Globalisation is a process that has been observed since the early 1980s and this has seen an improvement in the general welfare of people, but in some countries, it has seen an increase in inequality. Globalisation brought with it greater trade, the mobility of people and capital, although there are different types of trade agreements which imply different policies depending on their type. After several decades of international trade and its consequences, protectionist movements have grown in some areas of the world that have focused on the negative impact that trade has made on countries.
With globalisation as a worldwide event, a series of exchanges appeared not only in the economic field but also in the social and cultural realms, as discussed in the article Globalization. In the economic sphere, one way to trade similar to other countries are agreements to reduce taxes on imports or even eliminate these tariffs so that free competition is what determines which products consumers will prefer. The following graph shows how the world and its economies have globalised.
Graph 38. (18th December 2014). 38 maps that explain the global economy. Retrieved December 10, 2017, from https://www.vox.com/2014/8/26/6063749/38-maps-that-explain-the-global-economy
The first free trade agreement signed between the United Kingdom and France on 23 January 1860, was named the Cobden-Chevalier treaty, after the British and French chief promoters of the treaty. Free trade agreements consist of regional or bilateral trade agreements to expand the market of goods and services among participating countries. As stated in the previous paragraph, the agreements include the elimination or substantial reduction of tariffs for imports between participants so that they compete under market conditions without any other friction. These agreements are directed by the World Trade Organization or by a treaty between countries.
Free trade treaties do not necessarily lead to economic, social or political integration between the participants. But there are some deals such as the European Union or Mercosur (a South American trade bloc) which were created to promote trade. They include clauses on fiscal policy, the free mobility of people, and common political bodies. These latest clauses that go beyond a simple commercial agreement are not considered under free trade agreements, where only economic aspects prevail.
The main elements of a free trade agreement are:
- Elimination of the barriers that affected trade between the areas that sign the treaty
- Promotion of better conditions for fair competition
- Improving investment opportunities for local and foreign people
- Improving property rights on patents and innovations
- Cooperation between countries that in some cases goes more to that of the economic part
- Establish effective processes to stimulate national production and more loyal competition between countries.
Free trade agreements started to be signed between countries to put an end to economic protectionism because policies that try to protect local production reduce the well-being of people since they will have less quantity of goods to choose from, as well as having higher prices. The reason being that when local production does not face more efficient competition, they can establish higher prices.
Formally, free trade agreements propose an expansion of markets through the elimination of customs duties and any other policy that affects exports and imports in a market. It also seeks to eliminate the subsidies that some sectors have since in some cases there are productions that are competitive, but only because of state subsidies, which affects free competition due to that interference of the state in the market.
Agreements that go beyond the economic aspect focus on border controls of immigrants, the way in which there is parity between exchange rates and the establishment of a third party that mediates when there are commercial conflicts. Sometimes, the agreements are signed by more than two countries of the same region to try to compete together with other regions of the world and thus also protect their borders.
Classification of Commercial Treaties:
- International cooperation: Several countries establish an agreement through which they pursue certain common objectives in terms of solidarity aid between themselves and without changing the legal aspects of their countries.
- Partial scope agreement: Treaty whereby countries participating in the treaty decide to develop a clear reduction of trade restrictions to favour trade between the signing countries.
- Free trade agreement: This treaty eliminates commercial barriers within the zone that delimit participating countries seeking better yields and efficiencies of their economy.
- Customs Union: It has the characteristics of a free trade agreement added to the inclusion of tariffs for countries that are not part of the agreement to encourage the consumption of products from countries of the alliance.
- Common market: It is one step ahead of the customs union that includes the free flow of people and capital.
- Economic Union: It is the most comprehensive agreement in the category of commercial agreements at an international level since it means total harmonisation between the systems of the participating countries. The states modify their legal system and economic policies so that there is a unification of the member countries. A clear example of this type of agreement is the European Union.
The models and economic flows of recent years have exposed the benefits of international trade showing how these type of agreements improve general welfare due to the presence of a greater variety of products, more accessible prices and better conditions for the movement of people. But as it is usual, this type of economic change uncovers agents or people who feel that they lose with the implementation of these policies.
For example, local producers often feel that they are not as competitive to foreign producers, so they can go bankrupt or reduce their profit margins. Also, many times companies take advantage of this free circulation of capital to establish their businesses in countries where costs, such as taxation or labour, are lower.
