Unit III: Trade Negotiations | Financial Management & Economics Finance: CA Intermediate (Old Scheme) PDF Download

 Page 1


4.55 
 
TRADE NEGOTIATIONS 
UNIT III: TRADE NEGOTIATIONS 
 
LEARNING OUTCOMES 
 
At the end of this unit, you will be able to: 
? Distinguish between different types of regional trade 
agreements 
? Outline the course of the history of trade negotiations 
? Describe the structure and guiding principles of the WTO  
? Give an overview of the WTO agreements 
? List out the major concerns in respect of functioning of the 
WTO 
UNIT OVERVIEW 
International Trade
Trade Negotiations
RTAs GATT WTO
Page 2


4.55 
 
TRADE NEGOTIATIONS 
UNIT III: TRADE NEGOTIATIONS 
 
LEARNING OUTCOMES 
 
At the end of this unit, you will be able to: 
? Distinguish between different types of regional trade 
agreements 
? Outline the course of the history of trade negotiations 
? Describe the structure and guiding principles of the WTO  
? Give an overview of the WTO agreements 
? List out the major concerns in respect of functioning of the 
WTO 
UNIT OVERVIEW 
International Trade
Trade Negotiations
RTAs GATT WTO
4.56 ECONOMICS FOR FINANCE 
 3.1 INTRODUCTION 
The recent years have seen intense bilateral and multilateral negotiations among 
different nations in the international arena. India, for example, has already become part 
of 19 such concluded agreements and is currently negotiating more than two dozens of 
such proposals. Major events in the year 2020, such as Britain’s exit from the European 
Union, the new free trade agreement [which is a successor of the North American Free 
Trade Agreement (NAFTA)] concluded between Canada, Mexico, and United States, 
namely United States–Mexico–Canada Agreement (USMCA) and many other 
unpredictable developments in the trade front due to trade war between the US and 
China and the global pandemic, make trade negotiations a highly relevant area of study. 
International trade negotiations, especially the ones aimed at formulation of 
international trade rules, are complex interactive processes involving different 
countries having competing objectives. Trade negotiations are not just face to 
face discussions; rather they are multilevel or network games and involve intricate 
and time-consuming processes. They usually involve many parties who have 
conflicting interests and objectives. National governments are not the sole 
stakeholders in a trade negotiation. Many interest groups, lobbying groups, 
pressure groups and Non-Governmental Organizations (NGO) exert their 
influence on the process. As anyone can guess, the positions taken by each of the 
negotiating parties would represent their underlying agenda of interests. For 
example, in trade negotiations, when one of the parties seems to be bargaining 
for market access through reduction in tariffs, the other (s) may be clamouring on 
the issue of possible grant of protection to domestic industries. 
Before we go into the discussion on multilateral trade negotiations and the 
related institutions, it is relevant to understand the nature of regional as well as 
free trade agreements which evolve through negotiations.  
 3.2 TAXONOMY OF REGIONAL TRADE 
AGREEMENTS (RTAS)  
Regional Trade Agreements (RTAs) are defined as groupings of countries (not 
necessarily belonging to the same geographical region), which are formed with 
the objective of reducing barriers to trade between member countries. In other 
words, a regional trade agreement (RTA) is a treaty between two or more 
governments that define the rules of trade for all signatories. As of 1 June2020, 
303 RTAs were in force.  
 3
Page 3


