Since Adam Smith published The Wealth of Nations in 1776, the vast majority of economists have accepted the thesis that free trade between nations improves overall economic well-being. Free trade, normally defined as the absence of tariffs, quotas or other state barriers to international trade, allows each country to specialize in goods that it can produce cheaply and efficiently compared to other countries. Such specialization allows all countries to obtain higher real incomes. For most countries, international trade is governed by unilateral barriers of various types, including tariffs, non-tariff barriers and bans altogether. Trade agreements are a way to reduce these barriers and thus open up all parties to the benefits of increased trade. Suppose Japan sells bikes for fifty dollars, Mexico sells them sixty dollars, and both should expect a US duty of twenty dollars. If tariffs on Mexican goods are removed, the U.S. consumers will shift their purchases from Japanese bicycles to Mexican bicycles. As a result, Americans will buy from a more expensive source, and the U.S.
government will not receive customs revenue. Consumers save ten dollars per bike, but the government loses twenty dollars. Economists have shown that if a country joins such a „trade-orienting“ customs union, the cost of that reorientation can outweigh the benefits of increased trade with other members of the customs union. The end result is that the customs union could make the country worse. The third advantage is that it standardizes trade rules for all trading partners. Companies save legal fees because they follow the same rules for each country. The WTO also mediates trade disputes between member countries. If the government of one country accuses the government of another country of violating the rules of world trade, a WTO panel decides the dispute.
(The panel`s decision may be appealed to an appellate body.) If the WTO finds that the government of a member State has not complied with the agreements it has signed, the member is required to change its policy and bring them into line with the rules. If the Member considers that it is politically impossible to change its policy, it may offer other countries compensation in the form of lower trade barriers for other products. If it decides not to do so, other countries may obtain WTO authorization to increase customs duties (i.e. retaliatory measures) on goods from the Member State concerned in the event of non-compliance with it. The WTO is a negotiating forum on the liberalization of world trade. The EU negotiates in the WTO on behalf of all EU countries. Trade agreements, any contractual agreement between States on their commercial relations. Trade agreements can be bilateral or multilateral – that is, between two or more states.
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