World leaders have recognized that the reduction or elimination of artificial barriers to trade is
necessary for expanding world trade. The worldwide postwar efforts to expand foreign trade
included the elimination of tariff barriers through the World Trade Organization and the stabilization
of currencies through the International Monetary Fund. At the same time as these efforts
went forward on the international level, many countries around the world also pursued economic
cooperation at the regional level. Regional economic cooperation is based on the premise that
countries in a region connected by historical, geographical, cultural, economic, and political
similarities may be able to strike more intensive cooperative agreements for mutually beneficial
economic advantages.
In 1947, 23 countries signed the General Agreement on Tariffs and Trade (GATT) in Geneva.
To join GATT, countries must adhere to the most favored nation (MFN) clause, which requires
that if a country grants a tariff reduction to one country, it must grant the same concession to
all other countries. For example, if the USA cuts its tariff from 20 percent to 10 percent on wool
sweaters from Australia, it must grant the same concession on wool sweaters from all other countries.
The MFN clause also applies to quotas and licenses.
GATT members have held many talks since 1947 to expand and promote world trade. First,
GATT members held periodic meetings from 1947 to 1952 to cut specific tariffs. Second, the
Kennedy Round (1964–7) covered across-the-board tariff reductions on industrial products.
Perhaps the most important part of the Kennedy Round was to reduce trade barriers between
the USA and the European Economic Community. Third, the Tokyo Round (1973–9) of multilateral
trade negotiations discussed the reduction of nontariff barriers. The most important part
of these agreements is a series of detailed codes spelling out permissible and nonpermissible
“good” behavior by governments in almost all nontariff measures. Fourth, the Uruguay Round
(1986–93) discussed the expansion of trade liberalization to include services, intellectual
property rights, and agricultural products.
The new organization, known as the World Trade Organization (WTO), has replaced
the GATT since the Uruguay Round accord became effective on January 1, 1995. Today, the
WTO’s 144 members account for more than 97 percent of world trade. The WTO has five
major functions: (1) administrating its trade agreements; (2) acting as a forum for trade negotiations;
(3) monitoring national trade policies; (4) offering technical assistance and training
for developing countries; and (5) cooperating with other international organizations. China
joined the WTO in 2001. China’s WTO membership has further legitimized the idea of free
trade.
The WTO has more power to enforce the rules of international trade than the GATT. Under
the WTO there is a powerful dispute-resolution system, with three-person arbitration panels.
Countries may bring charges against their trading partners to a WTO panel. WTO members
cannot veto the panel’s rulings, as was the case under GATT. If an offending country fails to
comply with panel recommendations, its trading partners are guaranteed the right to compensation.
As a final resort, the trading partners are given the right to impose countervailing sanctions
against the offending country.
A trading bloc is a preferential economic arrangement between a group of countries that reduces
intraregional barriers to trade in goods, services, investment, and capital. There are more than
50 such arrangements at the present time. There are five major forms of economic cooperation
among countries: the free trade area, the customs union, the common market, the economic
union, and the political union.
The free trade area type of cooperation requires member countries to remove all tariffs among
themselves. However, the member nations are allowed to have their own tariff arrangements with
nonmember countries. The North American Free Trade Agreement among the USA, Canada,
and Mexico illustrates the free trade area type of agreement.
Under the customs union arrangement, member nations not only abolish internal tariffs
among themselves but also establish common external tariffs. The trading bloc called Mercosur
in Spanish constitutes a customs union. The four members of Mercosur – Argentina, Brazil,
Paraguay, and Uruguay (see figure 2.2) – account for 70 percent of South America’s total output.
The aims of this customs union are designed to establish free trade among member countries
and to impose a common tariff of 5–20 percent on products imported from the outside. Furthermore,
the leaders of these four countries wish to develop a unified strategy for trade negotiations
with the USA over the proposed Free Trade Area of the Americas.
In a common market type of agreement, member countries abolish internal tariffs among
themselves and levy common external tariffs. Moreover, they allow the free flow of all factors of
production, such as capital, labor, and technology. The Central American Common Market
exemplifies a common market type of agreement among Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua. This common market wishes to permit the free flow of production
factors among its member countries, but its goal is hampered by the nonuniformity of economic
conditions among them.
The economic union combines common market characteristics with harmonization of economic
policy. Member nations are required to pursue common monetary and fiscal policies. This
means that economic union members have to synchronize taxes, money supply, interest rates,
and regulation of capital markets. The current version of the European Union (EU) represents
an economic union. The name of the European Economic Community (EEC) was officially
changed to the EU on November 1, 1993, when the Maastricht Treaty of the EEC came into
effect.
