What exactly are a trade agreement....

(14 Posts)
froubylou Tue 05-Jul-16 18:54:24

..... And why are they necessary?

Why can't countries and companies just trade between themselves on terms that suit them?

So say the UK wanted to sell 1000 to Germany. The company manufacturering the cars say how much they want to charge. The buyers in Germany say whether that's what they want to pay. They agree a price. Cars are made and then sold.

I understand there will obviously be import tax (I assume anyway). Do trade agreements bypass those? Is that why agreements are so vital?

If so why are they so vital? Surely import costs should be factored into costs the same way VAT is when buying something VAT registered.

And why is trade so tied up with movement of people? Surely they should be a separate agreement?

froubylou Wed 06-Jul-16 06:02:52

Does anyone know?

MustStopAndThinkBeforePosting Wed 06-Jul-16 07:15:06

Countries have import tariffs to protect their own industries and support local jobs so UK car manufacturers are able to sell cheaper to UK customers than USA manufacturers. Yes you can trade without them but at the same time you have UK manufacturers of other stuff - say vacuum cleaners - who want to sell into the overseas markets and don't get high trade volumes because the import tariffs into the other countries are too high so their product is not as competitive as it could be.

Then there are also the fact that the two countries have different regulations governing health and safety standards and testing procedures for their cars and their vacuum cleaners - so as well as the import tariffs the companies who want to trade outside their domestic market have to understand and comply with multiple sets of regulations

So a simple trade agreement just says "you stop charging tariffs on cars and I will stop charging tariffs on vacuum cleaners and companies in both our countries will have access to wider markets and make more sales and pay more tax and both our countries will be better off". And that is good.

But you can take it a step further and add to this "and let's share a single definition of the health and safety and testing standards that these things need to meet so that companies in both our countries have less work to do getting their products into this bigger market. This reduces costs for everyone and is good.

Then a further step. The vacuum cleaner manufacturers in one country have rights to paid holiday, paid sick leave and maternity leave. Those rights are good but obviously have a cost to the companies. With a trade agreement like the above, they could now be competing with a vacuum cleaner manufacturer in another country who don't allow their workers these rights and so have the capacity to sell their vacuum cleaners cheaper. So instead of just a trade agreement you have a treaty that also includes minimum standards of workers rights so that the company who gives the workers a good package of benefits doesn't suffer unfair competition.

As well as competing for customers, the companies making these products are also competing with one another to get the best deal on the commodities they can buy in raw materials and manpower/skills of employees. This competition between them helps power a healthy economy and makes everyone richer. Trade agreements similar to the above can cover the raw materials trading but a more complex treaty is needed to allow the companies to compete freely to attract the staff they need so that skilled car manufacturers in one country can choose the best job on offer in either their country of birth or a different one, and skilled vacuum cleaner engineers likewise aren't restricted to only work for the companies in their home country. Enabling ordinary people to choose where to sell their labour also has a beneficial effect on the economy and makes everyone richer in the long term - so long as there are rules in place to prevent employers using this freedom to push down wages and employment conditions. These rules, along with others mentioned above, are often called "red tape" and when some politicians like to talk about cutting up red tape they mean reforming all these agreements to remove the protections for ordinary people that have been included in all these international treaties so that the economic benefits can be kept for the richest rather than being spread among the wider population.

froubylou Wed 06-Jul-16 07:30:04

Thanks mustthink.

So in theory a trade agreement should pull working standards up and not down. And make trading between companies easier.

So in the EU everyone within the EU must subscribe to the same set of rules. Whereas 2 countries trading independently can set the rules to suit the 2 countries that are trading?

I can see why the EU gets complicated and needs so much administration. It sounds a good idea in theory. BuT I can see how it could all go horribly wrong.

I voted remain btw. Purely because I don't actually understand the impact the EU has on the Uk. Which is why I asked.

scaevola Wed 06-Jul-16 07:38:03

Trade agreements are unrelated to conditions for the workforce.

If they weren't, then overseas manufacture is sweatshops couldn't happen and we all know it does. Or we'd be aligning with China and Brazil and Russia.

