National Trade Policies: Economic Impact & Market Share

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  • 0:08 Trade Agreements
  • 1:11 Reciprocity
  • 2:15 Most-Favored-Nation Status
  • 3:44 Non-Tariff Restrictions
  • 4:27 Market Share
  • 4:56 Lesson Summary
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Lesson Transcript
Instructor: Jessica Whittemore

Jessica has taught junior high history and college seminar courses. She has a master's degree in education.

This lesson will explain national trade policies. In doing so, it will highlight reciprocity and most-favored-nation status. It will also explain non-tariff restrictions and market share.

Trade Agreements

Trade agreements are something we are all rather familiar with. For instance, as a young girl I traded baseball cards on a regular basis. There's also my daughter, who has made an art of turning her lunch table into a mini-stock market, trading off her chocolate chip cookies for fruit roll-ups or potato chips. Although these examples of trade are rather simple, they share some characteristics with the topic of today's lesson - national trade agreements.

For starters, let's define a trade agreement. A trade agreement is a predetermined arrangement between states concerning their trade relationships. Unlike my daughter who trades her cookies sort of willie nilly or on the fly, national trade agreements are contractual agreements that have been formally arranged. When speaking of a trade agreement, they can be bilateral or multilateral. With bi meaning two, as in bicycle, a bilateral trade agreement is a trade agreement between only two entities. Being really easy to figure out, a multilateral trade agreement is a trade agreement between multiple entities.

Reciprocity

With this in mind, there are several different types of trade agreements. For instance, there is what is called reciprocity. In a trade agreement, reciprocity denotes each member of the trade agreement making economic gain from the agreement. Stating this simply, we can use the example of NAFTA, the North American Free Trade Agreement. In this agreement between the U.S., Mexico, and Canada, each country went in expecting economic gain by reducing or even eliminating many of their tariffs, or taxes paid on imports and exports.

Sort of in a you scratch my back, I'll scratch yours kind of way, NAFTA was built on reciprocity in which all parties expected to gain economically. For instance, Canada exports crude oil to the U.S. Since many of the tariffs between the two countries have been removed, Canada is able to sell the oil at a lower price. This works out for Canada quite well, but it also works out for the U.S., because they are then able to pass it onto American consumers at a lesser price as well.

Most-Favored-Nation Status

Moving away from reciprocity, there is also what is called most-favored-nation status. Stated very simply, most-favored-nation status demands that a country is given the best and most profitable economic trade agreement. Putting this into crazy simple terms, I often make my kids give each other most-favored status. For example, if my oldest makes a deal with her younger brother to trade one piece of gum for a Lifesaver, I make her give the same trade to her younger sister even though she could probably convince her to trade two pieces of gum for one Lifesaver.

Giving a more grown-up national example, let's say the U.S. has given Britain, one of its most-favored nations, a deal that they will only charge them a $1 tariff for each manufactured good, say car parts, it exports to the U.S. However, a year later, Japan makes a deal with the U.S. for 75¢. If the U.S. agrees to this 75¢ for Japan, it will then need to extend the same deal to Britain, one of its most-favored-nation trading partners. This can cause huge economic impact on an economy, because it forces a nation to almost level the playing field for those that they deem most-favored.

Before we move on, we should note that these most-favored-nation trade agreements have become extremely common since the 1995 creation of the World Trade Organization, an international organization overseeing the rules of trade between nations.

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