Question

Describe the three rationales for trade agreements, namely

a. Externality

b. Politcial Support

C. Politcial Commitment

Answer 1

a) An externality is a cost or benefit incurred by the parties who do not choose to incur those benefits or expenses. It can be positive or negative. A positive externality would increase the utility of the party without addressing any costs while a negative externality like air pollution common in case of manufacturing industries lower the utility and affects the health of those residing near the factories. In trade, the most common practices of externality are free riding where small countries who have not yet gained economies of scale can avail imports at a cheaper price than domestic producers can produce them.

b) Political support is essential in trade agreements as tariffs and subsidies on imports and exports are decided by the political will and government intervention. There are trade agreements where some countries from regional blocs preventing other non-member countries to not avail the benefit of trade among similar countries.

c) Political commitment towards an international policy is vital to initiate a trade agreement effectively within a country and across borders. Commitment towards selling cheap goods to a country in exchange of a good in which another country has a comparative advantage leads to positive externality and strengthen the bond of trade in terms of goods and services across borders and both countries are better off in such a trade.