5.2.6 Trade Agreements

Why has globalization increased so rapidly?


Trade agreements between nations contribute to increased globalization. Nations have always traded with one another and often nations that are geographically close have special trade relationships designed to increase trade. Formal agreements of these relationships are called
trade agreements
legal agreements among two or more nations including various clauses about trade, taxes, and tariffs

Often, trade agreements cause problems because they lead to changes in the way things have always been done. They deepen interdependence with trade partners. Stronger nations tend to dominate weaker nations. An increase in "free trade" is a common goal.
trade agreements. They include terms for trade, taxes, and tariffs among countries. Often, they include increased
free trade
the ability of people to trade with people in other countries without restrictions imposed from governments or other agencies

This can include

  • international trade of goods and services without tariffs
  • free movement of labour between countries
  • free movement of capitalbetween countries
  • the absence oftaxes, subsidies, regulations, or laws that give domestic companies advantage over foreign companies
free trade, and they establish some agency that handles disputes. When nations enter into these agreements, usually a closer bond develops between the countries. Their economies become more interconnected and
interdependence
a system of dependent relationships people and countries have with one another

The system of interdependence has become so significant that a change in one part of the world may affect millions of people in other parts of the world positively or negatively.

Through these relationships, people and nations rely on each other for aspects of life such as

  • economic prosperity through trade
  • peace and security
  • cultural exchange
  • technological advancement
  • environmental health
interdependent.

Many trade agreements exist between groups of countries and trading partners. These agreements are important forces leading to increased connections among nations.

Countries band together for mutual support against opposition from the outside world and from each other. If Canada and the US had to bicker over every item, person, or dollar that crosses our borders, little would get done. By having an agreement such as the North American Free Trade Agreement, the countries and citizens can interact in ways that will help everyone — or so the thinking goes. In 2018, a new trade agreement, called the Canada-United States-Mexico Agreement (CUSMA or USMCA) was signed. It is in the process of replacing NAFTA.



The Peace Arch between Canada and the United States
Source: Wikimedia Commons

The US-Canada Free Trade Agreement was signed in 1988.

Concerns with free trade: Many Canadians were concerned that a free trade agreement would cause Canada to lose in some important ways to the wealthier and more powerful United States.
  • Culture: Cultural groups were afraid that Canadian magazines, books, movies, music, and theatre would not be able to compete with those from the United States. Magazines such as Maclean's, Canadian Living, and Chatelaine would disappear from the shelves. Canadians writers would never be published. Canadian musicians would never be recorded. Canadian movies and TV would not be produced.

  • Natural resources: Canadians were concerned about the American demand for Canadian natural resources. The free trade agreement gives Americans the same access to Canadian natural resources that Canadian companies have.

  • Employment: Canadian workers were concerned that their jobs would move south. They were afraid that the transnational companies would move their factories to areas in the United States where wages and the cost of living were lower than they are in Canada.

  • Politics: Canadians feared a loss of
    sovereignty
    the authority of a country to make independent decisions concerning its own welfare

    Recognition by other countries of a nation's sovereignty helps to legitimize that nation's independence in the world community.

    Two things are important for a country to have sovereignty:

    1. independence in making its own decisions
    2. recognition by other countries of its independence
    sovereignty to the more powerful United States.

  • Social Aspects: Canadians feared their valued social program such as public health care would be threatened.

  • Opportunities for Free Trade: Other Canadians were in favour of the free trade agreement because they believe Canada would benefit.

  • A larger market: Businesses believed free trade would provide greater access to the larger American market. If they could sell their products in the United States, they would have ten times more potential customers.

  • Resource development: Producers of resources such as oil and gas would have greater opportunity to make sales.

Watch


Watch this eight-minute video explaining free trade.



The North American Free Trade Agreement came into effect in 1994. NAFTA includes Canada, the United States, and Mexico. The North American Free Trade Agreement included plans to eliminate half the tariffs among the three countries immediately and phase out the remainder over the next 14 years. In 2018/19, NAFTA was renegotiated and renamed as USMCA or CUSMA - Canada - United States - Mexico Agreement. The US has imposed many rules to protect its local industries. For example, a tariff (25%) has been imposed on Canadian Aluminium and Steel by the US government (2019). Discussions are still going on among US, Canada and Mexico to eliminate the new tariffs.

NAFTA caused controversy in the United States and Canada. American and Canadian workers were afraid of their jobs moving south to Mexico where wages were lower than in the United States. Both Canada and the United States feared industry would move to Mexico where environmental standards and working conditions were worse.

