Free Trade Agreements Have Limited Impact (Because Manufactured Goods are a Perfect Market)

Introduction

Free Trade Agreements between two or more countries or parties have been the centrepiece of international trade policy since the formation of the World Trade Organisation 25 years ago. Since 1995, no major round of multilateral trade liberalisation has been concluded, but there has been a sharp rise in the number of bilateral trade agreements. While some of these agreements have real consequences for trade in services and some administrative rules for trade, most of them do not because they focus mainly on tariffs on industrial and agricultural goods. Yet the economic gains from these reductions are now extremely limited. In fact, it is now difficult to improve the global market in goods by cutting tariffs. 

Tariffs are low, particularly for non-agricultural goods

It is estimated that in 1947 the average global tariff for all goods was between 20 and 30%. By 1952, and the first rounds of the GATT, this had reduced to 14%. At this point there were still significant tariffs on swathes of agricultural and industrial goods, for example the average UK tariff on finished manufactured products was 21.4% at the end of the 1950s. By the time of the Uruguay round in the second half of the 1980s the average developed country tariff for all industrial goods was only 6.3%, reducing to 3.8% as a result. The impact can be seen in the chart below, notably showing average applied industrial tariffs of lower than 4% in the EU, US, and Japan. 

To read the full paper by the European Centre for International Political Economy, please click here.