FX International Payments
By Karen Lynch
Following a surge of trade deals in recent years, there were nearly 300 bilateral and regional agreements in force worldwide by mid-2018 – in addition to the WTO’s overarching agreements among 164 nations. At the same time, new trade deals were still being negotiated, long-standing agreements were being renegotiated, and established conventions of global trade were being publicly challenged.
“Fears surrounding this uncertainty are particularly acute for the global business community, as many companies depend on global value chains vulnerable to new trade barriers,” the ICC said. And despite progress over time, the ICC’s Open Markets Index 2017 gave an average score of only 3.6 out of 6 (where 6 is most open) to a group of 75 countries. (The U.S. also scored a 3.6.)
International trade statistics show global trade in goods at an all-time high, with growth having rebounded in the wake of the global financial crisis to reach 4.7 percent in 2017. Some $17.2 trillion in goods and $5.25 trillion in services were traded worldwide in 2017.
U.S. companies exported $2.35 trillion and imported $2.9 trillion in goods and services in 2017, up from $25.9 billion and $22.4 billion, respectively, in 1960. “By the late twentieth century … the bulk of large U.S. industries had internationalized their production and had become dependent on foreign trade,” according to I.M. Destler, author of American Trade Politics. “So American business, heretofore divided, had become a strong overall supporter of trade-expanding agreements.”
At the same time, the global mosaic of international trade agreements has been changing. Recently completed deals include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership among Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam; the Japan-EU Economic Partnership Agreement; the Canada-European Union Comprehensive Economic and Trade Agreement; and others. Canada, Mexico, and the U.S. have been renegotiating the North American Free Trade Agreement. The Regional Comprehensive Economic Partnership has been in negotiations among the 10-nation Association of Southeast Asian Nations and the countries of Australia, China, India, Japan, New Zealand, and South Korea. The U.S. has bilateral free trade agreements with 20 countries, half of them in Latin America and the Caribbean.
International trade agreements date back to ancient Egypt – some achieved through peaceful negotiation and others through military campaigns. “Early commercial treaties were concerned less with opening up new markets and liberalizing trade than with ensuring that a country's traders enjoyed protection from arbitrary arrest and seizure in foreign countries,” according to the WTO trade history report.
Over time, the force of the Roman, Ottoman, and British empires was used to gain (sometimes exclusive) access to colonial markets. The modern use of international trade agreements to secure trade interests dates from the 18th and 19th centuries. Milestones have included Britain’s economic rise and promotion of open trade. This was embodied in what is considered the first international trade agreement involving significant reciprocal tariff reductions – Britain’s 1860 Cobden-Chavalier Treaty with France, which triggered a wave of similar treaties in Europe.
The U.S. declined to participate in this 19th century European network of trade treaties, choosing instead to negotiate its own reciprocal and preferential bilateral agreements. Pressures including trade competition among nations and a worldwide depression from 1873 to 1877 revived protectionism. A series of isolated trade wars broke out. “Although trade flows continued to expand during this period, the momentum towards building a network of trade rules and institutions had clearly been lost by the outbreak of the First World War in 1914,” the WTO report said.
A significant U.S. milestone between World War I and II was also one of the most controversial measures in its history: the Smoot-Hawley Tariff Act of 1930. In the wake of the 1929 stock market crash and amid a U.S. farm crisis, Smoot-Hawley “slapped an enormous number of tariffs on a wide range of goods, all in the hopes of protecting domestic industries from foreign competition at this moment of intense price wars,” according to Stephen Mihm, associate professor of history at the University of Georgia.
“History tells us what happened next,” according to Lee Branstetter, Professor of Economics at Carnegie Mellon University. “Soaring American tariffs set off a global trade war, our trading partners retaliated, and global trade fell sharply, deepening the Great Depression,” he said in a recent broadcast on Public Radio International’s The World.
The foundations of today’s global trading system were laid in the years after the World War II with the creation of the General Agreement on Tariffs and Trade (GATT, precursor to the WTO). Momentum toward new bilateral and regional agreements reemerged five years later.
“If the mid-nineteenth century marked the first major phase of regionalism, the last 60 years have witnessed three additional phases or ‘waves,’” according to the WTO history. “Each has been driven, at least in part, by a perceived need among groups of countries to go ‘further and faster’ than the broader GATT system in order to manage ‘deeper’ trade integration.”
The 300 new agreements in recent years have been catalyzed, in part, because the current Doha Round of WTO negotiations has eluded conclusion for more than 15 years. Note that WTO rules accommodate bilateral and regional agreements, which are variously described as complementing, feeding into, and producing complications and creative tension with the WTO.
Some observers see an erosion of the established order in international trade, and major governments have responded by committing to modernize the WTO. “In some ways you could say that the shake up in the global trade debate has been positive,” said WTO Director-General Roberto Azevêdo, “People are talking about these issues again. They are testing old certainties, revisiting assumptions, and questioning how rules and institutions can be improved.” Azevêdo has also committed to “renewing and strengthening multilateralism across the board,” while pointing out that the WTO has already made progress in new areas, such as the Trade Facilitation Agreement and e-commerce, “because members were willing to do things differently and pursue a more flexible framework.”
Nearly two-thirds of goods traded today are connected to global value chains, Azevêdo said. He called for continued support of “the stability that has been the pursuit of the multilateral trading system since World War Two. … Due to this stability, companies can plan their investments with a degree of certainty. They know what the rules are and they can forecast their costs based on stable tariffs.”
At the same time, more potential opportunity could be unleashed by reducing barriers to international trade. While tariffs have declined significantly over time, non-tariff barriers such as regulations and technical standards can often create greater obstacles. “Areas ripe for improvement include strengthening intellectual property rights in developing countries, creating a more consistent approach to dealing with the unfair advantages enjoyed by state-owned enterprises, and eliminating unnecessary restrictions on foreign investment,” said Christine McDaniel, a senior research fellow at George Mason University.
Brad McDonald, Deputy Chief, External Sector Unit at the International Monetary Fund, concurred that, “Despite successes, restrictive and discriminatory trade policies remain common. Addressing them could yield hundreds of billions of dollars in annual global benefits.”
To mitigate the potential downsides and exploit the potential upsides of international trade, “companies must assess the risks and opportunities that the altered trade rules create in their global value chains, develop plans of action based on various potential outcomes, and work proactively to influence policy,” according to the Boston Consulting Group.
Accessing the benefits of international trade agreements can mean competitive advantage, though it requires companies to do additional analysis and paperwork. Managing overlapping or conflicting international trade agreements is another area in which companies find themselves increasingly challenged – and increasingly employing technology solutions.
One nation’s export is another nation’s import – a basic fact that has also acted as a source of trade tensions throughout history. International trade agreements have eased market access and advanced global economic integration over time. But the history of trade has not been a straight line, as waves of agreements have been interspersed with setbacks and reversals. “Now more than ever, it is vital that businesses understand how to make the most of international trade agreements,” said the ICC.24 Each trade pact may be different, but many have common provisions, and all are likely to impact costs and the ability to deliver to customers and clients.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
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