4.55 
 
TRADE NEGOTIATIONS 
UNIT III: TRADE NEGOTIATIONS 
 
LEARNING OUTCOMES 
 
At the end of this unit, you will be able to: 
? Distinguish between different types of regional trade 
agreements 
? Outline the course of the history of trade negotiations 
? Describe the structure and guiding principles of the WTO  
? Give an overview of the WTO agreements 
? List out the major concerns in respect of functioning of the 
WTO 
UNIT OVERVIEW 
International Trade
Trade Negotiations
RTAs GATT WTO
4.56 ECONOMICS FOR FINANCE 
 3.1 INTRODUCTION 
The recent years have seen intense bilateral and multilateral negotiations among 
different nations in the international arena. India, for example, has already become part 
of 19 such concluded agreements and is currently negotiating more than two dozens of 
such proposals. Major events in the year 2020, such as Britain’s exit from the European 
Union, the new free trade agreement [which is a successor of the North American Free 
Trade Agreement (NAFTA)] concluded between Canada, Mexico, and United States, 
namely United States–Mexico–Canada Agreement (USMCA) and many other 
unpredictable developments in the trade front due to trade war between the US and 
China and the global pandemic, make trade negotiations a highly relevant area of study. 
International trade negotiations, especially the ones aimed at formulation of 
international trade rules, are complex interactive processes involving different 
countries having competing objectives. Trade negotiations are not just face to 
face discussions; rather they are multilevel or network games and involve intricate 
and time-consuming processes. They usually involve many parties who have 
conflicting interests and objectives. National governments are not the sole 
stakeholders in a trade negotiation. Many interest groups, lobbying groups, 
pressure groups and Non-Governmental Organizations (NGO) exert their 
influence on the process. As anyone can guess, the positions taken by each of the 
negotiating parties would represent their underlying agenda of interests. For 
example, in trade negotiations, when one of the parties seems to be bargaining 
for market access through reduction in tariffs, the other (s) may be clamouring on 
the issue of possible grant of protection to domestic industries. 
Before we go into the discussion on multilateral trade negotiations and the 
related institutions, it is relevant to understand the nature of regional as well as 
free trade agreements which evolve through negotiations.  
 3.2 TAXONOMY OF REGIONAL TRADE 
AGREEMENTS (RTAS)  
Regional Trade Agreements (RTAs) are defined as groupings of countries (not 
necessarily belonging to the same geographical region), which are formed with 
the objective of reducing barriers to trade between member countries. In other 
words, a regional trade agreement (RTA) is a treaty between two or more 
governments that define the rules of trade for all signatories. As of 1 June2020, 
303 RTAs were in force.  
 3
4.57 
 
TRADE NEGOTIATIONS 
Trade negotiations result in different types of agreements which are shown in the 
chart below- 
 
1. Unilateral trade agreements under which an importing country offers 
trade incentives in order to encourage the exporting country, to engage in 
international economic activities that will improve the exporting country’s 
economy. E.g. Generalized System of Preferences. 
2. Bilateral Agreements are agreements which set rules of trade between two 
countries, two blocs or a bloc and a country. These may be limited to certain 
goods and services or certain types of market entry barriers. E.g. EU-South 
Africa Free Trade Agreement; ASEAN–India Free Trade Area. 
3. Regional Preferential Trade Agreements among a group of countries 
reduce trade barriers on a reciprocal and preferential basis for only the 
members of the group. E.g. Global System of Trade Preferences among 
Developing Countries (GSTP) 
4. Trading Bloc has a group of countries that have a free trade agreement 
between themselves and may apply a common external tariff to other 
countries. Example: Arab League (AL), European Free Trade Association 
(EFTA) 
5. Free-trade area is a group of countries that eliminate all tariff and quota 
barriers on trade with the objective of increasing exchange of goods with 
each other. The trade among the member states flows tariff free, but the 
member states maintain their own distinct external tariff with respect to 
imports from the rest of the world. In other words, the members retain 
independence in determining their tariffs with non-members. Example: 
NAFTA. 
Types of RTA
Unilateral 
trade 
agreements
Bilateral 
Agreements
Regional 
Preferential 
Trade 
Agreements
Trading Bloc
Customs 
union
Common 
Markets
Economic 
and 
Monetary 
Union
Page 4