  • The North American Agreement for Environmental Cooperation (NAAEC) forces Mexico to meet the same environmental standards as Canada and the US.
  • However, Mexico still is far behind Canada and the U.S. in environmental protection.
  • Labour standards in Mexico are not as demanding as those in US and Canada.

Trade has increased among Canada, the United States, and Mexico.

  • Almost a third of the money earned in Canada comes from selling our products outside Canada. ( World Bank, 2018)
  • 65% of Canada's total exports go to the United States. ( Statistics Canada, 2019)
  • American exports to Canada have increased by 197% since before NAFTA. ( Office of the United States Trade Representative, 2018)
  • 48% of US oil imports come from Canada.
  • Canada consumes more US agricultural products than any other country does.

Case Study: Dispute Resolution


Softwood lumber: As part of the free trade agreement, the United States is supposed to allow Canadian softwood lumber to cross the border without paying tariffs. Lumber tends to be cheaper in Canada than in the United States because Canada has many forests and fewer people. We have trees where the United States has farms and cities.

The government of the United States argued that its trees are owned by private individuals while Canadian lumber is on crown land (owned by the government). US firms must purchase their timber from private individuals, but Canadian companies pay a stumpage fee, a small price for each tree cut. Therefore, the United States argued that, because Canada
subsidy
money paid by a national government to keep prices lower than what they would be in a free market or to keep alive businesses that would otherwise be unsuccessful or to generate activities that otherwise would not occur

Subsidies can be a form of protectionism because they keep the prices of domestic goods artificially low compared to the real cost in a free market.
subsidizes its lumber industry, the US could charge a tariff on all imported lumber. This form of
protectionism
the economic policy of limiting trade by means of tariffs on imported goods, quotas, and anti-dumping laws to protect the industries of a nation; opposite to free trade
protectionism led to an increased price of lumber in the United States and threatened many Canadian jobs.

Canada believed this was against the free trade rules of NAFTA.

The Canadian government protested and the NAFTA Resolution Board and the World Trade Organization agreed with the Canadian government. In 2006, the US agreed to repay a significant portion of the duties collected.


 Watch


Watch this two-minute video on the resolution of the softwood lumber dispute as reported by the CBC.




Effect on Mexico: Trade between Canada and Mexico has increased only slightly since NAFTA, but trade between Mexico and the United States has increased tremendously. Factories called
maquiladora
an international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers. WTO is the only international agency overseeing the rules of international trade. It polices free-trade agreements, settles trade disputes between governments, and organizes trade negotiations.
maquiladoras have been built along the border of Mexico and the United States. Raw materials are sent to these maquiladoras where they are made into manufactured goods.

The European Union or EU is the world's largest confederation of independent states with 28 independent democratic European member nations as of July 1, 2013. Their agreement goes beyond the terms of a trade agreement but includes a common currency-the euro (Euro), common policies for agriculture and fisheries, and a common foreign and security policy. European nations also allow free movement across their borders.

Movement toward a free trade agreement began with six countries joining 1967 that became European Union in 1992 under the Maastricht Treaty.

The European Union and its currency was formed to compete with the power of the United States.

  • When the Euro was first issued, it dropped as low as US$0.81.
  • The Euro and the US dollar were valued about the same in July 2002. That is, one could trade US$1 for Euro1.
  • The Euro has been valued as much as US$1.59.
  • In March 2013, the Euro was worth US$1.38. 


This map shows the 28 members of the European Union as of 2013. Reproduced under GNU licence.

Note: The United Kingdom is in the process of leaving the EU as of 2019.
Some others trade alliances include the following:

  • Caribbean Community and Common Market or CARICOM includes the countries of the Caribbean and the surrounding area, including the Bahamas, Barbados, Belize, Dominica, Guyana, Haiti, Suriname, Trinidad and Tobago, and others.

  • The Southern Common Market Mercosur or Mercosul in South America includes Brazil, Argentina, Uruguay, Paraguay, and Venezuela.

  • The Association of Southeast Nations (ASEAN) includes Singapore, Malaysia, Thailand, the Philippines, Indonesia, and Malaysia among others.

  • The Common Market for Eastern and Southern Africa (COMESA) is designed to serve the interests of eastern and southern Africa nations.

  • The Economic Union of West African States (ECOWAS) includes Benin, Burkina Faso, Cape Verde, Cote d'Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo.

  • The South Asian Association for Regional Cooperation (SAARC) includes nations in southeast Asia.

  • The Southern African Development Community (SADC) includes Angola, Botswana, Mauritius, South Africa and 10 other countries from the south African region