Module Six examines two topics in detail. Again, as in all of the previous modules, we will further study trade policies in detail. But the other important part are regional trade agreements. We have read and discussed throughout our work in this class that trade agreements are the bread and butter of global trade. Decreasing barriers is crucial and is done through regional trade agreements.
Drafting, signing, and entering into a trade agreement can take several years, sometimes even a decade. It is hard to put in writing all the details and nuances of the trade agreement, and making all parties agree with it is even harder. Once the agreement is signed, it is used by the multinational corporations and medium and small companies doing business with the countries on the trade agreement. The free trade agreement (FTA) requires certain procedures from firms:
The use of FTA rates requires firms to meet the rules of origin (ROO) and obtain certificates of origin (COO) in exporting to countries and to submit the COO to the customs in importing countries. The COO certifies that the exported goods meet the required ROO. (Hayakawa, Hiratsuka, Shiino, & Sukegawa, 2013)
The application process, even though bureaucratically not that challenging, adds costs to the corporations that would like to use the preferential tariff based on the FTA. The costs include “administrative costs to certify origin and fees to the third parties and costs related to lead time” (Hayakawa, Hiratsuka, Shiino, & Sukegawa, 2013).
So do trade agreements work? With so many new trade agreements being drafted and signed globally, the answer is yes (for now). However, there is little or no scholarly evidence for this claim. A gravity equation is used in international trade to “study the ex post effects of FTAs and customs unions on bilateral merchandise trade flows” (Baier & Bergstrand, 2007). A study done by Tinbergen suggested “economically insignificant average treatment effects” of FTAs on trade flows (Baier & Bergstrand, 2007).
Studies are one thing, but another is looking at the North American Free Trade Agreement (NAFTA) or the Association of Southeast Asian Nations (ASEAN) Free Trade Area and seeing actual transaction numbers after the trade agreements were implemented.
Walter Kemmsies, chief economist at Moffatt Nichol, an international infrastructure consultancy, notes that close to 40% of what the U.S. imports from Mexico is derived from U.S. sources. “This is the symbol of the success of NAFTA.” Twenty years ago, he estimates, that percentage was less than 5%. (Knowledge@Wharton, 2014).
Regional trade agreements are crucial for starting talks and cooperation among the member states. There is no doubt that there will be new ones being signed in the near future as more and more countries want to be active in the global economy. For your final project, you will need to identify all the trade agreements your chosen country has entered into based on the parent country of the corporation which you are studying. It is important to mention that every trade agreement is customized and also addresses different parts of the economy.
References
Baier, S., & Bregstrand, J. (2007). Do Free trade agreements actually increase members’ international trade? Journal of International Economics, 71(1).
Hayakawa, K., Hiratsuka, D., Shiino, K., & Sukegawa, S. (2013). Who uses free trade agreements? Asian Economic Journal, 27(3).
Knowledge@Wharton. (2014, Feb. 19). NAFTA, 20 years later: Do the benefits outweigh the costs? Retrieved from http://knowledge.wharton.upenn.edu/article/nafta-2…