2.3. Government Action and International Trade

Trade Policy

Markets are becoming increasingly global as real incomes rise in countries all over the world. Businesses will be unable to keep pace with international competitors without easy access to overseas markets. Eliminating barriers to free trade and cross-border investment will increase business and consumer choice, and reduce the cost of goods and services.

International trade policy operates within the General Agreement on Tariffs and Trade (GATT), now being taken further in the new World Trade Organisation (WTO).

GATT was established by 23 countries in 1947 with the aim of negotiating mutual reductions in tariffs and restrictions to free trade. GATT membership has now grown to over 150 countries. The latest round of negotiations, which started in 1986 in Uruguay, concluded on 11 December 1993 with the signing of an historic agreement in Switzerland between participating members. Its 28 separate accords extended fair trade rules for the first time to agriculture, textiles, services, intellectual property, and foreign investment. Member countries have agreed to cut tariffs on industrial products by a third.

A newly created World Trade Organisation will oversee the implementation of the GATT Uruguay round agreements and continue to promote open markets in international trade.

The European Union

The European Community (EC) began in 1958 when six countries – West Germany, Italy, France, Belgium, the Netherlands, and Luxembourg – signed the Treaty of Rome, committing themselves to the formation of common market.

By 1993, the UK, Spain, Portugal, Greece, Eire, and Denmark had also joined, making a total of 12 member states (the ‘EU12’) and forming market of over 350 million people.

On 1 January 1995, the number of EC countries increased to 15, as Austria, Finland, and Sweden became full members. Turkey and Cyprus have also applied for membership, with many more considering joining, such as the former communist countries of Poland and Hungary. Since February 1992 the EC has become known as the European Union (EU).

EU objectives

The EU has a number of broad objectives which will dramatically alter the way in which people live and conduct business.

• To form a customs union. The EU to be a customs union whereby:

• Participating members agree not to place tariffs on goods and services imported from other EU member countries

• EC member countries establish a common external tariff on all goods imported from non-EU countries. The common external tariff is designed to protect business and jobs in the EU from cheap imports from outside the EU. A tariff is simply a tax on imports imposed by the importing country to reduce domestic demand for foreign goods. Tariff rates applied to the price of imported goods and services have to be the same in each EU country. If the UK applied a 20% tariff to the price of imports from non EU countries, while France only applied a 10% tariff, a Japanese firm exporting to the UK could first export their products to France and then ship them to the UK without incurring extra tax.

• To encourage freedom of movement. In addition to the removal of tariffs between member countries, the EU aims to remove all barriers to the free movement of goods and services, capital, and people across EU borders. People in the EU should be free to live and work in any member state and be entitled to the same conditions of employment, health care, and social security benefits as anyone else in their chosen member country.

• To establish a Single European Market. Although the customs union had been in existence for 30 years, many nontariff barriers to trade remained between EU member countries. The Single European Market Act 1986 set an agenda and timetable for the removal of all other barriers to trade and the free movement of goods, services, capital, and people. The Single European Market (or internal market) came into force at midnight 1 January 1993. Member states are now actively working towards the removal of such barriers to movement and free trade as:

• Frontier checks at custom posts

• Cumbersome importing documentation designed to raise importing costs

• Differential national product and safety standards

• The application of separate – and sometimes unnecessary – health checks

• Major differences in indirect taxation, such as rates of value added tax, excise duties and duty-free allowances. 

• To create economic and monetary union. The European Union (EU) was formally agreed on 7 February 1992, when individual member governments signed the Maastricht Treaty. The main focus of the agreement was the creation of a framework for European Economic and Monetary Union (EMU), involving the creation of a single currency and common economic policy by 1 January 1999.