Marketing > Trade Agreements
What is a trade agreement?
A trade agreement is a contract/agreement/pact
between two or more nations that outlines how they will
work together to ensure mutual benefit in the field of
trade and investment. Such trade agreements may involve
co-operation in the field of R&D, the lowering of
import duties to be levied on the other partners’ exports,
guaranteeing any investments made by the partner(s) in
the home market, co-operation on the tax front, etc.
Bilateral and multilateral agreements
Trade agreements (also sometimes referred to as ‘trade
pacts’) are usually bilateral or multilateral. Bilateral
trade agreements – as the name suggests – is
an agreement between two nations, while a multilateral
trade agreement involves more than two nations.
Trade agreements and trading blocs
These two concepts are close related. A trade agreement
general leads to a trading bloc being formed. A trading
bloc is generally defined as “two or more countries
bound by a specific agreement which determines some or
all of their international trade practices and which usually
provides for common import tariffs on certain, if not
all, imported products.” Some economists argue that
although trading blocs are see as a means of reducing
trade restrictions (between the countries involved), they
themselves represent a form of trade barrier as they exclude
here to learn more about trading blocs.
Different types of trade agreements/trading blocs
Trade agreements/trading blocs also come in different
forms, involving increasing levels of co-operation. Examples
- Free Trade Areas (FTA) – This
is the simplest kind of trading bloc and incorporates
a two or more countries that have agreed to eliminate
tariffs and other barriers to trade amongst members,
but individually each country retains its own tariffs
on imports from other non-member countries. Perhaps
the best example of a FTA is the North
American Free trade Area (NAFTA). Click
here to read more about NAFTA.
- Common Monetary Area (CMA) – A
Common Monetary Area is when countries usually geographically
closely located to each other agree to accept one
dominant currency as legal tender.
- Customs Union – A Customs
Union goes one step further than an FTA in that it
abolishes all tariffs amongst member countries, while
members agree to a single, external tariff on goods
imported from outside the Customs Union. Revenue generated
by the Customs Union is shared amongst members based
on a specific formula.
- Common Market – In a Common Market, like with
a Customs Union, a common tariff is placed on imports
from other non-member countries, while no tariffs are
exist on goods produced by one member country and sold
in the other member country’s. The main additional
difference between a Customs Union and a Common Market
is that with the latter, the free movement of labour
and is capital is also permitted. In other words, any
restrictions on immigration, emigration and cross-border
investment (amongst member countries) are abolished.
The current European Union developed from the European
Economic Community, a form of Common Market. The Common
Market for Eastern and Southern Africa (COMESA)
and the Caribbean Community – formerly the Caribbean
Community and Common Market (CARICOM) are perhaps
the two best examples of Common Markets.
- Monetary Union – In the case of a Monetary Union,
member countries agree to use a single currency or to
fix their rates of exchange for the respective currencies.
Essentially, a Monetary Union includes a Common Market
Area (discussed above), the difference being, that a
Monetary Union involves far greater integration and
co-operation amongst member countries. The best example
of a monetary union is European Union in which member
countries have agreed to use a new, single currency – the
euro! There are many other Monetary Unions in place – click
here to learn more.
- Economic Union – Beyond
the free movement of labour and capital, an economic
union incorporates the harmonization of economic policies
amongst member states, including the integration of
monetary policies, economic policies, taxation and
other regulatory requirements. European Union is perhaps
the only true Economic Union in place today.
Trade agreements and marketing
The purpose of trade agreements is to reduce the barriers
to trade between countries and to make it easier to do
business (i.e. to trade) between the countries concerned.
Clearly, any agreement that reduces the barriers to trade
is likely to have a positive effect on the exports of
goods to the partner country(ies). It is essential that
you keep tabs on such negotiations by reading the newspaper
and keeping track through websites such as ExportHelp.
If you know about a trade agreement that is being negotiated,
you should inform yourself as to the possible benefits
you may get as a result of the agreement. In some instances,
there may be little benefit because there are already
no duties levied on your products. On the other hand,
if your product is subject to high duties, an agreement
may prove very beneficial to your product and you would
want to be ready to act as soon as any agreement came
Generalized System of Preferences (GSPs)
What are GSPs?
The Generalized System of Preferences,
or GSP, is a formal, non-reciprocal system of exemption
from the more general rules of the World Trade Organization
(WTO). Specifically, it's a system of exemption from
the Most Favored Nation principle (MFN) that obligates
WTO member countries to treat the imports of all other
WTO member countries no worse than they treat the
imports of their "most
favored" trading partner. In essence, MFN requires
WTO member countries to treat imports coming from all
other WTO member countries equally, that is, by imposing
equal tariffs on them, etc.
GSP, however, exempts WTO member countries from MFN for
the purpose of lowering tariffs for developing
countries (without also doing so for rich countries).
The idea of tariff preferences for developing countries
was the subject of considerable discussion within UNCTAD
in the 1960s. Among other concerns, developing countries
claimed that MFN was creating a disincentive for richer
countries to reduce and eliminate tariffs and other trade
restrictions with enough speed to benefit developing countries.