katexReady = {
if (window.katex && typeof window.katex.renderToString === "function") {
return window.katex;
}
return new Promise((resolve, reject) => {
const check = () => {
if (window.katex && typeof window.katex.renderToString === "function") {
resolve(window.katex);
} else {
setTimeout(check, 30);
}
};
check();
setTimeout(() => reject(new Error("katex failed to load")), 8000);
});
}
// Block-cell form so Quarto OJS resolves the `katexReady` dependency before
// downstream cells call katexLabel(...). A plain `function katexLabel() {…}`
// would bypass dependency tracking and error at first call.
katexLabel = {
const ready = katexReady;
return function (mathStr, trailing = "") {
const span = document.createElement("span");
const mathSpan = document.createElement("span");
mathSpan.innerHTML = ready.renderToString(mathStr, { throwOnError: false });
span.appendChild(mathSpan);
if (trailing) span.appendChild(document.createTextNode(trailing));
return span;
};
}International Trade Agreements
ECON 171 · Spring 2026 · Week 9
How much trade do agreements cover?
- WTO-MFN tariffs cover nearly all merchandise trade (164 members) — the trade-weighted average is only ~2.5% for manufactures (2024).
- On top of MFN, ~370 PTAs are in force — roughly half of world trade is now preferential.
- Tariffs are low; the action has moved to rules (services, IP, standards) and to agreements as foreign-policy tools.
Most policy questions today are about which agreement, with whom, on what terms — not whether to trade.
Source: WTO RTA database; UNCTAD; Bown & Crowley (Handbook of Commercial Policy, 2016).
NAFTA → USMCA at 30
Free-trade area
- 1994: NAFTA enters into force — eliminates tariffs on most US, Canada, Mexico trade over 15 years.
- 2024: trilateral goods trade reaches ~ $1.8 T. Mexico becomes the #1 US trading partner.
- Each country keeps its own external tariff against non-members — that’s what makes it a free-trade area, not a customs union.
- 2020: renegotiated as USMCA — new auto rules-of-origin (75% North-American content), labour and environment chapters.
FTA — zero tariffs inside, each member sets its own tariffs outside.
USMCA goods trade — $1.8 T in 2024; Mexico is now the US’s #1 trading partner.
Source: USTR, USMCA Implementation Report (2024); BEA international transactions; Hufbauer & Schott, NAFTA Revisited (PIIE, 2005).
The EU: deepest integration
Customs union → common market → economic union
- 1957 Treaty of Rome creates the EEC — a customs union with a common external tariff.
- 1993 Single Market — free movement of goods, services, capital, and labour.
- 1999/2002 Euro — common currency for 20 of 27 members; ECB sets monetary policy.
- Each step trades sovereignty for integration — tariff (1968), regulatory (1993), monetary (1999).
The EU is the only economic union of significant size. The depth bought integration; Brexit (2020) shows the exit cost is large too.
Each rung trades policy autonomy for deeper market integration.
Source: European Commission, EU at 30; Baldwin & Wyplosz, The Economics of European Integration (6th ed., 2019).
A ladder of integration
Five rungs, each adds one freedom
- PTA — partial cuts on some goods / partners (EU GSP).
- FTA — zero internal tariffs, own external tariff; needs rules of origin (USMCA, AfCFTA).
- Customs union — FTA + common external tariff; drops rules of origin (Mercosur, EEC).
- Common market — CU + free factor movement (EU Single Market).
- Economic union — CM + common currency (Eurozone).
Each rung trades policy autonomy for market access. Higher rungs are rare — the EU is the only major economic union.
Further reading: Bhagwati, Termites in the Trading System (Oxford, 2008); WTO, World Trade Report 2011: The WTO and Preferential Trade Agreements.
Multilateral vs. preferential
Multilateral — WTO / GATT
- MFN (Art. I): a cut to any member extends to every member — non-discriminatory.
- Eight rounds since 1948; Uruguay (1986–94) cut industrial tariffs ~40% and created the WTO.
- Strength: nobody left out. Weakness: 164-member consensus is slow.
Preferential — RTAs / PTAs
- Discriminatory by design: deeper cuts for some partners. ~370 in force; half of world trade.
- Allowed by GATT Art. XXIV / the Enabling Clause if “substantially all” trade is covered.
- Strength: deeper, faster, covers services / IP. Weakness: the “spaghetti bowl”.
References: Bagwell & Staiger, The Economics of the World Trading System (MIT, 2002); WTO RTA database (2024); Baldwin, “Big-Think Regionalism: A Critical Survey” (NBER, 2008).
Viner’s (1950) insight
- Tariff cuts to a partner are a mixed bag. Two effects pull in opposite directions:
- Trade creation. Inefficient domestic production replaced by efficient partner production. Welfare \(\uparrow\).
- Trade diversion. Imports shift from the efficient non-member to the (now tariff-free, but higher-cost) partner. The non-member’s lower cost was hidden by the tariff. Welfare \(\downarrow\).
- Net effect is ambiguous — depends on cost gaps, initial tariffs, and elasticities.
A preferential tariff cut is not unambiguously welfare-improving — unlike a unilateral MFN cut.
Source: Viner, The Customs Union Issue (Carnegie, 1950); KMO Ch. 11.
Setup: Home, Partner, Rest of World
- One good, three countries. Chart →: Home = UK, Partner = EEC, ROW = New Zealand (1973 accession).
- Cost ranking \(c_R < c_P < c_H\) — NZ cheapest (£60), EEC dearer (£80), UK dearest.
- Pre-FTA: uniform MFN tariff \(t\) (£40). Lowest landed cost \(= c_R + t =\) £100 → UK imports from NZ.
- Post-FTA: EEC tariff → 0, NZ still pays \(t\). EEC landed cost \(= c_P =\) £80 \(<\) £100.
- Since \(c_P < c_R + t\), the UK switches to the higher-cost EEC — trade is diverted off NZ.
The tariff revenue the UK used to collect on NZ butter vanishes with diversion — pure loss.
Framework: KMO Ch. 11; Pomfret, The Economics of Regional Trading Arrangements (Oxford, 1997).
Decomposing the welfare change
- Home welfare change \(\Delta W_{H} = \underbrace{\Delta CS}_{\text{consumer gain}} + \underbrace{\Delta PS}_{\text{producer loss}} + \underbrace{\Delta TR}_{\text{tariff revenue}}\).
- The creation triangles (\(\Delta CS\) and the corresponding \(\Delta PS\) loss) net to a positive triangle — efficiency gain.
- The diversion rectangle = (per-unit cost difference \(c_P - c_R\)) × the pre-FTA import volume (the trade diverted off ROW). It is negative — pure transfer to less-efficient partner producers.
- Sign of \(\Delta W_H\): ambiguous. Sign of \(\Delta W_P\): positive (gain export market). Sign of \(\Delta W_R\): negative (lose export market).
The Partner’s gain can exceed the ROW’s loss + Home’s net loss — aggregate welfare may rise even when each country’s incentives diverge.