It is because of this feeling in the face of trade that there are winners and losers that in recent years have emerged protectionist movements and even processes to get out of economic unions. The current president of the United States, Donald Trump, has made statements on the implementation of protectionist policies to encourage production in the United States and thus economic growth in the short term.
Another example of protectionist measures is the exit of the United Kingdom from the European Union, which is not only a political process, but will have economic consequences as well. The departure of the United Kingdom from the European Union has its origins in 1975 where political groups wanted to end this Union. In 2016, a referendum was held to determine the exit of the United Kingdom from the European Union, but it was not a uniform result since Scotland, Northern Ireland and Gibraltar voted for permanence. The important demographic weight of England and the large participation in this country were decisive for the result to be given. Noteworthy also, was the fact that the decisive factor that favoured the Brexit success was the vote of the elders. The polls show that only 19% of people between 19 and 24 years supported Brexit, while the vote among pensioners was 59% favourable to the EU departure.
The economic consequences that resulted from the referendum result were the immediate release of British bond yields to the minimum, the devaluation of the currency to levels not seen since 1985, as well as social problems such as racist attacks by the English population.
Although the referendum was not binding on the British government, it was clear that it would have been difficult for the parliament not to follow what the population demanded, so parliament began the process to remove the European Union’s agreements on the part of England.
People in favour of holding the referendum argued that the European Union had changed a lot in recent decades and had more control over the daily life of the British, there was no confidence in the Brussels bureaucracy, they wanted more control of immigration and greater security. In addition, they maintained that belonging to the European Union was an obstacle to economic development where the United Kingdom gave more than what it received from the economic union, added to the excessive European regulations that conditioned the way British companies could compete.
Since the accession of the United Kingdom to the European Economic Community in 1973, there were movements to limit interference on internal policies. For example, in 1985 the Schengen area, consisting of 26 countries, was created to abolish its internal borders, but the United Kingdom remained on the sidelines. It was also integrated in 1993 into the single market that promoted the free movement of goods and people as if the member states were one country, but did not adopt the Euro and continued to have its own currency.
The lands that were in favour of the permanence of the United Kingdom argued that the benefits of belonging to the European Union were the simple sale of goods and services to other countries. And that the free mobility of people allowed incoming flow of new capital which allowed better economic growth and it energised all aspects of the life of the British.
The single market is the great pillar of the European Union, and the central point of this is the free market without commercial tariffs. But not only is it an open market alliance, it also implies the free movement of goods, people, and capital. Therefore, the departure of the United Kingdom implies social, economic and even political consequences to countries within the European Union.
Although the conditions of Brexit have not been negotiated, some speculate that an economic crisis could be unleashed, a decrease in foreign investment and even local investment would be affected. A short-term recession could follow, and it could be profound, but that will not be grasped until after the negotiations conclude and an agreement is reached about the future relationship of the United Kingdom with the European Union. In the following graph, you can see the possible consequences that Brexit would have depending on how the negotiations end.
Graph 39. (2nd February 2016). Here’s how horrific the economic fallout from a Brexit would be. Retrieved 10th December 2017, from http://www.businessinsider.com/hsbc-research-eu-referendum-brexit-consequences-2016-2
But the consequences will not only concern the United Kingdom, but the European Union will also be affected because its attractiveness as a trading partner will no longer have the same image and may weaken its commercial power. Besides, some countries within the trade agreement could follow in the footsteps of Brexit which could threaten the European Union, its policies, and its common currency.
In conclusion, there are currently several menaces on protectionism and anti-global policies in the world that threaten economies and financial markets. There is a general frustration with the political elites which has led to voting for people and unexpected events such as Brexit and the election of Donald Trump in the United States which has led the political nonconformity to the economic sphere.
Even though a few decades ago all the theories and economic advances were centred on globalisation and greater commercialisation in the world, protectionist currents are now gaining strength. Mainly they are due to slow growth in many economies, a social advance that in some cases has stalled and a political change due to the general discomfort of people concerning the elites. When a country begins seeking to protect itself economically and socially, it will trigger a reaction in other countries that recognise the same threats with globalisation and the free mobility of people, which generates a chain effect. That is what we are currently witnessing.