International Trade (Intl Trade) 101: Trade Policy and Agreements - Regional Trade, Agreements Bilateral vs. Multilateral Free Trade Area Customs Union Common Market Economic Union

What This Is

Regional Trade Agreements (RTAs) are agreements between two or more countries to reduce or eliminate trade barriers, tariffs, and other restrictions. These agreements matter in international trade as they can significantly impact the cost, efficiency, and complexity of cross-border transactions. For example, consider a shipment of electronics from China to the US. If the two countries have a free trade agreement (FTA), the shipment may be eligible for reduced or zero tariffs, making it more competitive in the US market.

Key Terms & Rules

• Bilateral RTA: An agreement between two countries to reduce or eliminate trade barriers. Example: US-Mexico FTA.
• Multilateral RTA: An agreement between three or more countries to reduce or eliminate trade barriers. Example: ASEAN Free Trade Area (AFTA).
• Free Trade Area (FTA): A type of RTA where countries eliminate tariffs and other trade barriers on most goods. Example: US-Canada FTA.
• Customs Union (CU): A type of RTA where countries eliminate tariffs and other trade barriers on most goods and establish a common external tariff. Example: European Union (EU).
• Common Market (CM): A type of RTA where countries eliminate tariffs and other trade barriers on most goods, establish a common external tariff, and allow free movement of factors of production (e.g., labor, capital). Example: European Economic Community (EEC).
• Economic Union (EU): A type of RTA where countries eliminate tariffs and other trade barriers on most goods, establish a common external tariff, allow free movement of factors of production, and coordinate economic policies. Example: European Union (EU).
• WTO Agreement on RTAs: A set of rules governing RTAs, including requirements for transparency, non-discrimination, and national treatment. Example: Article XXIV of the GATT 1994.
• Tariff Schedule: A document listing the tariffs applicable to imports and exports. Example: US Harmonized Tariff Schedule (HTS).
• Rules of Origin (ROO): Regulations determining the country of origin of goods. Example: US-Mexico FTA ROO.
• Certificate of Origin: A document certifying the country of origin of goods. Example: US-Mexico FTA Certificate of Origin.

Step-by-Step Process

1. Identify the type of RTA: Determine whether the agreement is bilateral, multilateral, FTA, CU, CM, or EU.
2. Understand the terms and conditions: Familiarize yourself with the agreement's terms and conditions, including tariffs, ROO, and certificate of origin requirements.
3. Classify goods: Determine the Harmonized System (HS) code for the goods being traded.
4. Determine the applicable tariff: Check the tariff schedule to determine the applicable tariff rate.
5. Obtain necessary documents: Obtain the required documents, including the certificate of origin and commercial invoice.
6. Comply with ROO: Ensure that the goods meet the ROO requirements.

Common Mistakes

• Mistake: Confusing FTA and CU.
• Correction: A FTA eliminates tariffs and other trade barriers on most goods, while a CU establishes a common external tariff and allows for the free movement of goods.
• Example: A US company exports goods to Mexico under the US-Mexico FTA. The company mistakenly assumes that the goods are eligible for the CU's common external tariff, resulting in additional costs and delays.
• Mistake: Assuming that a CM is the same as an EU.
• Correction: A CM allows for the free movement of factors of production, while an EU coordinates economic policies and allows for the free movement of factors of production.
• Example: A European company exports goods to another EU country under the EU's CM. The company mistakenly assumes that the goods are eligible for the EU's economic union policies, resulting in additional regulatory requirements.
• Mistake: Misusing the term "free on board" (FOB) with air freight.
• Correction: FOB is an Incoterm that applies to sea and inland waterway transport, not air freight.
• Example: A US company exports goods to China using air freight. The company mistakenly uses the FOB term, resulting in confusion and delays.

Exam / Certification Tips

• Common question patterns: Expect questions on the types of RTAs, terms and conditions, and ROO.
• Tricky distinctions: Be prepared to distinguish between FTA, CU, CM, and EU.
• Memory aids: Use the following memory aid to remember the types of RTAs: FTA (Free Trade Area), CU (Customs Union), CM (Common Market), and EU (Economic Union).
• Key terms: Familiarize yourself with key terms, including tariff schedule, ROO, and certificate of origin.

Quick Practice Scenario

Scenario: A Chinese exporter sells goods to a US importer under the US-China FTA. The goods are classified under HS code 8543.90. The US importer receives the goods and pays the applicable tariff rate. Who pays for the main carriage?

Answer: The US importer pays for the main carriage under the FOB term.

Explanation: The FOB term applies to sea and inland waterway transport, not air freight. The US importer is responsible for paying for the main carriage.

Last-Minute Cram Sheet

• RTAs are agreements between two or more countries to reduce or eliminate trade barriers.
• Bilateral RTAs are agreements between two countries, while multilateral RTAs are agreements between three or more countries.
• FTAs eliminate tariffs and other trade barriers on most goods.
• CUs establish a common external tariff and allow for the free movement of goods.
• CMs allow for the free movement of factors of production.
• EU coordinates economic policies and allows for the free movement of factors of production.
• Tariff schedules list the tariffs applicable to imports and exports.
• ROO determine the country of origin of goods.
• Certificates of origin certify the country of origin of goods.
• FOB is an Incoterm that applies to sea and inland waterway transport, not air freight.
• The US-Mexico FTA is an example of a bilateral RTA.
• The ASEAN Free Trade Area (AFTA) is an example of a multilateral RTA.
• The European Union (EU) is an example of an economic union.
• Article XXIV of the GATT 1994 governs RTAs.
• The US Harmonized Tariff Schedule (HTS) lists the tariffs applicable to imports and exports.
• Rules of origin (ROO) determine the country of origin of goods.
• Certificates of origin certify the country of origin of goods.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• A FTA eliminates tariffs and other trade barriers on most goods, while a CU establishes a common external tariff and allows for the free movement of goods.