Talking Trade blog
What makes a “good” trade agreement?
Published 01 July 2020
Trade agreements are not all the same. Some are signed between partners that have never had (and perhaps never will) engage in much trade with one another. Some run to hundreds of pages of binding legal commitments with thousands of additional pages of individual country commitments in areas like goods, services and investment.
Why sign a trade agreement if it is not intended for trade? Typically, it is because the deal is part of a larger signal of support between the member countries for political or security reasons. Governments like to be seen “doing” things and signing shallow deals can satisfy the need to be active.
Agreements like these tend to have a few characteristics in common. First, existing trade between parties is often quite limited with little likelihood of change, especially between far-flung members. Second, the text of the agreement is short and full of soft language using terms like “parties agree to cooperate on…” Finally, such deals typically include only market access for goods and do not extend promises to cover services, investment, or other areas.
Agreements that include only goods are not automatically useless, of course. Goods are an important element of trade flows and, in some markets, barriers in the form of tariffs can be quite high. A trade agreement that lowered tariff barriers between member parties can provide helpful a competitive boost to firms on both sides.
That said, agreements signed for non-trade reasons tend to exclude key sectors or items of interest, even in market access in goods chapters. They might provide 100 percent coverage of snow equipment—snow boots, skis, jackets, snowplows and snowmobiles—but carve out, or exclude, tropical fruits.
If the agreement involves two equatorial members, a boast of “full coverage” for snow suits is unlikely to be met by enthusiastic manufacturers or traders, particularly if fruits that are actually exchanged are getting nothing new.
Officials will often talk of the extent of coverage by bragging about the inclusion of tariff lines, ie, “this agreement includes 65% of tariffs from the first day of the agreement, rising to 90% coverage when fully implemented.”
Given the high concentration of trade in a handful of tariff lines, firms might be extremely disappointed to discover that even 90% coverage may not provide any new tariff benefits for key products of interest.
Better trade deals include more things.
For trade in goods, coverage needs to start at a high level and conclude, at the end of implementation, as close as possible to 100% of all tariff lines.
This is an ambitious goal that almost no trade deals meet. Why not? Because tariffs are typically in place to protect local goods producers. Elimination or even reduction of tariffs could expose local producers in sensitive sectors to additional competition. Many governments are reluctant to abandon protection for such goods and will leave tariffs in place even in the wake of a trade agreement.
This creates a tension—to be a truly useful trade agreement of value to large and small firms, it is important to include every good with tariff cuts and, most helpfully, tariff elimination. But such an agreement could run into political opposition from entrenched interests with a history of successful protection.
Why do firms need such extensive coverage? Consider a small firm that wants to use a trade deal to obtain better benefits than trade outside the agreement. Such firms do not have the time and attention to determine whether their specific products are included or not. They cannot pour through pages of tariff schedules to see when their key lines receive reductions and try to position themselves for possible duty-free treatment in, say, 5 or 10 or 16 years.
The best trade deals aim for duty-free or zero tariffs on as wide a range of products as possible.
Better trade deals also include more than just goods. They extend pledges and commitments to include trade in services and investment. On services, improved agreements go beyond existing promises made to one another in the World Trade Organization (WTO) or other existing regional deals. After all, simply repeating an existing commitment is not going to result in new access or benefits.
Beyond country-specific pledges for specific types of commitments in tariff cuts, services and investment coverage, possible movement of people (such as visas for intracorporate transfers) and so forth, better trade deals tackle a wide range of other issues that can bedevil trade.
For instance, promising to open up tariffs is not especially meaningful if goods cannot easily cross borders because customs inspections are unduly onerous. Firms cannot qualify for tariff rate cuts in a trade deal if the accompanying rules of origin are too complex or do not match the processes companies actually use to create things and add value.
Standards, product inspections, labeling, licensing and qualifications requirements continue to impede cross-border trade. Most trade agreements—even the best ones—tend to lightly address these topics. Most of these behind-the-border regulations and restrictions can be especially hard for trade officials to tackle and meaningfully address in a trade agreement.
Firms need trade texts to be legally binding. Why? Because it shows the commitment that governments have made to preserving the agreement. Such promises reduce risk and uncertainty that companies otherwise have to consider before engaging in cross-border trade and investment.
Of course, no government simply signs away all rights to govern. Even the toughest, highest quality and ambitious trade deals provide space for governments to respond to changing events and protect human, animal and plant life and health.
Better agreements do, however, include transparency provisions to minimize sudden and unexpected policy shifts that can catch firms off-guard with no time to prepare.
Trade agreements, at bottom, ought to be about encouraging cross-border trade between members. That requires a commitment to make it easy for firms to use them to obtain benefits from the deal. An agreement that is too complicated, covers items not actually traded, or with unclear and uncertain provisions is destined for limited use.
Given the length of time required to negotiate (or upgrade) and sign a trade agreement, it makes sense to try to create an outcome that will create actual benefits for companies, rather than languishing in a desk drawer somewhere.
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