Reciprocal, << rih SIHP ruh kuhl, >> trade agreement is a pact between two or more nations to lower tariffs or other trade barriers on certain goods or services. Reciprocal trade agreements form the basis of most nations’ foreign trade policies.
Most reciprocal trade agreements begin as pacts between two governments to lower specific tariffs or other trade restrictions. Such pacts are called bilateral trade agreements. Since 1947, most bilateral trade agreements have been expanded to include other countries. That year, 23 countries, including the United States and Canada, signed the General Agreement on Tariffs and Trade (GATT). They received tariff reductions on goods specified in various bilateral trade agreements. The GATT provision that grants the reductions is called a most-favored-nation clause. See General Agreement on Tariffs and Trade .
As an example of how a reciprocal trade agreement might be arranged, suppose that one nation produces more wheat than it needs–but not enough shoes. Another country may produce too many shoes but not enough wheat. The two governments would negotiate a bilateral trade agreement. The first country would reduce by a certain percentage its tariff on shoes imported from the second country. The second country would similarly reduce its tariff on wheat imported from the first country. Under the most-favored-nation clause of the GATT, each country would extend its tariff reductions to all GATT countries. These nations could then trade under the lower tariff even if they had not signed a trade agreement with that country. Most nations have subscribed to the GATT.
In 1995, the World Trade Organization (WTO) was set up to administer the GATT and to reduce barriers to trade in services and in other areas not covered by the GATT. As a result, the most-favored-nation clause began to be applied to trade in services and other areas.
Reciprocal trade agreements have been an important part of U.S. foreign trade policy since 1934. That year, Congress passed the first Reciprocal Trade Agreements Act. Since then, periodic legislation has allowed the government to continue such trade policies.
Today, some reciprocal trade agreements are designed to encourage economic growth in developing countries. For example, industrial nations may agree to import manufactured products from developing countries at a lower tariff rate than is charged for the same products made by other industrial nations. At the same time, the developing countries may keep their own tariffs high to encourage expansion of their domestic industries.