4.55 
 
TRADE NEGOTIATIONS 
UNIT III: TRADE NEGOTIATIONS 
 
LEARNING OUTCOMES 
 
At the end of this unit, you will be able to: 
? Distinguish between different types of regional trade 
agreements 
? Outline the course of the history of trade negotiations 
? Describe the structure and guiding principles of the WTO  
? Give an overview of the WTO agreements 
? List out the major concerns in respect of functioning of the 
WTO 
UNIT OVERVIEW 
International Trade
Trade Negotiations
RTAs GATT WTO
4.56 ECONOMICS FOR FINANCE 
 3.1 INTRODUCTION 
The recent years have seen intense bilateral and multilateral negotiations among 
different nations in the international arena. India, for example, has already become part 
of 19 such concluded agreements and is currently negotiating more than two dozens of 
such proposals. Major events in the year 2020, such as Britain’s exit from the European 
Union, the new free trade agreement [which is a successor of the North American Free 
Trade Agreement (NAFTA)] concluded between Canada, Mexico, and United States, 
namely United States–Mexico–Canada Agreement (USMCA) and many other 
unpredictable developments in the trade front due to trade war between the US and 
China and the global pandemic, make trade negotiations a highly relevant area of study. 
International trade negotiations, especially the ones aimed at formulation of 
international trade rules, are complex interactive processes involving different 
countries having competing objectives. Trade negotiations are not just face to 
face discussions; rather they are multilevel or network games and involve intricate 
and time-consuming processes. They usually involve many parties who have 
conflicting interests and objectives. National governments are not the sole 
stakeholders in a trade negotiation. Many interest groups, lobbying groups, 
pressure groups and Non-Governmental Organizations (NGO) exert their 
influence on the process. As anyone can guess, the positions taken by each of the 
negotiating parties would represent their underlying agenda of interests. For 
example, in trade negotiations, when one of the parties seems to be bargaining 
for market access through reduction in tariffs, the other (s) may be clamouring on 
the issue of possible grant of protection to domestic industries. 
Before we go into the discussion on multilateral trade negotiations and the 
related institutions, it is relevant to understand the nature of regional as well as 
free trade agreements which evolve through negotiations.  
 3.2 TAXONOMY OF REGIONAL TRADE 
AGREEMENTS (RTAS)  
Regional Trade Agreements (RTAs) are defined as groupings of countries (not 
necessarily belonging to the same geographical region), which are formed with 
the objective of reducing barriers to trade between member countries. In other 
words, a regional trade agreement (RTA) is a treaty between two or more 
governments that define the rules of trade for all signatories. As of 1 June2020, 
303 RTAs were in force.  
 3
4.57 
 
TRADE NEGOTIATIONS 
Trade negotiations result in different types of agreements which are shown in the 
chart below- 
 
1. Unilateral trade agreements under which an importing country offers 
trade incentives in order to encourage the exporting country, to engage in 
international economic activities that will improve the exporting country’s 
economy. E.g. Generalized System of Preferences. 
2. Bilateral Agreements are agreements which set rules of trade between two 
countries, two blocs or a bloc and a country. These may be limited to certain 
goods and services or certain types of market entry barriers. E.g. EU-South 
Africa Free Trade Agreement; ASEAN–India Free Trade Area. 
3. Regional Preferential Trade Agreements among a group of countries 
reduce trade barriers on a reciprocal and preferential basis for only the 
members of the group. E.g. Global System of Trade Preferences among 
Developing Countries (GSTP) 
4. Trading Bloc has a group of countries that have a free trade agreement 
between themselves and may apply a common external tariff to other 
countries. Example: Arab League (AL), European Free Trade Association 
(EFTA) 
5. Free-trade area is a group of countries that eliminate all tariff and quota 
barriers on trade with the objective of increasing exchange of goods with 
each other. The trade among the member states flows tariff free, but the 
member states maintain their own distinct external tariff with respect to 
imports from the rest of the world. In other words, the members retain 
independence in determining their tariffs with non-members. Example: 
NAFTA. 
Types of RTA
Unilateral 
trade 
agreements
Bilateral 
Agreements
Regional 
Preferential 
Trade 
Agreements
Trading Bloc
Customs 
union
Common 
Markets
Economic 
and 
Monetary 
Union
  
 
4.58 ECONOMICS FOR FINANCE 
6. A customs union is a group of countries that eliminate all tariffs on trade 
among themselves but maintain a common external tariff on trade with 
countries outside the union (thus, technically violating MFN).The common 
external tariff which distinguishes a customs union from a free trade area 
implies that, generally, the same tariff is charged wherever a member 
imports goods from outside the customs union. The EU is a Customs Union; 
its 27 member countries form a single territory for customs purposes. Other 
examples are Gulf Cooperation Council (GCC), Southern Common 
Market (MERCOSUR). 
7. Common Market: A Common Market deepens a customs union by 
providing for the free flow of output and of factors of production (labour, 
capital and other productive resources) by reducing or eliminating internal 
tariffs on goods and by creating a common set of external tariffs. The 
member countries attempt to harmonize some institutional arrangements 
and commercial and financial laws and regulations among themselves. 
There are also common barriers against non-members (e.g., EU, ASEAN)  
8. Economic and Monetary Union: For a common market, the free transit of 
goods and services through the borders increases the need for foreign 
exchange operations and results in higher financial and administrative 
expenses of firms operating within the region. The next stage in the 
integration sequence is formation of some form of monetary union. In an 
Economic and Monetary Union, the members share a common currency. 
Adoption of common currency also makes it necessary to have a strong 
convergence in macroeconomic policies. For example, the European Union 
countries implement and adopt a single currency. 
There has been significant growth in international trade since the end of the 
Second World War, mostly due to multilateral trade system which is both a 
political process and a set of political institutions. It is a political process because 
it is based on negotiations and bargaining among sovereign governments based 
on which they arrive at rules governing trade between or among themselves. The 
political institutions that facilitate trade negotiations, and support international 
trade cooperation by providing the rules of the game have been the former 
General Agreements on Tariffs and Trade (GATT) and the World Trade 
Organization (WTO). 
Page 5


