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1、PreferentialTradingAgreementsAllinternationaltradeagreementsinvolvea“nondiscriminatory”iteminthereductionintariffrates.Forexample,whentheUnitedStatesagreeswithGermanytoloweritstariffonimportedmachinery,thenewtariffrateappliestomachineryfromanyothernations.Infact,theUnitedStatesgrantsm
2、anycountriesatreatmentknownas“mostfavorednation”(MFN),assuringthattheirexporterswillpaytariffsnohigherthanthatofthenationthatpaysthelowest.AllcountriesgrantedMFNstatuspaythesamerates.TariffreductionunderGATTaremadeonanMFNbasis.Therearesomeimportantcases,however,inwhichnationsestablish
3、preferentialtradingagreementsunderwhichthetariffstheyapplytoeachother’sproductsarelowerthantheratesonthesamegoodscomingfromothercountries.TheGATTingeneralprohibitssuchagreementsbutmakesaratherstrangeexception:ItisagainsttherulesforcountryAtohavelowertariffsonimportsfromcountryBthanont
4、hosefromcountryC,butitisacceptableifcountriesBandCagreetohavezerotariffsoneachother’sproducts.Thatistosay,theGATTforbidspreferentialtradingagreementsingeneral,asaviolationoftheMFNprinciple,butallowsthemiftheyleadtofreetradebetweentheagreeingcountries.Ingeneral,twoormorecountriesagreei
5、ngtoestablishfreetradecandosoinoneoftwoways.Theycanestablishafreetradearea,inwhicheachcountry’sgoodscanbeshippedtotheotherwithouttariffs,butinwhichthecountriessettariffsagainsttheoutsideworldindependently.Ortheycanestablishacustomsunion,inwhichthecountriesmustagreeontariffrates.TheNor
6、thAmericanFreeTradeAgreement,whichestablishesfreetradeamongCanada,theUnitedStates,andMexico,createsafreetradearea:Thereisnorequirementintheagreementthat,forexample,CanadaandMexicohavethesametariffrateontextilesfromChina.TheEuropeanUnion,ontheotherhand,isafullcustomsunion.Allofthecount
7、riesmustagreetochargethesametariffrateoneachimportedgood.Thedifferencebetweenafreetradeareaandacustomsunionis,inbrief,thatthefirstispoliticallystraightforwardbutanadministrativeheadache,whilethesecondisjusttheopposite.Oncecustomsunionisestablished,tariffadministrationisrelativelyeasy:
8、Goods