The political union combines economic union characteristics with political harmony among
the member countries. Essentially, countries merge with each other to create a new nation. Thus,
it is the ultimate market agreement among nations. In the 1950s, Egypt, Syria, and Yemen formed
a political union, but it did not last long. Thus, in its pure form, an example of the political
union does not exist. However, the recently created commonwealth of 11 former Soviet republics
could be considered a political union.
necessary for expanding world trade. The worldwide postwar efforts to expand foreign trade
included the elimination of tariff barriers through the World Trade Organization and the stabilization
of currencies through the International Monetary Fund. At the same time as these efforts
went forward on the international level, many countries around the world also pursued economic
cooperation at the regional level. Regional economic cooperation is based on the premise that
countries in a region connected by historical, geographical, cultural, economic, and political
similarities may be able to strike more intensive cooperative agreements for mutually beneficial
economic advantages.
In 1947, 23 countries signed the General Agreement on Tariffs and Trade (GATT) in Geneva.
To join GATT, countries must adhere to the most favored nation (MFN) clause, which requires
that if a country grants a tariff reduction to one country, it must grant the same concession to
all other countries. For example, if the USA cuts its tariff from 20 percent to 10 percent on wool
sweaters from Australia, it must grant the same concession on wool sweaters from all other countries.
The MFN clause also applies to quotas and licenses.
GATT members have held many talks since 1947 to expand and promote world trade. First,
GATT members held periodic meetings from 1947 to 1952 to cut specific tariffs. Second, the
Kennedy Round (1964–7) covered across-the-board tariff reductions on industrial products.
Perhaps the most important part of the Kennedy Round was to reduce trade barriers between
the USA and the European Economic Community. Third, the Tokyo Round (1973–9) of multilateral
trade negotiations discussed the reduction of nontariff barriers. The most important part
of these agreements is a series of detailed codes spelling out permissible and nonpermissible
“good” behavior by governments in almost all nontariff measures. Fourth, the Uruguay Round
(1986–93) discussed the expansion of trade liberalization to include services, intellectual
property rights, and agricultural products.
The new organization, known as the World Trade Organization (WTO), has replaced
the GATT since the Uruguay Round accord became effective on January 1, 1995. Today, the
WTO’s 144 members account for more than 97 percent of world trade. The WTO has five
major functions: (1) administrating its trade agreements; (2) acting as a forum for trade negotiations;
(3) monitoring national trade policies; (4) offering technical assistance and training
for developing countries; and (5) cooperating with other international organizations. China
joined the WTO in 2001. China’s WTO membership has further legitimized the idea of free
trade.
The WTO has more power to enforce the rules of international trade than the GATT. Under
the WTO there is a powerful dispute-resolution system, with three-person arbitration panels.
Countries may bring charges against their trading partners to a WTO panel. WTO members
cannot veto the panel’s rulings, as was the case under GATT. If an offending country fails to
comply with panel recommendations, its trading partners are guaranteed the right to compensation.
As a final resort, the trading partners are given the right to impose countervailing sanctions
against the offending country.
A trading bloc is a preferential economic arrangement between a group of countries that reduces
intraregional barriers to trade in goods, services, investment, and capital. There are more than
50 such arrangements at the present time. There are five major forms of economic cooperation
among countries: the free trade area, the customs union, the common market, the economic
union, and the political union.
The free trade area type of cooperation requires member countries to remove all tariffs among
themselves. However, the member nations are allowed to have their own tariff arrangements with
nonmember countries. The North American Free Trade Agreement among the USA, Canada,
and Mexico illustrates the free trade area type of agreement.
Under the customs union arrangement, member nations not only abolish internal tariffs
among themselves but also establish common external tariffs. The trading bloc called Mercosur
in Spanish constitutes a customs union. The four members of Mercosur – Argentina, Brazil,
Paraguay, and Uruguay (see figure 2.2) – account for 70 percent of South America’s total output.
The aims of this customs union are designed to establish free trade among member countries
and to impose a common tariff of 5–20 percent on products imported from the outside. Furthermore,
the leaders of these four countries wish to develop a unified strategy for trade negotiations
with the USA over the proposed Free Trade Area of the Americas.
In a common market type of agreement, member countries abolish internal tariffs among
themselves and levy common external tariffs. Moreover, they allow the free flow of all factors of
production, such as capital, labor, and technology. The Central American Common Market
exemplifies a common market type of agreement among Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua. This common market wishes to permit the free flow of production
factors among its member countries, but its goal is hampered by the nonuniformity of economic
conditions among them.
The economic union combines common market characteristics with harmonization of economic
policy. Member nations are required to pursue common monetary and fiscal policies. This
means that economic union members have to synchronize taxes, money supply, interest rates,
and regulation of capital markets. The current version of the European Union (EU) represents
an economic union. The name of the European Economic Community (EEC) was officially
changed to the EU on November 1, 1993, when the Maastricht Treaty of the EEC came into
effect.
The political union combines economic union characteristics with political harmony among
the member countries. Essentially, countries merge with each other to create a new nation. Thus,
it is the ultimate market agreement among nations. In the 1950s, Egypt, Syria, and Yemen formed
a political union, but it did not last long. Thus, in its pure form, an example of the political
union does not exist. However, the recently created commonwealth of 11 former Soviet republics
could be considered a political union.
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