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Article Contributor: Brian Freskos, University of North Carolina Wilmington
Updated: 2 June 2010


Page Outline:

1. Basic Facts
2. Which Mechanisms Constitute Barriers to Free Trade?
3. What is the World Trade Organization?
4. The International Monetary Fund and its Trade Involvement
5. What is the North American Free Trade Agreement?
6. What Is Washington Doing?
7. Sources

Basic Facts

Which mechanisms constitute barriers to free trade?

Import Restrictions

• Import restrictions are methods employed in controlling the volume or value of goods coming into the country, usually to maintain the exchange rate of a country’s currency.
• Such restrictions primarily come in four varieties: Tariffs, also called import duties or customs duties, are taxes levied on imported goods to make them costlier to domestic consumers; Import quotas, or import licenses, limit the amount of goods imported or imported from a certain country; Currency Restrictions limit the amount of foreign exchange made available for payment of imports; and Prohibition, a policy aimed at preventing the importing of illegal or harmful items. The latter three–import quotas, currency restrictions and prohibition–are grouped in one category of non-tariff barriers. ³

Export Promotions

• Countries trying to increase the volume of their exports will initiate incentive programs designed to make exporting more attractive to firms by offering assistance in such manufacturing areas as marketing or product identification and development, pre- and post-shipment financing, training, payment guaranty schemes, trade fairs and/or foreign representation. ⁴
• Governments can shore up exports by granting Export Subsidies to manufacturers. These subsidies take two principle forms: a service subsidy or a cash subsidy. Cash subsidies can be further delineated into direct and indirect. A Service Subsidy is where a government provides a manufacturer trade information, trade shows, feasibility studies or foreign representation. Direct Cash Subsidies provide manufacturers with direct payments of either cash financing or in-kind contributions; whereas an Indirect Cash Subsidy offers rebates on imported raw materials ⁵ or goods and services at prices below their market value. ⁶
• Export Bounties compensate manufacturers for duties paid on imported raw materials, and are designed to increase the amount of exported goods. These bounties usually take the form of direct cash subsidies; but they can also come in a “concealed form,” such as exports relieved from tax payments or excise duties ⁷ (excise duties are taxes levied on a firm’s revenue, as oppose to its income). ⁸

What is the World Trade Organization?

Purpose in a nutshell

• According to the group’s Web site, the WTO deals in the rules of trade between nations at a global or near-global level. An international body consisting of 153 member nations, it presses for liberalizing international trade, hoping to ensure goods and services flow as freely, predictably and smoothly as possible. Headquartered in Geneva, it also provides governments a forum to develop and negotiate trade agreements and settle bi or multilateral disputes. Basically, the WTO establishes the ground rules for international commerce. ⁹

• WTO member nations agree that governing rules secure trade channels to better guarantee producers and consumers have access to supplies, an array of finished products, components, raw materials and services they use. ¹⁰

• The WTO does not facilitate all trade between nations. Many trade agreements have materialized between nations and are currently active without WTO involvement.

A free trade organization?

• Although the WTO pushes for trade liberalization, it is not entirely accurate to label it a free trade organization. This is because the WTO has supported maintaining or establishing trade barriers in circumstances where such restrictions may protect consumers, prevent the spread of disease or protect the environment. ¹¹

How it works

• According to its Web site, the WTO’s multilateral trading system is rooted in trade agreements, negotiated and signed by a majority of the world’s trading nations and ratified in their legislatures. These agreements set the ground rules for country-to-country commerce and guarantee trade rights for participating nations. ¹²
• Agreements are also binding, in that they restrict individual government trade policies from exceeding certain limits. Binding agreements usually put a ceiling on import tariffs, and provide traders and investors with a loftier degree of market security.
• Member nations cannot discriminate from one another except under special exceptions. ¹³In other words, if a country grants low import tariffs to another country, it must apply that tariff to all WTO members.
• These agreements deal in agricultural products, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations and intellectual property like inventions, creations and design.
• The rules of an agreement are imposed gradually through a process called “progressive liberalization,” giving member nations the time they need to comply.

Does the WTO control trade?

• No. A member-driven organization, the WTO does not dictate trade policy to the world’s governments. Decisions are made through consensus involving all member nations, rules of the system are a result of member negotiations and the rules are later ratified by their respective legislatures. ¹⁴

Brief History

• The WTO is the successor body of the General Agreement of Tariffs and Trade, commonly referred by the acronym GATT. Born in the wake of World War II to prevent the ruinous bouts of protectionism that exacerbated the Great Depression, the GATT has carried out numerous rounds of global trade talks, which have been successful in lowering tariffs and liberalizing trade in manufacturing, agricultural products, services, investment and government procurement. ¹⁵
• GATT facilitated international commerce for the next 50 years. But, whereas GATT mainly dealt with trade in goods, its WTO successor also covers trade in services and intellectual property like inventions, creations and designs.
• GATT was dismantled during the Uruguay Round of trade talks between 1986 and 1993. Classified as the largest trade negotiation in history, 123 nations had taken part in the Uruguay Round by its end. Although the GATT has been replaced, the WTO’s updated general agreement is still the framework that guides it operations. ¹⁶
• The most recent round of global trade talks, called the Doha Round, collapsed in 2008 following 7 years of negotiations. The blame was placed on China, India and the United States, a trio of large economies who failed to reach a consensus and refused to compromise on measures to protect farmers in developing nations from greater trade liberalization. ¹⁷ Efforts are underway to restart the Doha negotiations.

