Free trade is an agreement between two or more countries to eliminate tariffs on all trade transactions that are taking place between them. The recent kinds of agreements do not only curtail the interference of governments that are responsible for levying the various tariffs and taxes, but there are more commitments included in the agreements such as customs co-operation, the protection of intellectual property, foreign direct investment and other factors that will enhance commerce between those that sign the freed trade agreement (FTA) (Groomsman and Helpmate, 1995).
Among many advantages such agreements usher in, it had been possible to integrate the economies of the participants of the free trade agreements that will avail mutual benefits such as increased export choices. Importing countries will also have more choices of products to import. Furthermore, the law of co-operative advantage states that participants in FTAs always attain mutual gain from exchanging goods and services (Krugman, 1991).
When there is a free trade agreement between two or more countries, what takes place is the price the members of the participant countries are paying are the outcome of real supply and demand, in their turn they would be responsible for determining what kind of resource allocation should be employed.
One thing that distinguishes free trades from other kinds of trades is none of the participants are allowed to introduce any kind of artificial pricing because of protectionism tendency, where governments cannot intervene to adjust supply and demand by introducing restrictions that could raise or bring down the price of goods and services. The main aim of free trade is to eliminate such protectionism tendencies so that what will determine what should be bought and sold and at what price would be demand and supply (Landsburg, 2005).
When that is not the case governments can always intervene by introducing subsidies, tariffs, taxes, and non-tariff barriers where they can introduce legislation or quotas, or it is possible for two or more governments to come up with bilateral or multilateral agreements that allow a preferential treatment for the participants only, by disallowing others to take advantage of what such agreements entail. When there is a bilateral or multilateral agreement between countries the first step is eliminating all taxes and tariffs (Hoda, 2002).
However, bilateral agreements that take place between two countries do not apply for other countries where if the two countries could agree among themselves about what kind of tariff and tax to introduce, those agreements apply only to those two countries. If the agreement is multilateral and between three or more countries the agreed upon tariffs and taxes apply only to those participating countries, whereas others whether it is a bilateral or multilateral agreement are not participants will always pay the regularly required tariffs and taxes.
The governments of such countries that have FTA between them are free to introduce any kind of trade barriers on others for any reason that serves them a purpose. Therefore, it is possible to look at many bilateral and multilateral agreements around the world where for example the US and Canada used to have a bilateral agreement between them before Mexico was added and the agreement called NAFTA came into the picture which was a multilateral agreement between the three countries.
This does not mean other traders that are trading with these three countries will get similar kind of preferential treatment such as no barriers on trades and services between the three countries, the implementation of trade distorting policies such as the introduction of taxes, subsidies, laws and regulations that will avail special advantages for the members of one of the traders. These three trading partners have free access to each other’s market, which does not mean others will have a similar access.
It does not mean the multilateral agreements between the three countries will prevent them from creating another bilateral or multilateral agreements with other countries since for example the US has many bilateral and multilateral trade agreement with countries that do not have any geographical proximity to it showing that bilateral and multilateral agreements are not limited by region (Reizeman, 1999).
Other amenities such trading partners have at their disposal, whether they are bilateral or multilateral, in addition to having free access to each others’ markets, purely based on demand and supply they could also allow each other to have access to a free market information, which is vital to making informed decisions. Governments of trading members are not allowed to engage in a government-imposed monopoly or oligopoly power, although private sectors can have a monopoly or oligopoly according to what the anti trust laws allow.
Other development among such countries is there is a free movement of labour, as well as capital. Therefore, when looking at the dissimilarities of bilateral and multilateral agreements there are many factors that play roles, because most of all, what kind of preferential treatment the participants are allowing each other is the deciding factor (Goyal and Joshi, 2006). This means that two bilateral countries could deprive that preferential treatment to other countries, but if they are in multilateral agreement, they cannot differentiate among the member no matter how much their number is.
If a country is a member of the World Trade Organisation that requires all its members to allow each other a preferential treatment in order to facilitate trade has no choice other than to allow to all members similar preferential treatment. However, the exception is that for example based on geographical region or otherwise if there is a bilateral agreement they could give special preferential treatment for the trading partner if they found it beneficial to do so without availing the same preferential treatment to their other bilateral, multilateral or WTO members partners.
This means that both bilateral and multilateral agreements based on any mutual benefit for the participants are allowed by WTO for its members, the only requirement being a voluntary notification of the existence such an agreement so that some kind of transparency of what is taking place will prevail. Consequently, there are bilateral agreements that take place between two countries, multilateral agreements that usually require more than two countries and the membership of WTO is also multilateral since the obvious number of the participants is many.
This means that except that a bilateral agreement is a very simple form of such free trade agreements, there is nothing that makes it different in complexity than similar multilateral agreements (Friedman, 1997). A good example to cite is price where in a bilateral agreement the available demand and supply determine the price of goods and services. The only problem with such an agreement is if there is another country that sells what a given country buys from a bilateral partner much cheaper.
In a situation like this it is a given that the other country wants to take advantage of the cheaper price, but since there is no agreement there are tariffs and taxes to add on the market price of the goods that will still make the bilateral partners goods and services preferable because of the absence of tariff and tax. In order to take advantage of that cheap price the particular country might want to start a free trade agreement with the other partner that will be complicated and time consuming.
