how can trade agreements impact on a country?
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Trade agreements have a major impact on trade and investment worldwide. In fact, they are responsible for shaping business relationships among companies across the globe. In order to succeed in the international environment, small business exporters need to be aware of the impact trade agreements have had and will have on their businesses. Likewise, lenders must be familiar with trade agreements in order to better understand the needs and financial concerns of their customers. But why are trade agreements flourishing? The answer lies in their broad array of benefits.
Some countries have established free trade agreements and are in the process of expanding them, while other countries have established customs unions and common markets. This development is having a profound effect on small businesses worldwide.
A free trade area is formed when two or more nations establish preferential trade liberalization policies by eliminating or substantially reducing trade barriers among themselves. A customs union surpasses free trade liberalization policies by establishing a common external tariff for non-members. A common market goes even further. Members eliminate restrictions on the movement of labor and capital among each other. Additionally, members may harmonize national policies to some degree, including monetary, fiscal and social policies, and concede a degree of political and legal control to a single ruling authority.
Michael Porter, a contemporary trade theorist, explains that the principal economic goal of a nation is to produce a high and rising standard of living for its citizens. Porter contends that the ability to do so depends on the productivity with which a nation’s resources are employed. Productivity is defined as the value of the output produced by a unit of labor or capital. It depends on both quality and features of products and the efficiency with which they are produced. As such, the ability to export many goods produced with high productivity allows a nation to import many goods involving lower productivity. This is desirable because it translates into higher national productivity.
In pursuit of both increased productivity and international competitiveness, governments must promote trade without barriers — or free trade — without which the economic growth of a nation will be stunted. Free trade promotes the following:
The creation of economies of scale;An increase in efficiency and competitiveness;A reduction of resources used in the production of goods; andA higher standard of living.Most free trade agreements (FTAs) owe their success, at least in part, to prior reductions in trade barriers between the parties to the agreement. For example, integration and cooperation in the iron, steel, coal, and nuclear energy sectors set a precedent for Western Europe to tear down barriers in other sectors. The U.S.-Canada Free Trade Agreement was preceded in 1965 by the Automotive Products Trade Act (APTA), which allowed duty-free trade between the United States and Canada in almost all motor vehicles and parts. This resulted in extensive integration of motor vehicle production between the two countries. Likewise, many U.S. firms are taking advantage of Mexico’s maquiladora program and U.S. tariff provision 9802.00.80, demonstrated by the growing use of assembly operations in Mexico by these firms. The provision allows for the elimination of duty on goods co-manufactured in both countries.
The progeny of this marriage — Mexico’s maquiladora program and U.S. tariff provision 9802.00.80 — has resulted in more internationally competitive industries. This has made business and government leaders in both countries see that the elimination of remaining barriers through a U.S.-Mexico FTA would benefit each country even more. Canadian leaders, too, saw the advantage of access to low-cost Mexican labor for its producers and access to Mexico’s burgeoning market for its products. Consequently, Canada opted for the North American Free Trade Agreement (NAFTA).
The benefits of free trade already have been proven through a variety of pacts throughout the world. In 1983, New Zealand and Australia implemented an accord liberalizing trade between them. For the three years preceding the accord, Australian exports to New Zealand grew at an average of 10 percent each year. After implementation, through fiscal year 1985, exports rose 18 percent annually. New Zealand’s exports to Australia also increased as trade barriers declined.
Some countries have established free trade agreements and are in the process of expanding them, while other countries have established customs unions and common markets. This development is having a profound effect on small businesses worldwide.
A free trade area is formed when two or more nations establish preferential trade liberalization policies by eliminating or substantially reducing trade barriers among themselves. A customs union surpasses free trade liberalization policies by establishing a common external tariff for non-members. A common market goes even further. Members eliminate restrictions on the movement of labor and capital among each other. Additionally, members may harmonize national policies to some degree, including monetary, fiscal and social policies, and concede a degree of political and legal control to a single ruling authority.
Michael Porter, a contemporary trade theorist, explains that the principal economic goal of a nation is to produce a high and rising standard of living for its citizens. Porter contends that the ability to do so depends on the productivity with which a nation’s resources are employed. Productivity is defined as the value of the output produced by a unit of labor or capital. It depends on both quality and features of products and the efficiency with which they are produced. As such, the ability to export many goods produced with high productivity allows a nation to import many goods involving lower productivity. This is desirable because it translates into higher national productivity.
In pursuit of both increased productivity and international competitiveness, governments must promote trade without barriers — or free trade — without which the economic growth of a nation will be stunted. Free trade promotes the following:
The creation of economies of scale;An increase in efficiency and competitiveness;A reduction of resources used in the production of goods; andA higher standard of living.Most free trade agreements (FTAs) owe their success, at least in part, to prior reductions in trade barriers between the parties to the agreement. For example, integration and cooperation in the iron, steel, coal, and nuclear energy sectors set a precedent for Western Europe to tear down barriers in other sectors. The U.S.-Canada Free Trade Agreement was preceded in 1965 by the Automotive Products Trade Act (APTA), which allowed duty-free trade between the United States and Canada in almost all motor vehicles and parts. This resulted in extensive integration of motor vehicle production between the two countries. Likewise, many U.S. firms are taking advantage of Mexico’s maquiladora program and U.S. tariff provision 9802.00.80, demonstrated by the growing use of assembly operations in Mexico by these firms. The provision allows for the elimination of duty on goods co-manufactured in both countries.
The progeny of this marriage — Mexico’s maquiladora program and U.S. tariff provision 9802.00.80 — has resulted in more internationally competitive industries. This has made business and government leaders in both countries see that the elimination of remaining barriers through a U.S.-Mexico FTA would benefit each country even more. Canadian leaders, too, saw the advantage of access to low-cost Mexican labor for its producers and access to Mexico’s burgeoning market for its products. Consequently, Canada opted for the North American Free Trade Agreement (NAFTA).
The benefits of free trade already have been proven through a variety of pacts throughout the world. In 1983, New Zealand and Australia implemented an accord liberalizing trade between them. For the three years preceding the accord, Australian exports to New Zealand grew at an average of 10 percent each year. After implementation, through fiscal year 1985, exports rose 18 percent annually. New Zealand’s exports to Australia also increased as trade barriers declined.
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