There’s several components to trade deals, of increasing complexity depending on the deal and the countries who negotiated them. I’ll try to summarise some of the common components. Not all trade deals have all of these, and some may have other components.
The starting point for most trade deals, historically, has been an agreement to lower tariffs reciprocally, or even eliminate them.
While tariffs raise money for governments, they increase prices that the government’s own citizens pay for imported goods. They also hinder market access for companies in country A who want to sell in country B, and vice versa. So lowering tariffs is usually what starts negotiations. Those can be reciprocal reductions on tariffs, item by item, or just across the board reductions.
But wait: what if the widget company in country A operates its factory in country C, which is not part of the trade deal, and then brings the widgets back to A, and then sells them in country B? That gives country C some of the benefit of the deal, even tho’ C is not a party.
To avoid giving the factory in C the benefit of the lowered tariff, the deal has to include country of origin requirements.
That can get complicated, depending on the sector. For agricultural products, it’s pretty easy - the cow or wheat or whatever had to be grown in B to get low tariffs from A.
But what about manufactured goods? What if the widget factory in B got most of its raw materials from D, some finished components from E, and then put them together in B? When it ships the finished product from B to sell in A, does that product qualify for low tariffs from A?
Most deals have quotas on how much foreign material is allowed in the finished product to qualify as a product from B. What proportions are needed for this issue is very thorny, and can vary from sector to sector and type of product.
(As a factual aside, I understand this is one of the issues the US is raising in the NAFTA negotiations, to require a greater proportion of made-in-Canada components in cars made in Canada, to be eligible for the low tariff coming into the States. If Canadian car manufacturers can’t find a domestic source for components to meet that quota, they’ll have to import more components from the US (instead of Europe or China), incorporate the US-made components into their products, and then ship the finished product back to the US for the low tariff. Whether that’s a fair concern or not I don’t know, and seems more GD. )
And then there’s internal trade barriers. What if country A says that all beef sold to the consumer has to have the country of origin prominently displayed on the package, along with the country’s flag? Even if the beef is admitted on the low tariff, that type of packaging requirement is a not-so-subtle signal to the consumers in A to “Buy beef from A and support our A farmers!” If the labelling doesn’t serve a legitimate consumer protection purpose, it’s likely an internal barrier.
Or the BC wine example, currently in dispute: BC says only BC wine can be sold in supermarkets. Foreign wine can only be sold in the liquor stores. The US says that’s an internal trade barrier, since it makes it easier to buy BC wine.
Then there can be agreements on the names of products. For instance under NAFTA, only corn whiskey from the US can be marketed as “bourbon” in the three NAFTA countries, “tequila” has to come from Mexico, and “Canadian rye whiskey” has to come from Canada (subject again to content source rules).
Then there’s anti-dumping rules. If an industry in B is getting some of its components cheaply because of government subsidies and then sells them in A, that’s considered an unfair dumping because it drives A’s industries in that sector out of business. So if a country is dumping a particular product into A’s markets, the agreement may allow A to impose specific counter-vailing tariffs on that product from B, to raise the price of that product in A’s markets.
(Again a factual aside: Canada’s softwood lumber industry is often accused of dumping softwood lumber into the US, unfairly competing against US lumber companies. The Canadian response is usually a variant of “Have you seen our forests in BC? We have a huge supply so we can produce it at a low price!” Then the US industry says, “Yeah, but that’s Crown land and the BC government is giving you a sweetheart deal on stumpage fees, so it’s dumping!” And the BC industry says “Any US company can come up and buy logging rights at the same price!” And the US companies say something else, and the dance goes on. Who’s right? Dunno. GD territory.)
Another element in some trade deals is that a country has to treat the businesses of the other country the same. If a shoe company from B opens a shoe factory in A, country A can’t favour shoe factories owned by A’s citizens over the B company. Countries can be quite inventive in favouring their own industries, like a requirement that the armed forces of A must buy their boots from companies owned by A citizens, or more restrictive labour standards and financing rules on the B shoe factory, or even nationalising the B shoe factory and selling it to the A shoe company. Those would normally all be breaches of a trade agreement. Country A has to treat foreign investment from B the same as investors from A.
Another issue may be labour standards or environmental standards. What if one country has significantly lower wages and laxer environmental standards? That could give the industries from that country a major cost of production advantage, enabling it to sell its products at a significantly lower price in the other country. This one is a harder issue, because things like average wages in different countries aren’t necessarily set by the government. They’re just naturally lower in some economies. This was a major issue in NAFTA, since Mexico’s wages and environmental standards were much lower than in Canada and the US , which were much closer to each other. They dealt with those issues with a couple of side protocols. Don’t know how successful that’s been. Again, GD.
So it gets complicated. What if A is convinced B is breaching the rules? Almost every trade deal has a dispute-resolution mechanism, usually a type of arbitration, before a panel of trade experts drawn from both countries.
Country A files a detailed complaint against B. B responds. The trade panel makes a ruling. If it finds the complaint valid, the remedy can vary depending on the trade agreement. Under some agreements, the panel may be able to order B to stop the practice. Or, it may authorise A to impose counter-vailing tariffs, targetting B’s industry which is in breach. Depends on the dispute-resolution mechanism. And there may be an appeal to an appeal board. And so on.
Side comment: it seems like the dispute-resolution panels are a big sticking point for the US in the current NAFTA talks, with the US saying they should be eliminated or watered-down, and Mexico and Canada saying the dispute-resolution process is at the heart of the deal. What’s the point of rules if there’s no way to enforce them? Again, GD.
So, that’s my summary of what is meant by “rules-based trade agreements”. Feel free to ask follow-up questions.
