an international organization that regulates global trade and ensures that trade flows as smoothly, predictably, and freely as possible. It replaced GATT.
North Free Trade Agreement (NAFTA) – Signed in 1994, NAFTA created a trilateral trade bloc between the U.S., Canada and Mexico. It was replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020.
European Union (EUI) Common Market – The EU represents a powerful example of free trade legislation within a political and economic union, where member states have largely removed internal barriers to trade and have common external trade policies.
Pros and Cons of Free Trade Legislation:
Pros:
Economic Growth: By promoting competition and efficiency, free trade can lead to increased economic growth.
Consumer Benefits: Lower tariffs typically result in lower prices for consumers.
Increased Variety of Goods: Consumers can access a wider range of goods and services from different countries.
Specialization: Countries can focus on industries where they have a competitive advantage, improving overall global productivity.
Cons:
Job Losses in Certain Sectors: Industries that cannot compete with the cheaper foreign goods may suffer, leading to job losses.
Environmental Concerns: Some argue that free trade can lead to environmental degradation as companies may relocate to countries with less stringent environmental regulations.
Economic Inequality: While free trade benefits many, it may also exacerbate income inequality both within and between countries.
Cultural Impact: Some critics argue that free trade could lead to a loss of cultural identity as foreign goods and media flood domestic markets.
Free Trade in Practice:
The effectiveness and consequences of free trade legislation depend largely on the specifics of the agreements and the economic context in which they are implemented. In some cases, countries might negotiate “fair trade” policies that aim to address labor and environmental standards alongside trade liberalization, addressing some of the negative impacts often associated with pure free trade.
This article isn’t intended to be a comment on the current uncertainty relative to tariffs and the countries involved. The concept of free trade and fairness in international trade policies depends on the countries involved and the industrial polices in those countries. Sometimes it gets complicated.
Contact Steve Bina: steve@humanpoweredsolutions.com