Over the past two decades, countries have struck an increasing number of free-trade agreements to lower trade barriers and spur economic growth. There are currently 369 FTAs globally and two large new trade pacts are coming into force - the EU-Japan Economic Partnership Agreement, and the Comprehensive & Progressive Agreement for Trans-Pacific Partnership, covering 11 Pacific-Basin countries (but not the US or China).
These accords often deliver significant cost savings via tariff reductions. And, increasingly they tackle other trade barriers - like red tape, burdensome customs procedures and regulatory misalignment - to provide improved market access for goods and services.
Yet, as the number of trade agreements increases, their complexity grows too. Less than a quarter of firms globally make full use of available FTAs according to one survey. High compliance costs, regulatory barriers, low savings, overlapping trade agreements, and lack of awareness of FTA benefits are key reasons for low usage by companies.
Nevertheless, at a time of increasing global trade turbulence, FTAs can give traders certainty by locking in trade policy concessions, increasing trade between partners substantially.
Ultimately, trade deals provide consumers with a greater choice of goods and services while businesses benefit from access to competitive inputs, increased opportunities to specialise, and lower barriers to export.
There have been trade pacts for centuries, but after the Second World War, GATT, the General Agreement on Tariffs & Trade took a multilateral approach to trade liberalisation. Continual reductions in tariffs helped global trade to grow by an average 8 per cent a year in the 1950s and 1960s.
But reducing tariffs led countries to impose non-tariff barriers to shield domestic firms from foreign competition. Further, GATT did not cover services and investment well and had poor means of resolving trade disputes between members.
The World Trade Organization was thus formed in 1995 to tackle not only tariff issues but also other barriers to goods trade, while also improving policy transparency and dispute resolution.
Yet, burdens remain. A further simplification of the import and export processes could reduce trade costs even more than eliminating all remaining global tariffs.
The WTO’s negotiating momentum has slowed with members divided on how to move forward. Factions exist between developing and developed members and among some advanced economies. This has led members to strike hundreds of bilateral and plurilateral FTAs with each other outside the WTO.
When accounting for the contribution of services to manufacturing exports, services comprise more than 50 per cent of exports for countries such as the UK, US, France, Italy, Germany and Japan and around 44 per cent for China. But, barriers to services trade are often more complicated than those affecting trade in goods and can be equivalent to a tariff of 20 per cent to 80 per cent.
Liberalisation via FTAs has boosted trade in services between partners by 7 per cent to 32 per cent on average. But more work remains. The impact of FTAs on services has been much less than for goods. Further progress would particularly help smaller services firms, which are hit hardest by the burden of tackling regulatory hurdles.
Bilateral and plurilateral FTAs can expand market access and cover new issues beyond what is achievable via the WTO. With fewer participants, regional and bilateral accords among like-minded partners can be easier and faster to complete. But the depth of agreements varies by region: reducing non-tariff trade costs is particularly important for developing countries where barriers remain higher than for developed economies.
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