4.55 
 
TRADE NEGOTIATIONS 
UNIT III: TRADE NEGOTIATIONS 
 
LEARNING OUTCOMES 
 
At the end of this unit, you will be able to: 
? Distinguish between different types of regional trade 
agreements 
? Outline the course of the history of trade negotiations 
? Describe the structure and guiding principles of the WTO  
? Give an overview of the WTO agreements 
? List out the major concerns in respect of functioning of the 
WTO 
UNIT OVERVIEW 
International Trade
Trade Negotiations
RTAs GATT WTO
4.56 ECONOMICS FOR FINANCE 
 3.1 INTRODUCTION 
The recent years have seen intense bilateral and multilateral negotiations among 
different nations in the international arena. India, for example, has already become part 
of 19 such concluded agreements and is currently negotiating more than two dozens of 
such proposals. Major events in the year 2020, such as Britain’s exit from the European 
Union, the new free trade agreement [which is a successor of the North American Free 
Trade Agreement (NAFTA)] concluded between Canada, Mexico, and United States, 
namely United States–Mexico–Canada Agreement (USMCA) and many other 
unpredictable developments in the trade front due to trade war between the US and 
China and the global pandemic, make trade negotiations a highly relevant area of study. 
International trade negotiations, especially the ones aimed at formulation of 
international trade rules, are complex interactive processes involving different 
countries having competing objectives. Trade negotiations are not just face to 
face discussions; rather they are multilevel or network games and involve intricate 
and time-consuming processes. They usually involve many parties who have 
conflicting interests and objectives. National governments are not the sole 
stakeholders in a trade negotiation. Many interest groups, lobbying groups, 
pressure groups and Non-Governmental Organizations (NGO) exert their 
influence on the process. As anyone can guess, the positions taken by each of the 
negotiating parties would represent their underlying agenda of interests. For 
example, in trade negotiations, when one of the parties seems to be bargaining 
for market access through reduction in tariffs, the other (s) may be clamouring on 
the issue of possible grant of protection to domestic industries. 
Before we go into the discussion on multilateral trade negotiations and the 
related institutions, it is relevant to understand the nature of regional as well as 
free trade agreements which evolve through negotiations.  
 3.2 TAXONOMY OF REGIONAL TRADE 
AGREEMENTS (RTAS)  
Regional Trade Agreements (RTAs) are defined as groupings of countries (not 
necessarily belonging to the same geographical region), which are formed with 
the objective of reducing barriers to trade between member countries. In other 
words, a regional trade agreement (RTA) is a treaty between two or more 
governments that define the rules of trade for all signatories. As of 1 June2020, 
303 RTAs were in force.  
 3
4.57 
 
TRADE NEGOTIATIONS 
Trade negotiations result in different types of agreements which are shown in the 
chart below- 
 
1. Unilateral trade agreements under which an importing country offers 
trade incentives in order to encourage the exporting country, to engage in 
international economic activities that will improve the exporting country’s 
economy. E.g. Generalized System of Preferences. 
2. Bilateral Agreements are agreements which set rules of trade between two 
countries, two blocs or a bloc and a country. These may be limited to certain 
goods and services or certain types of market entry barriers. E.g. EU-South 
Africa Free Trade Agreement; ASEAN–India Free Trade Area. 
3. Regional Preferential Trade Agreements among a group of countries 
reduce trade barriers on a reciprocal and preferential basis for only the 
members of the group. E.g. Global System of Trade Preferences among 
Developing Countries (GSTP) 
4. Trading Bloc has a group of countries that have a free trade agreement 
between themselves and may apply a common external tariff to other 
countries. Example: Arab League (AL), European Free Trade Association 
(EFTA) 
5. Free-trade area is a group of countries that eliminate all tariff and quota 
barriers on trade with the objective of increasing exchange of goods with 
each other. The trade among the member states flows tariff free, but the 
member states maintain their own distinct external tariff with respect to 
imports from the rest of the world. In other words, the members retain 
independence in determining their tariffs with non-members. Example: 
NAFTA. 
Types of RTA
Unilateral 
trade 
agreements
Bilateral 
Agreements
Regional 
Preferential 
Trade 
Agreements
Trading Bloc
Customs 
union
Common 
Markets
Economic 
and 
Monetary 
Union
  
