ATL Standard

International trade has been a cornerstone of the global economy since ancient times. Over the past four decades, trade processes and regulations have become more organized. Countries now create trade agreements to establish standards that allow for tariff-free trading. However, these agreements are not always permanent. Recent research from Georgia Tech offers insights into predicting the stability of these relationships.

Professor Tibor Besedes from the School of Economics categorizes trade agreements into two types: shallow and deep. Shallow agreements focus on reducing tariffs, such as the United States-Mexico-Canada Agreement, which simplifies trading by lowering tariffs among the U.S., Mexico, and Canada. In contrast, deep agreements involve more comprehensive economic integration between countries.

“Often in deep agreements, countries start to harmonize standards; for example, car emission regulations are identical across all the countries signing the agreement, which makes it easier for goods to travel between borders,” Besedes explained.

The European Union is an example of a deep agreement with extensive integration that includes a common currency—the euro—facilitating easier trade among its members.

Researchers used data from the United Nations commodity trade database and Baier and Bergstrand’s trade agreements database to develop a mathematical model assessing how trade depth impacts stability. The findings were unexpected: both shallow and deep agreements lead to less stable relationships, but shallow agreements have a larger impact. While both reduce costs and encourage international trading experiments, these experiments can fail and cause instability leading to potential dissolution—a scenario exemplified by Brexit when the U.K. exited the EU in 2020.

“Shallow agreements reduce the cost of trading,” Besedes noted. “When a country signs a trade agreement, it reduces tariff rates. That reduces the cost of trading in the long run because the country has already established that relationship, and it’s now even easier to trade future products.”

Although most trade agreements last several years, they may be subject to change due to political shifts.

“Tariffs going up could make existing relationships less stable," said Besedes. "On the flip side, it also means that other countries could impose tariffs on the U.S., and there will be less of an opportunity for American businesses to export their products.”

Predicting future changes in global trade remains uncertain; however, expected stability may no longer be guaranteed.