When a country engages in trade protection, it hurts two groups. We’ve already emphasized the adverse effect on domestic consumers, but protection also hurts foreign export industries. This means that countries care about one anothers’ trade policies: the Canadian lumber industry, for example, has a strong interest in keeping U.S. tariffs on forest products low.
International trade agreements are treaties in which a country promises to engage in less trade protection against the exports of other countries in return for a promise by other countries to do the same for its own exports.
Because countries care about one anothers’ trade policies, they enter into international trade agreements: treaties in which a country promises to engage in less trade protection against the exports of another country in return for a promise by the other country to do the same for its own exports. Most world trade is now governed by such agreements.
The North American Free Trade Agreement, or NAFTA, is a trade agreement among the United States, Canada, and Mexico.
Some international trade agreements involve just two countries or a small group of countries. The United States, Canada, and Mexico are joined together by the North American Free Trade Agreement, or NAFTA. This agreement was signed in 1993, and by 2008 it had removed all barriers to trade among the three nations.
The European Union, or EU, is a customs union among 28 European nations.
In Europe, 28 nations are part of an even more comprehensive agreement, the European Union, or EU. In NAFTA, the member countries set their own tariff rates against imports from other nonmember countries. The EU, however, is a customs union: tariffs are levied at the same rate on goods from outside the EU entering the union.
The World Trade Organization, or WTO, oversees international trade agreements and rules on disputes between countries over those agreements.
There are also global trade agreements covering most of the world. Such global agreements are overseen by the World Trade Organization, or WTO, an international organization composed of member countries, which plays two roles. First, it provides the framework for the massively complex negotiations involved in a major international trade agreement (the full text of the last major agreement, approved in 1994, was 24,000 pages long). Second, the WTO resolves disputes between its members. These disputes typically arise when one country claims that another country’s policies violate its previous agreements. Currently, the WTO has 160 member countries, accounting for the bulk of world trade.
Here are two examples that illustrate the WTO’s role. First, in 1992 a trade dispute broke out over the European Union’s import restrictions on bananas, which gave preference to producers in former European colonies over producers from Central America. In 1999 the WTO ruled that these restrictions were in violation of international trade rules. The United States took the side of the Central American countries, and the dispute became a major source of trade conflict between the European Union and the United States, known as the “banana wars.” In 2012, twenty years after the dispute began, the European Union finally changed its import regulations to abide by the WTO ruling.
A more recent example is the dispute between the United States and Brazil over American subsidies to its cotton farmers. These subsidies, in the amount of $3 billion to $4 billion a year, are illegal under WTO rules. Brazil argues that they artificially reduce the price of American cotton on world markets and hurt Brazilian cotton farmers. In 2005 the WTO ruled against the United States and in favor of Brazil, and the United States responded by cutting some export subsidies on cotton. However, in 2007 the WTO ruled that the United States had not done enough to fully comply, such as eliminating government loans to cotton farmers. After Brazil threatened, in turn, to impose import tariffs on U.S.-manufactured goods, in 2010 the two sides agreed to a framework for the solution to the cotton dispute.
In September 2009 the U.S. government imposed steep tariffs on imports of tires from China. The tariffs were imposed for three years: 35% in the first year, 30% in the second, and 25% in the third.
The tariffs were a response to union complaints about the effects of surging Chinese tire exports: between 2004 and 2008, U.S. imports of automobile tires from China had gone from 15 million to 46 million, and labor groups warned that this was costing American jobs. The unions wanted an import quota, but getting the tariff was still a political victory for organized labor. But wasn’t the tariff a violation of WTO rules? No, said the Obama administration. When China joined the WTO in 2001, it agreed to what is known, in trade policy jargon, as a “safeguard mechanism”: importing countries were granted the right to impose temporary limits on Chinese exports in the event of an import surge. Despite this agreement, the government of China protested the U.S. action and appealed to the WTO to rule the tariff illegal. But in December 2010 the WTO came down on America’s side, ruling that the Obama administration had been within its rights.
You shouldn’t be too cynical about this failure to achieve complete free trade in tires. World trade negotiations have always been based on the principle that half a loaf is better than none, that it’s better to have an agreement that allows politically sensitive industries to retain some protection than to insist on free-
Both Vietnam and Thailand are members of the WTO. Yet the United States has, on and off, imposed tariffs on shrimp imports from these countries. The reason this is possible is that WTO rules do allow trade protection under certain circumstances. One circumstance is where the foreign competition is “unfair” under certain technical criteria. Trade protection is also allowed as a temporary measure when a sudden surge of imports threatens to disrupt a domestic industry. The response to Chinese tire exports, described in the accompanying For Inquiring Minds, is an important recent example.
The WTO is sometimes, with great exaggeration, described as a world government. In fact, it has no army, no police, and no direct enforcement power. The grain of truth in that description is that when a country joins the WTO, it agrees to accept the organization’s judgments—