By Rob Gehring

Nobel prize winner Milton Friedman, one of the 20th century’s most influential economists, once said: “Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith, there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries, and of the world.”

Yet, as the current US presidential election campaign gathers momentum, a remarkable distrust of free trade and globalization appears to have gained a voice in mainstream politics.

Not only in the United States but around the world, people are increasingly opposed to free trade agreements (FTAs) and suspicious of foreign entanglements.

WTO’s Legal Authority

Before discussing the economic rationale for free trade and FTAs, let us discuss the legal authority enabling the World Trade Organization (WTO) member countries to negotiate legally binding FTAs. I focus on the WTO because the WTO is the only international organization dealing with the global rules of trade between nations. Since most countries are members of the WTO, they must consequently adhere to the substantive rules and institutional arrangements of the WTO.

Understanding FTAs and CUs

FTAs are a part of the negotiations that take place between countries. They can be best understood as contractual arrangements between countries concerning their trade relationships (often with the goal to reduce tariff rates between countries). These differ from Customs Unions (CUs). A CU agreement determines external tariffs among the signatories. With a CU, as opposed to FTAs, countries commit to a certain external policy.

In brief, the legal authority enabling WTO member countries to negotiate a legally binding FTA is Article XXIV of the General Agreement on Tariffs and Trade 1994 (GATT). Paragraph 8 of the GATT determines that: “A free-trade area shall be understood to mean a group of two or more custom territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV, and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.” Article XXIV, clearly, cannot justify a measure which grants WTO-inconsistent duty-free treatment to products originating in third countries not parties to an FTA.

WTO and its legal authority over FTAs | Photo Courtesy: Google Images

WTO and its legal authority over FTAs | Photo Courtesy: Google Images

However, with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the GATT has some requirements. The duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or the interim agreement.

Exemptions And Exceptions

This legal authority enables WTO member countries to give specific benefits, such as the elimination of certain duties, to particular countries without having the obligation to extend this benefit to all WTO countries, based on Article 1 of the GATT. Article 1 of the GATT states: “(…) any advantage, favour, privilege or immunity granted by any contracting party to any product originating in, or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”

An FTA is thus an exception to the principle of the ‘Most-favoured-nation’ (MFN).

An FTA is thus an exception to the principle of the ‘Most-favoured-nation’ (MFN). The ‘MFN’ status implies that a lower customs duty offered by one member of the WTO to another country must be extended to all other members of the WTO. Hence, if an FTA is not in conformity with the WTO provisions of the GATT, then the specific FTA concessions must in principle be given to all WTO members! That is also part of the reason why a WTO member must promptly notify all other WTO contracting parties when it enters into an FTA.

Again, I only addressed the legal authority enabling two WTO member countries to negotiate legally binding FTAs with respect to goods. The WTO also authorizes members to negotiate FTAs with regards to services. In a nutshell, article V of the General Agreement on Trade in Services (GATS) enables member countries to negotiate legally binding FTAs regarding services.

Rob Gehring is a Lawyer and economist specialized in European law, competition/antitrust law and free market economics.

Featured Image Source: Gabriel Garcia via Unsplash

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Posted by The Indian Economist