 
4.58 ECONOMICS FOR FINANCE 
6. A customs union is a group of countries that eliminate all tariffs on trade 
among themselves but maintain a common external tariff on trade with 
countries outside the union (thus, technically violating MFN).The common 
external tariff which distinguishes a customs union from a free trade area 
implies that, generally, the same tariff is charged wherever a member 
imports goods from outside the customs union. The EU is a Customs Union; 
its 27 member countries form a single territory for customs purposes. Other 
examples are Gulf Cooperation Council (GCC), Southern Common 
Market (MERCOSUR). 
7. Common Market: A Common Market deepens a customs union by 
providing for the free flow of output and of factors of production (labour, 
capital and other productive resources) by reducing or eliminating internal 
tariffs on goods and by creating a common set of external tariffs. The 
member countries attempt to harmonize some institutional arrangements 
and commercial and financial laws and regulations among themselves. 
There are also common barriers against non-members (e.g., EU, ASEAN)  
8. Economic and Monetary Union: For a common market, the free transit of 
goods and services through the borders increases the need for foreign 
exchange operations and results in higher financial and administrative 
expenses of firms operating within the region. The next stage in the 
integration sequence is formation of some form of monetary union. In an 
Economic and Monetary Union, the members share a common currency. 
Adoption of common currency also makes it necessary to have a strong 
convergence in macroeconomic policies. For example, the European Union 
countries implement and adopt a single currency. 
There has been significant growth in international trade since the end of the 
Second World War, mostly due to multilateral trade system which is both a 
political process and a set of political institutions. It is a political process because 
it is based on negotiations and bargaining among sovereign governments based 
on which they arrive at rules governing trade between or among themselves. The 
political institutions that facilitate trade negotiations, and support international 
trade cooperation by providing the rules of the game have been the former 
General Agreements on Tariffs and Trade (GATT) and the World Trade 
Organization (WTO). 
4.59 
 
TRADE NEGOTIATIONS 
 3.3 THE GENERAL AGREEMENT ON TARIFFS 
AND TRADE (GATT) 
Despite wide ranging benefits, a number of countries hinder the free flow of 
international trade by imposing trade barriers. It was felt necessary that all 
countries embark on cooperative economic relations for establishing mutual self-
interest. The General Agreement on Tariffs and Trade (GATT) provided the rules 
for much of world tradefor 47 years,from 1948 to 1994; but it was only a 
multilateral instrument governing international trade or a provisional agreement 
along with the two full-fledged “Bretton Woods” institutions, the World Bank and 
the International Monetary Fund. The original intention to create an International 
Trade Organization (ITO) as a third institution to handle the trade side of 
international economic cooperation did not succeed for want of endorsement by 
some national legislatures, especially the US. 
Eight rounds of multilateral negotiations known as “trade rounds” held under the 
auspices GATT resulted in substantial international trade liberalization. Though 
the GATT trade rounds in earlier years contemplated tariff reduction as their core 
issue, later on the Kennedy Round in the mid-sixties, and the Tokyo Round in the 
1970s led to massive reductions in bilateral tariffs, establishment of negotiation 
rules and procedures on dispute resolution, dumping and licensing.  The 
arrangements were informally referred to as ‘codes’ because they were not 
acknowledged by the full GATT membership. A number of codes were ultimately 
amended in the Uruguay Round and got converted into multilateral commitments 
accepted by all WTO members. The eighth, the Uruguay Round of 1986-94, was 
the last and most consequential of all rounds and culminated in the birth of WTO 
and a new set of agreements. 
The GATT lost its relevance by 1980s because 
• it was obsolete to the fast-evolving contemporary complex world trade 
scenario characterized by emerging globalisation  
• international investments had expanded substantially  
• intellectual property rights and trade in services were not covered by GATT  
• world merchandise trade increased by leaps and bounds and was beyond its 
scope. 
• the ambiguities in the multilateral system could be heavily exploited