Unsurprisingly, economic theory, as it applies to trade in services, is still under development. In general, economists now believe that the fundamental theory of comparative advantage, as it applies to goods, also applies to cross-border trade in services. Geza Feketekuty says: «The theory of comparative advantage as a theoretical statement on economic relations should be as valid as the products covered by the theory are negotiable physical goods such as shoes and oranges, or tradable services such as insurance and mechanical engineering. [24] Increasing import competition also has dynamic advantages, as domestic producers are forced to become more efficient in competing in a lower price environment. Lower prices can also have a positive impact on monetary policy; Because import competition reduces the risk of inflation, central banks can adopt a more liberal monetary policy, with lower than usual interest rates. These lower rates benefit investment, housing and other productive sectors. To give a real picture of the nation`s situation, the current account is often measured as a percentage of GDP; when a country develops, a larger current account surplus or deficit is not concerned, as the economy can absorb its effects more easily. Trade agreements are generally unilateral, bilateral or multilateral. Yi notes that tariff reductions in these global supply chains have a much greater impact than on traditional trade. Suppose, for example, that China, Bangladesh and the United States each reduce their tariffs by 1% and that imported substances and buttons account for half of the cost of the China-made suit; the cost of manufacturing the suit in China will then be reduced by 0.5 percent. At the same time as the 1% reduction in U.S.
tariffs, the cost to the U.S. consumer would be reduced by 1.5%. If the complaint had been entirely fabricated in China, the cost to the consumer would have been reduced only by reducing U.S. tariffs, or 1%. Almost all Western economists today believe in the desire for free trade, and this is the philosophy championed by international institutions such as the World Bank, the International Monetary Fund and the World Trade Organization (WTO). And that`s what the Second World War thought, when Western leaders launched the General Agreement on Tariffs and Trade (GATT) in 1947. However, in the event of trade diversion, a member makes sales at the expense of a more competitive producer in a country that is not a member of the bloc, simply because its products enter the market of its partner duty-free, while the non-member producer, more competitive, is subject to a discriminatory obligation. [20] Third-country exporters with a comparative advantage under equal competitive conditions are losing their commercial character.
Regional trade agreements are very difficult to conclude and claim when countries are more diverse.