What is a Trade Agreement?

Trade agreement

A trade agreement is a set of rules that regulates international economic interactions. Generally, trade agreements reduce government barriers to trade (such as tariffs or quotas) and internal restrictions on commerce (such as regulations or taxes). Countries negotiate and accede to the rules of international trade to improve their trading positions. There are three types of trade agreements: bilateral, regional, and multilateral.

Multilateral trade agreements are generally negotiated by regions of the world, or groups of countries that share historical and demographic characteristics. Regional trade agreements are negotiated by groups of countries that are near each other geographically and typically share economies. Bilateral trade agreements are negotiated by individual governments.

The most common type of trade agreement is a free trade agreement (FTA). In general, FTAs offer preferential treatment for a given product category based on the country of origin of the goods in question. This lowers the landed cost of imports and stimulates international trade.

Typical provisions of an FTA include schedules for lowering tariffs on qualified products; provisions to allow participation in government procurement entities (i.e., “Buy National” requirements); and provisions to protect intellectual property and other business interests. Since the implementation of the General Agreement on Tariffs and Trade in 1948 and its successor, the World Trade Organization, worldwide tariff levels have dropped dramatically, and trade has expanded substantially.

Because of the benefits of trade, most governments are willing to agree to the rules governing the practice. However, a trade agreement is only effective when its rules are enforced. This is why most trade agreements include enforceable procedures for dispute resolution and have “teeth” in the form of suspension of the benefits of the trade agreement in the event of noncompliance.