Is it more advantageous for emerging countries to agree international trade agreements with the EU on a bilateral or multilateral basis? Why?
International trade is the trade conducted between different countries of the world across their boundaries. It simply means the exchange of goods and services from one country to another.
International trade agreements are a kind of agreement between different countries to cooperate with each other on various matters like socially, economically, politically or technologically. It’s like a settlement or a contract that binds two or more countries together.
As in today’s world a lot Globalization is taking place, many people, companies and organizations from one part of the world can communicate and transact with the other part of the world. For example a company based in African continent can do business with another company based in the European continent. We can also see many people travelling from one place to another looking for better opportunities or also trying to expand their business.
Due to this interdependence and integration of the countries with each other, we see many countries forming trade agreements with each other. This allows them to trade with each other and also benefit from the agreement in terms reduced costs, taxes or tariffs from the goods imported from each other.
This agreement is known as the Economic Integration, which is the political and economic agreements among countries that give the preference to member countries to the agreement. (Daniels et al, 2009)
Some examples of these economic integrations are like World trade organization (WTO), which deals with the trading activities of its members around the world. The North American free trade agreement (NAFTA), The Association of Southeast Asian nations (ASEAN), The East African community (EAC) and the European Union (EU).
As the question of this assignment is based on the trade agreements with the EU, let us talk about EU and its trade agreements with various countries.
History of the European Union (EU)
European Union is the largest and most comprehensive regional economic group in the world so far. It was first formed in 1957 under the name of European Economic Community, then in 1966 it was called European community to finally be known as The European Union in 1992.
The EU is a free trade agreement formed among the European nations. These nations decided to integrate with each other on the customs union initially, later they also removed the tax and tariffs on goods imported from each other, so there was a free movement of goods and services among the member countries. Currently EU has 27 members.
(Daniels et al, 2009)
The EU can be seen as having various trade agreements with various countries around the world. These countries decide whether to have agreements on a bilateral basis or multilateral basis.
And so on.
Bilateral agreement is an agreement between two parties or countries. It binds these countries together resulting in their mutual agreement on various trading activities. In this contract, there are terms and conditions that define the trading activities of its partners.
Nowadays many countries can be seen as forming bilateral agreements with its neighboring country or also other parts of the world. These countries tend to do that so as to benefit from each other, for example the agreement between the US and Canada has led to the free movement of people from one country to another with just an Identification card rather than the Passport or visa. (Blank C, 1999)
There are many bilateral agreements which the EU has entered with different countries, examples might include the agreement with the East African community (EAC) in 2007, The Economic partnership agreement between the EU and the African, Caribbean and Pacific countries (ACP) to mention but a few. (europa, 2010)
There are many benefits that these countries get through this agreement; the following can give us some knowledge:
There is free access to imports with no quotas and taxes e.g.: The EAC countries can buy from the EU without having to pay taxes. Where as in the absence of this agreement, they would have paid the taxes charged on the imports by the government.
There’s also cooperation on sustainable fishing activities. As fishing is one of the major industries in the EAC states, there is a certain agreement on the activities of this industry. The EAC countries also seem to be exporting fish products to the EU countries. (europa, 2010)
Also the Bilateral agreement is an easy to manage agreement and time saving too, as only two parties are involved, the decision making can be done quickly and the solution is found instantly. All the parties know the rules and regulations and there is no confusion.
It promotes greater trade among the members involved. As there is a contract between these countries, there can be seen free movement of goods and services. For example: EAC can be seen as exporting products like tea, coffee, fish products to the EU countries. On the other hand, EU exports machineries and vehicles to the EAC. (europa, 2010)
These agreements also quicken global trade liberalization if multilateral negotiations run into difficulties. For example The EU eventually signed a free trade agreement with Mexico to ensure that European goods would not be at a competitive disadvantage in the Mexican market as a result of North American Free trade agreement (NAFTA)
As a result of bilateral agreement, the parties can also decide to go and explore other areas such as investment, competition, labor standards or environment where there is no consensus among WTO members. (Pascal Lamy, 2006)
Bilateral agreements also help its members to learn from each other and also become good negotiators. This strengthens the trading activities of the member countries and they get to know what to check or say while making a deal in their business. (Pascal Lamy, 2006)
This agreement also enables parties to share strengths and overcome the weaknesses. Like EU is strong in technology, organizational skills, management while EAC is still coming up so it can learn from the EU. On the other hand EU lacks minerals, raw materials so it can overcome this from the agreement signed.
Apart from the advantages, there are also short-comings of this type of agreement. Some of the downfalls are like:
As this agreement involves only two countries and so sometimes they do benefit from each other but they would be loosing out on other opportunities from other countries that are not part of this agreement. For example country A could be buying its raw materials from country B for a particular price which is higher than that the country C charges but because Country C is not part of the agreement, Country A has to buy it from B.