Closer political union, for things such as common standards - whether on employment conditions or anything else - is political union, not trade agreement.

Mistigri Wed 06-Jul-16 07:53:10

So in theory a trade agreement should pull working standards up and not down. And make trading between companies easier.

Not necessarily. It depends on the type of agreement. A "simple" trade agreement (this would include the "default" WTO position) would simply seek to reduce and harmonise tariffs.

However, the type of "trade agreement" I think you are talking about go a little further. Typically these seek to reduce or remove tariffs on the categories of trade that they cover (they don't typically cover all trade) and, importantly, reduce non-tariff barriers ie simplify customs procedures. This type of agreement tends to be both more advantageous and more restrictive than the WTO type, to limit cheating and promote fair competition.

However, the EU isnt a "trade agreement" in this sense. The EU is a single market, in which there are no borders - goods and services can move around freely with no tariffs and no customs. This has huge advantages for business, but in order to make it as fair as possible, there have to be strict rules to make sure that no one country can take an unfair advantage. This is why for example there are strict rules about governments giving state aid to companies (because it would give them an unfair advantage over their competition), why there are strict rules governing product quality, and it's also one reason (there are others) why there are some basic minimum employment standards.

annandale Wed 06-Jul-16 08:01:48

I'm learning so much on MN at the moment.

froubylou Wed 06-Jul-16 10:16:04

I am glad it's not just me annandale. I felt a bit of a divvy asking to be honest.

So now we are leaving the single market we need to negotiate within the EU for our trade arrangements.

With regards to the rest of the world did they trade with us via the EU? So we buy say electronics from China. As it stands at the moment do those electronics go via the EU or just into the UK? Ie did we agree the deals with China as China to UK. Or is it China to UK in which case we need to renegotiate those as well?

froubylou Wed 06-Jul-16 10:17:12

Sorry that should read china to EU or China to UK.

Mistigri Wed 06-Jul-16 10:49:28

frouby you don't need a specific trade agreement in order to trade. There is currently no EU-China trade agreement, but China is still the EU's second largest trading partner.

HarrietVane99 Wed 06-Jul-16 11:37:33

OP, if you're at all interested in history, you might like to read up on Free Trade and British politics in the 19th and early 20th century. Starting with the Corn Laws and Sir Robert Peel. (Which anyone old enough to have done O level history will no doubt remember!)

There was a divide between producers, who wanted tariffs on imported goods to protect them from foreign competition, and consumers, who benefitted from having access to a wider range of often cheaper imported goods. Tariffs, being taxes on imports, also raised money for the government.

This particularly applied to food, so it became a hugely emotive and divisive issue.

The issue of Free Trade twice caused a major split in the Conservative party; what we're seeing now is (so far) mild in comparison.

The counter argument to Protectionists, as anti-FreeTraders were called, was that if we imposed tariffs on goods imported from, say, the USA, they'd do the same to us, making it more difficult for our producers to export to them.

Free Trade was the dominant view in the second half of the 19th century. Britain negotiated Free Trade agreements with most of its trading partners. Then towards the end of the century there were increasing demands from producers for Protectionist policies.

That's a very simplified account. There's a lot more to it than that, but this would become an (even more) extended essay. Congratulations to anyone who made it this far!

(I teach history, in case you hadn't guessed!)

froubylou Wed 06-Jul-16 12:23:02

Thank you Harriet. That makes sense. And ironically in my home town we have a monument on a local roundabout to Robert Peel. No one had a clue what it was. It's steel girders painted various shades of yellow to represent corn.

So now I can tie in what I learned about the corn laws with what's happening in the EU and worldwide.

ThankS everyone who has commented on this thread. I feel slightly less baffled by it all now.

Corcory Wed 06-Jul-16 12:23:11

The EU is a single market and in turn has trade agree ments with about 50 countries. We trade with these 50 countries only through the EU agreements we have. We can trade with any country we like but will have to pay their tariffs. When we !eave the EU we will have no trade agreements with anyone and will have to negotiate our own but will still be able to trade with any country.

tootiredtotidy Mon 11-Jul-16 01:23:40

Thanks posters this is a great thread!

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