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1、PreferentialTradingAgreementsAllinternationaltradeagreementsinvolvea“nondiscriminatory”iteminthereductionintariffrates.Forexample,whentheUnitedStatesagreeswithGermanytoloweritstariffonimportedmachinery,thenewtariffrateappliestomachineryfromanyothernations.In
2、fact,theUnitedStatesgrantsmanycountriesatreatmentknownas“mostfavorednation”(MFN),assuringthattheirexporterswillpaytariffsnohigherthanthatofthenationthatpaysthelowest.AllcountriesgrantedMFNstatuspaythesamerates.TariffreductionunderGATTaremadeonanMFNbasis.Ther
3、earesomeimportantcases,however,inwhichnationsestablishpreferentialtradingagreementsunderwhichthetariffstheyapplytoeachother’sproductsarelowerthantheratesonthesamegoodscomingfromothercountries.TheGATTingeneralprohibitssuchagreementsbutmakesaratherstrangeexcep
4、tion:ItisagainsttherulesforcountryAtohavelowertariffsonimportsfromcountryBthanonthosefromcountryC,butitisacceptableifcountriesBandCagreetohavezerotariffsoneachother’sproducts.Thatistosay,theGATTforbidspreferentialtradingagreementsingeneral,asaviolationoftheM
5、FNprinciple,butallowsthemiftheyleadtofreetradebetweentheagreeingcountries.Ingeneral,twoormorecountriesagreeingtoestablishfreetradecandosoinoneoftwoways.Theycanestablishafreetradearea,inwhicheachcountry’sgoodscanbeshippedtotheotherwithouttariffs,butinwhichthe
6、countriessettariffsagainsttheoutsideworldindependently.Ortheycanestablishacustomsunion,inwhichthecountriesmustagreeontariffrates.TheNorthAmericanFreeTradeAgreement,whichestablishesfreetradeamongCanada,theUnitedStates,andMexico,createsafreetradearea:Thereisno
7、requirementintheagreementthat,forexample,CanadaandMexicohavethesametariffrateontextilesfromChina.TheEuropeanUnion,ontheotherhand,isafullcustomsunion.Allofthecountriesmustagreetochargethesametariffrateoneachimportedgood.Thedifferencebetweenafreetradeareaandac
8、ustomsunionis,inbrief,thatthefirstispoliticallystraightforwardbutanadministrativeheadache,whilethesecondisjusttheopposite.Oncecustomsunionisestablished,tariffadministrationisrelativelyeasy:Goods