Again as these countries gain access to each other, sometimes as one country has an advantage of low cost of production in the other country, it tends to move its industries in that country and hence this result in many people loosing their jobs in their home countries. E.g.: many countries can be seen moving their production activities in China as they have low cost of labor, so those countries’ people might be at a risk of loosing their jobs.
Furthermore as bilateral agreements is between two countries, these countries benefit from each other in terms of tariffs or taxes on their imports or exports to and from each other but the other countries outside this agreement are not treated the same. They are charged on their imports and exports from or to these countries. So this can be seen as discriminating the World trade organization’s (WTO) objective of eliminating the tariffs world wide. E.g: The countries that are not part of EAC are charged taxes when they buy from the EU.
Also as there are issues that must be addressed globally like environmental issues such as pollution, global warming, bilateral agreements can be seen as having a short coming as there are only two parties and so they just decide solutions on their own and don’t get access to the more ideas from other nations. For example if EU gets into agreement with a certain country to reduce carbon dioxide emissions, this issue wont be solved as there will be other countries who would still be emitting this poisonous gases and harming the environment.
Let us now talk about multilateral agreement.
A Multilateral agreement is an agreement between more than two parties at a particular period of time. Here the parties come into contact and decide to benefit from each other on various matters such as economically like reduce import or export taxes, technologically they help each other with technical skills.
Therefore multilateral agreement is that which binds the parties involved for the specific circumstances.
Examples of multilateral agreements of EU with a number of countries are: EU having contracts with the World trade organization (WTO) countries, The Kyoto protocol with the Japan, US, Russia, Australia and Iceland in 2005. (n.d, kyotoprotocol.com)
The parties involved in multilateral agreement also benefit from this kind of agreement; some of the benefits can be seen as follows:
Since many parties around the globe are involved, it results in freer trade activities to take place. People can easily get what they don’t get in their country from other country and that also with reduced/eliminated tariffs. So there can be seen smooth flow of goods and services.
As multilateral agreement involves many countries, there would be exchange of information and ideas to a large extend as opposed to the few countries or bilateral agreement, where there is limited knowledge on a particular subject, this result in gaining more knowledge and information and using it to solve daily challenges.
It also helps to solve/tackle the macro-environmental factors such as inflation, unemployment, low GDP, so the countries in which these things or issues take place can easily co operate with its members on the agreement and balance this issue by moving its goods or services to those countries, so there is a free mobility of factors of production. The members countries involved could also bring investment to help increase the income of the people of that country. (www.ehow.com)
Multilateral agreement gives its members an access to a wider market as opposed to bilateral agreement, which is limited to the market of the two countries involved. So buyers and sellers have vast market to be served and to buy their goods from.
Let us look at the disadvantages of this agreement.
As many countries are involved at the same time there will be a conflict between them when an important issue needs to be decided as one country would say this and the other country would say that. So this will delay the decision making process.
Also it can be seen to be difficult for all the members to live up to the agreement. For example In the Kyoto protocol which was about the climatic changes taking place around the world, in 1997, all but US ratified it.(Anon, 2010)
According to Douglas Irvin (2008), trade liberalization is very slow or weak in the multilateral agreements. It does not have success in liberalizing trade in agriculture, textiles and apparel industries.
Multilateral agreements tend to be complicated. As there are many nations involved, there is a lot of confusion among the members. Some don’t know who deals with what or the agreements on the trading activities involved.
The above mentioned are some of the drawbacks of multilateral agreements that the countries might face while conducting such agreement.
CONCLUSION AND RECOMMENDATION:
To conclude the question of the assignment, it rather depends on the emerging countries themselves to decide whether to have a bilateral or a multilateral agreement with the EU.
The main objective of having these agreements is to conduct the business or the movement of goods and services smoothly with less trade barriers and government intervention as possible.
According to the research i went through, many countries after the Second World War decided to have mutual agreements and benefit from each other. These countries were at first having the multilateral agreements with each other, and then came the bilateral agreements.
Nowadays, many countries prefer forming the bilateral contracts at first, then slowly moving to the multilateral agreements. Bilateral agreements in fact can be seen as the stepping stones towards the formation of multilateral agreements.
According to Peter Mandelson (2008), Careful and ambitious bilateral agreements usually lead to trade creation, fair competition, liberalization in other areas like investment. The countries need to sit together and decide the main objective of having such agreements and see that these objectives are achieved.
Both bilateral and multilateral agreements are interdependent on each other. Successful bilateral agreements lead to the multilateral agreements. we can see this by taking example of the members of The Association of Southeast Asian nations (ASEAN), they have bilateral trade agreements with the EU which gives them access to the EU market and gives them many prospects but then the countries in the ASEAN like India also look s for forming another agreement with another countries so that it can benefit from both, the bilateral agreement with EU and also the agreement made with another country outside EU. (2006, Mandelson P)
So the emerging countries should at first take small steps and form the bilateral agreements, then after having experience should move towards the multilateral agreements.