This shows that one country can have a bilateral agreement with two or more countries or it is possible to create a multilateral agreement among all participants and this kind of agreement is common among those that live in a given geographical region, as attested by the number of regional free trades (Bhagwati, 2002). But that does mean free trade is limited to a certain pattern since it can take many forms.
It can be bilateral based on what the two countries agree, multilateral based on the participating countries agree that do not necessarily should have geographical proximity such as the US has a bilateral agreement with Israel, Jordan, Chile, Singapore, Australia and more and Australia has many bilateral trade agreement with many Asian countries that does not affect the relation it has with other countries because each participant gets certain advantage from the bilateral deal they are making. The most common FTA used to be among countries in the same region but that is changing (Levy, 19997).
Looking at international multilateral agreements such as the members of the WTO reveals that there are more than 160 countries that have eliminated trade barriers among themselves and are allowing similar preferential treatment for each other, while they are allowed to go into any kind of bilateral or multilateral trade arrangement with other countries and create preferential treatment that they do not have to allow to the other members of WTO, where what is not allowed is not to discriminate among members (Pugel, 2003) (Aghion et al, 2007).
One other dissimilarity will be the competition will be different when multilateral countries are trading with each other with no tax and tariff barriers based on demand and supply, where the choices of the participants will be more and can buy from those who are offering the lowest price without engaging in dumping (Bagwell and Staiger, 1997). Dumping always creates difficulties since it is always the outcome of subsidies that mostly originate from governments that had signed not to intervene in the market by any means (Brander and Krugman, 1983).
World Trade Organisation (WTO) WTO is an international organisation that promotes free trade by working with its members to enable them abolish tariffs and taxes so that there will be unhampered trade among countries. The main duties of the organisation are it polices the free trade agreements among countries, and it settles whatever disputes ensue among the participating countries and their governments. Whenever there is a dispute with two trading countries that are members it is its job to resolve the dispute and is empowered by its members to enforce its decisions by introducing sanctions on those who have breached the agreed upon rules.
WTO had replaced another organisation called the General Agreement on Tariffs and Trade (GATT) in 1995. GATT came into existence in 1948 when 23 countries agreed to bring down their tariffs and taxes among the trading partners. The difference between GATT and WTO is the later has more scope and oversees more trade sections other than trade in goods and services alone such as banking, telecommunications and intellectual property rights. WTO has 160 countries that allow each other a preferential treatment or a favoured trading partner status.
The organisation provides a framework others can employ to negotiate and form trade agreements, while at the same time it oversees the signed agreements ratified by the parliaments of the member countries are strictly observed. The organisation, for the most part, focuses on trade negotiations such as the Uruguay Round (1986-1994) and currently the defunct negotiation called Doha Development Agenda known also as Doha Round that tried in 2001 to raise the overall status of poorer countries that make up the majority of the world population.
This particular negotiation had been derailed by the same group that the negotiation was trying to enhance their equitable representation that demanded to see in place a special safeguard measure that will shield farmers from import flooding. The particular organisation is under the governance of ministerial conference that takes place every two years and has a general council in charge of implementing whatever agreement the conference arrives at and for administrating the day to day business, while it is represented by a director-general.
The WTO works hand-in-hand with other organisations such as the World Bank, Intentional Monitory Fund, International Trade Organisation etc. that go much further than focusing on trade and deal in areas that are related to trade indirectly such as employment, investment, various kinds of lending, regulation business practises that do not adhere to the rules and various agreements dealing with how to manipulate commodities.
The GATT is very important in such a way that if the WTO was not formed, GATT would have been reigning still serving the same purpose the WTO started serving, because it was the only multilateral agreement between countries starting from 1948. There had been seven rounds of negotiation under the GATT that were working to bring down tariffs among countries. The Kennedy Round in the sixties raised the question of antidumping where when countries are caught in the action of selling goods substantially less than they are selling in their own market.
In the seventies, the Tokyo Round started to look at other barriers that are not tariff related where it was not easy to get results, because of the controversial nature of what were taking place since some of them known as plurilateral agreements were not approved by all participants. However the Uruguay Round had amended some of them later and they had become multilateral agreements. The Uruguay Round that took place in 1986 had introduced new areas such as including services and intellectual properties in the agreements.
The Uruguay Round also dealt with trade reforms in the area of agriculture and textile that were always sensitive areas. Finally in 1994 the Final Act concluded what the members started in the Uruguay Round and established the WTO that took place at the Marrakech Agreement. This means that WTO does not have its own mandate till date and it is still using GATT as its umbrella treaty, although the Final Act at Marrakech had added new 60 agreements adopted into the mandates of the organisation.
Consequently, the major areas the WTO oversees among its international members are to oversee how goods and investment are crossing the borders of member countries, including the various services, intellectual property, dispute settlement and reviewing the trade policies the various member governments are introducing from time to time. There had been several ministerial conferences since the WTO was formed that came up with various policies to deal with the various problems at hand at the time the various conferences were taking place.
The major principles of the WTO concerning trade are non-discrimination that has two key components, the most favoured nations and national treatment. The former requires member to treat every member equally where if they create a favourable condition for a given member they have to create to all members, a requirement that is possible to override among bilateral and multilateral agreements. The national treatment requires that goods and services imported should receive similar treatment with what are locally available.
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