Thread by @EmporersNewC

I’m sick of politicians simultaneously saying ‘no deal’ is fine, and how great trade deals around the world will be, so how about we start to go into the nitty-gritty of how this all works so people can understand the mechanics for themselves?

In days gone by, any country with a number of bilateral deals that gave preferential access to certain sectors would be considered to be adequately equipped, but times have changed.

Any country with a reasonably large economy would seem outmoded with such a trade policy today, and those who continue to buck the trend are becoming ever more economically isolated.

The conclusion of the World Trade Organisation’s (WTO) Uruguay round, in 1994, saw comprehensive Free Trade Agreements (FTA) become all the rage.

Partly because the Uruguay round of multilateral trade negotiations, and the rounds prior to this, reduced tariffs sufficiently that such agreements began to look more practical.

Before the Uruguay round concluded, the average tariffs were high enough generally that reducing them in all sectors would have resulted in an economic shock for most countries.

It wasn't just the tariff levels that helped the rise of the Free trade agreement. The Uruguay round also produced the Memorandum of Understanding on the badly drafted rules around free trade agreements which was greatly needed if they were to become commonplace.

As a result of the tariffs being low enough, and with greater clarity on the rules around trade deals, the number of new trade deals being signed has grown considerably.

Not least, as a result of major economic blocs like the US and the EU actively accelerating their course of regional expansion and integration.

In addition, countries that have not concluded RTAs are gradually encountering economic isolation, and are now endeavouring to pursue RTAs.

The European Union (EU) is, by far, the most prolific in terms of signing trade deals. Since 1994 it has concluded 40 trade deals at a rate of 1.66 trade deals a year, with its closest rival being Switzerland at 1.08.

Despite signing trade deals at the fastest, rate, the EU has a reputation for being slow and, and when compared to the US in terms of the time from inception to completion, it appears to be a fair criticism, but this is mitigated the EU’s leveraging its capacity to negotiate.

The EU is currently negotiating/renegotiating roughly twelve deals, while the US has its focus on just one: USMCA. A deal they already have and are simply updating. They are about to start another 3, but one of those is with the EU itself.

So what is a comprehensive trade agreement? There are specific interpretations and contrary to the fact they are referred to as "free trade agreements", they do not create "free trade".

A comprehensive trade agreement, as far as the WTO is concerned, is an agreement that creates a free-trade area in which two or more territories eliminates their duties and restrictive regulations on substantially all trade.

Two important terms in the definition are ‘eliminates’ and ‘substantially all trade’. It is important to note that the word is ‘eliminates’ and not ‘reduce’.

You don't lower tariffs, you eliminate them.

There is no reference in the WTO rules to suggest that tariffs do not go to anything but zero, or at least eventually. While ‘eliminates’ is not controversial, what amounts to ‘substantially all trade’ is more subjective and has evolved over time.

In the 1960s, for example, a trade deal with coverage of 75% would have been considered good. Today we are seeing an increasing number of trade agreements with tariff coverage of over 95%.

Even then, the exact definition of what ‘substantially all trade’ is not clear. We may be looking at a challenge of the USMCA regarding adherence to this term in the near future.

Some tariffs are eliminated at the commencement of the agreement, but some are brought down at certain schedules rates. This is to allow sectors to integrate at a safe speed and prevent an economic shock.

Even with low tariffs, shocks can be significant, and this is why trade deals also often contain safeguard provisions to protect economies should the speed of the integration begin to damage particular sectors.

Shocks can also occur when a country leaves a free trade agreement. An example of which would be the termination of the UK-Australia Trade Agreement in February 1972.

Australia has spent years moving their markets to Asia with full knowledge the UK would eventually join the Common Market.

Between 1962 and 1967 Australia’s exports to the UK went from 24% down to 17.5%

Even then, Australia were increasing dependence on key products. When the UK entered the EEC (with a safeguard clause for Australia) it led to a massive hit on Apple farming, and also in particular, dairy farming. The small dairy farms of Australia were wiped out completely.

There are both benefits and losses of going into free trade agreements. The main benefit of comprehensive free trade deals is economic integration. Economic integration leads to an increase of economic activity, and this in itself can be both positive and negative.

Some people claim they can help the consumer by reducing tariffs, and this is true, but too much is made of this because this effect comes with many caveats. For example, sometimes the exporter pays the tariff as part of a deal with the importer.

A Delivery Duty Paid agreement can see the exporter not just paying the tariffs but taking on all the responsibility and the risk of transportation.

Also, the cost of tariffs can be entirely subsumed in the delivery chain.

There is also the matter of things like ‘shelf space’, one of the highest valued resources in retail.

A retailer doesn’t buy products to sell at prices that are not competitive, because they end up sitting on the shelves taking up shelf space that could be used for products that sell and actually make the retailer profit.

Consequently, many consumer items have to be sold at a certain price and additional costs like tariffs just hit someone's profit margins.

If a seller is already successful in the market there is absolutely no reason why they should think to pass a tariff reduction on to the consumer.

(Trying to work out how much cheaper things become after a trade deal based on tariff reduction isn't really a productive exercise)

If the majority of the trade that comes from a particular country are ‘interim products’ that are simply components of a future product, again the benefit is not to the consumers but to a company that will sell them on as part of something else.

It may be the case that the greater majority of goods imported from a particular economy happen to fall into a range of goods where the tariffs are particularly low or zero.

Some trade deals may actually return very little benefits in terms of tariffs. The European Union for example, as you would expect from any developed economy, has a low average tariff rate.

However, in every case, reducing tariffs reduces money that your government is collecting and releases them into the world economy.

This increases economic activity, and the greater integration of markets, does generally benefit the population.

Trade deals can also be a two edged sword. Greater integration leads to greater competition and this can negatively affect certain domestic industries.

However, this also means some other domestic industries can become more competitive.

In both these cases the consumer benefits.

Although if the consumer works for the business that is not benefitting, then the consumer can ultimately lose.

If enough businesses are negatively impacted, the currency can be devalued and all the gains wiped out.

Due to the fact that the tariff return on these agreements is quite minimal, governments have widened the scope of the agreement provisions to include things like intellectual property, promoting competition, government procurement, and other forms of government cooperation.

Trade deals, therefore, provide relatively small returns with both benefits and losses. There are risks associates with joining one, and risks associated with leaving one.

The key thing is to enter, or leave, slowly and carefully.

(Preferably with safeguards)

/End