The International Monetary Fund and its Trade Involvement

What is the IMF and how did it begin?

• The IMF is an overseer of the international financial system. Consisting of 186 member countries, the organization is charged with ensuring a sound monetary system through lending, oversight, and technical assistance.
• Established to stave off a repetition of the disastrous economic policies that caused and then fueled the Great Depression, the IMF began operations in 1947. As its membership mushroomed over the ensuing decades, the IMF established a system of fixed exchange rates. This system would later prove unsuccessful, as a jump in United States domestic and military spending in the 1960s and 70s caused overvaluation of the dollar. The system would collapse by 1973, and a system of floating exchange rates and free arrangements would take its place. ¹⁸

How does it work?

• Providing low-cost loans to countries embroiled in financial crisis has been the chief function of the IMF. ¹⁹  Countries unable to meet their foreign loan payments pose a threat to the entire international financial system, which the IMF works to protect. Any member country can turn to the IMF for financial support if it is unable to find sufficient financing on affordable terms in capital markets. ²⁰  These loans are supposed to shore up economies and resolve balance of payment problems; however, they are often accompanied by stringent conditions that require countries to clean up their books, usually through spending cuts or currency devaluations.
• Beyond financing, the IMF is also an oversight agency. It regularly monitors and scrutinizes economies to identify and root out weaknesses that are causing or may cause financial or economic instability. Each member country is subject to such monitoring–as IMF membership entails commitment to policies conducive to economic growth, price stability, fair comparative advantage and exchange rates that are not manipulated. ²¹
• As part of its effort to head off financial and economic instability, the IMF dispenses expertise to help member countries in areas such as central banking; monetary, exchange and tax policy; and tax administration. It also provides advice to countries whose economies are trying to rebound after severe domestic unrest or war. ²²

What does the IMF have to do with trade?

• By ensuring a sound financial system, the IMF lays the groundwork for vibrant international trading arrangements. Its safeguard against financial and economic instability facilitates trade expansion, promotes balanced economic growth, and it encourages exchange stability and the elimination of exchange restrictions that hinder trade.
• IMF’s work is complementary to that of the World Trade Organization, and the two groups often work together. While the former provides the foundation on which a trading system can sprout and grow, the latter ensures trade flows smoothly, reducing the risk of payment imbalances and financial crisis.
• The missions of the IMF and WTO often overlap. The two organizations often work jointly, advising and participating in cooperative meetings, working groups and committees

In addition to a joint working relationship, the IMF also plays the role of advisor when dealing with financial policy as it relates to international trade. The WTO is required to consult the IMF when dealing in issues of monetary reserves, balance of payments, and foreign exchange arrangements, for example.

What is the North American Free Trade Agreement (NAFTA)?

• A controversial trading accord, the North American Free Trade Agreement, commonly called by its acronym, NAFTA, brought the economies of the United States, Canada and Mexico under one canopy. ²³ Effective as of Jan. 1, 1994, the accord was largely designed to remove tariff barriers between the three countries and liberalize the channels of trade between them by 2009. ²⁴

What it did

• According to the Office of the United States Trade Representative, NAFTA created the world’s largest free trade area, linking 444 million people and $17 billion worth in goods, causing cross-border trade and investment to soar.
• All remaining duties and quantitative restrictions were eliminated by 2008. ²⁵

Was it effective?

• NAFTA has achieved limited results, and its applications has underscored both the promises and perils of free trade. Although Mexico’s imports have quintupled to $292 million in 2008, the agreement has done little to stymie illegal immigration by individuals seeking opportunities in the United States that are lacking south of the border.
• It has also largely failed to deliver on promises of job creation or raise living standards.
• Perhaps most disturbing of all is that, in some cases, NAFTA produced results in Mexico that were the exact opposite of its intentions. For example, domestic industries in Mexico were dismantled as multinational corporations imported materials from their own suppliers. Also, farmers were priced out of the market by food imported tariff-free.
• In addition, Mexico, once a magnet for industry seeking cheap labor, saw its advantages dwindle when China entered the World Trade Organization and offered industries even lower wage standards. ²⁶
• During his campaign for office, President Barack Obama pledged to renegotiate NAFTA to make it more advantageous to U.S. workers, but whether that promise was actually sincere remains to be seen.

What is Washington Doing?

Obama’s National Export Initiative

• Announced during his 2010 State of the Union address, Obama made public his National Export Initiative, an effort officials hope will lead to long term, sustainable economic growth for the U.S. It sets the goal of doubling exports by 2015, a jump that would support 2 million American jobs.
• According to the International Trade Administration, a division of the U.S. Department of Commerce, the initiative establishes the first government-wide export promotion strategy with focused attention from the President and Cabinet. It is designed to assist farmers and small businesses multiply their exports and “reform export controls consistent with national security. During his address, Obama specifically called for strengthening relations with markets in Asia and key partners in South Korea, Colombia and Panama. ²⁷
• Trade agreements with Panama and Colombia have since been stalled by Congressional Democrats who want Colombia to do more to curtail the killing of trade unionists and pursue those responsible for past slayings. Also, Obama is demanding tougher labor standards as part of the agreements. ²⁸

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