21.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally

International trade organizations and agreements play a crucial role in shaping global commerce. The World Trade Organization (WTO) stands at the forefront, promoting free trade and resolving disputes. Regional trading agreements, like NAFTA and the EU, further facilitate trade within specific geographic areas.

National trade policies, including tariffs, quotas, and subsidies, significantly impact international commerce. These measures can protect domestic industries but may also lead to higher prices for consumers. Historical trends show a gradual reduction in trade barriers, though recent years have seen a rise in protectionist measures.

Global Trade Organizations and Agreements

Purpose of World Trade Organization

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• Established in 1995 as successor to General Agreement on Tariffs and Trade (GATT)
• Promotes free trade by reducing trade barriers ensures level playing field for all member countries
• Provides forum for negotiating trade agreements resolving trade disputes
• Monitors enforces member countries' adherence to WTO agreements
• Reduced tariffs non-tariff barriers leading to increased international trade
• Promoted transparency predictability in trade policies enhancing business confidence
• Encouraged competition innovation benefiting consumers through lower prices greater variety of goods
• Facilitates trade liberalization through multilateral negotiations and agreements

Regional trading agreements vs national effects

• Trade pacts between two or more countries in specific geographic region (EU, NAFTA, ASEAN)
• Reduced or eliminated tariffs non-tariff barriers within region promoting trade among member countries
• Increased market access for member countries' goods services
• Enhanced economic cooperation integration among member countries
• Potential for trade diversion where trade shifts from more efficient non-member countries to less efficient member countries

National Trade Policies and Trends

Government trade policies and consequences

• Tariffs: Taxes imposed on imported goods
  • Protect domestic industries from foreign competition
  • Raise revenue for government
  • May lead to higher prices for consumers reduced economic efficiency
• Quotas: Quantitative limits on amount of specific good that can be imported
  • Protect domestic industries by limiting foreign competition
  • May result in higher prices reduced consumer choice
• Subsidies: Financial assistance provided by government to domestic industries
  • Help domestic firms compete against foreign rivals
  • May distort market prices lead to inefficient allocation of resources
• Non-tariff barriers: Regulations, standards, administrative procedures that can hinder trade
  • Licensing requirements, technical standards, customs procedures
  • Can be used to protect domestic industries or achieve other policy goals
  • May increase costs complexity for foreign firms limiting their market access
• Trade sanctions: Economic penalties imposed on countries to influence their behavior or policies

Historical trends in trade barriers

• Post-World War II era: Gradual reduction in trade barriers through GATT WTO negotiations
  • Successive rounds of multilateral trade negotiations led to significant tariff reductions
  • Promoted expansion of international trade global economic growth
• Rise of non-tariff barriers: As tariffs decreased, countries increasingly used non-tariff measures to protect domestic industries
  • These measures can be more difficult to identify address than tariffs
  • May create additional obstacles for international commerce
• Proliferation of regional trade agreements: In recent decades, countries have increasingly engaged in RTAs to promote trade economic integration
  • RTAs have reduced trade barriers among member countries, but may also lead to trade diversion fragmentation of global trading system
• Trade tensions protectionist measures: In some cases, countries have adopted more protectionist trade policies, such as increased tariffs or other trade barriers
  • These measures can disrupt global supply chains, increase costs for businesses consumers, lead to trade disputes
  • Protectionist policies may have negative implications for international commerce global economic growth

International Trade Dynamics

• Comparative advantage: Principle that countries should specialize in producing goods they can make most efficiently relative to other countries
• Most-favored-nation status: Trade policy that extends the best trading terms given to any one country to all other countries
• Balance of trade: Difference between a country's exports and imports, reflecting its trade surplus or deficit