Expanded International Trade Agreements Explanation

by on April 9, 2021

While virtually all economists believe that free trade is desirable, they do not agree on the best way to move from tariffs and quotas to free trade. The three fundamental approaches to trade reform are one-sided, multilateral and bilateral. While the GATT aimed to promote tariff reduction between Member States and thus lay the groundwork for multilateral trade expansion, waves of regional trade agreements intensified over the next period. In less than five years after the creation of the GATT, Europe, with the creation of the European Coal and Steel Community in 1951, would begin a programme of regional economic integration which would ultimately become what we know today as the European Union (EU). Free trade allows the total import and export of goods and services between two or more countries. Trade agreements are forged to reduce or eliminate import or export quotas. These help participating countries to act competitively. Overall, the United States currently has 14 trade agreements involving 20 different countries. IMF conditionality is a series of strategies or “conditions” that the IMF needs in exchange for financial resources. The IMF does not require country guarantees for loans, but asks the government for help to correct its macroeconomic imbalances in the form of political reforms. If the conditions are not met, the funds are withheld. Conditionality is the most controversial aspect of IMF policy. These credit conditions ensure that the credit country will be able to repay the fund and that the country will not seek to resolve its balance-of-payments problems in a way that would have a negative impact on the international economy.

The incentive problem of moral hazard, namely the actions of economic operators who maximize their own benefits at the expense of others if they do not bear the full consequences of their actions, is mitigated by conditions rather than providing guarantees; In any case, countries that need IMF loans do not have guarantees of international value. Conditionality also assures the IMF that the funds allocated to them will be used for the purposes defined in the articles relating to the agreement and provides guarantees as to the country`s ability to correct its macroeconomic and structural imbalances. The Fund believes that the member`s adoption of certain corrective measures or policies will allow the member to repay the Fund, which will ensure that the same resources are available to assist other members. NAFTA is an agreement signed by Canada, Mexico and the United States that creates a trilateral trade bloc in North America. The Dominican Republic-Central America (CAFTA-DR) is a free trade agreement between the United States and the small central American economies. It is called El Salvador, Dominican Republic, Guatemala, Costa Rica, Nicaragua and Honduras. NAFTA replaced bilateral agreements with Canada and Mexico in 1994. The United States renegotiated NAFTA as part of the U.S.-Mexico-Canada agreement, which came into effect in 2020.

The main free trade zones are the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Association of South Asian Nations (ASEAN).

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