What is a Trade Agreement?
Trade agreement
A trade agreement sets rules for international economic policy. In the most common type of trade agreement, governments commit to limit protectionist barriers to trade by lowering tariffs or other trade barriers on products that are imported and exported across the borders of the countries that signed the agreement. Trade agreements also set rules to prevent the misuse of subsidies that can distort trade through their support for domestic industry.
The most common types of trade agreement are regional trade agreements (RTAs), bilateral investment treaties (BITs) and World Trade Organization (WTO) agreements.
RTAs typically include three or more countries that are located in a specific geographical region with similar histories, demographics and economic goals. A well-known example of an RTA is the U.S.-Mexico-Canada Agreement, or USMCA (entered into force on July 1st, 2020).
Bilateral BITs are usually between two countries that have strong commercial and diplomatic relations. These agreements help protect private investments and promote economic growth through increased market access in the partner country.
While trade agreements do not always succeed in preventing protectionism, they are still an important tool for shifting the global economy toward more free and competitive markets. They are a vital component of the world’s rule-based trading system and have helped to reduce corporate demand for special government privileges. Despite the many criticisms that have surfaced, the thousands of pages of trade agreements that have been negotiated over the years have shifted the world in the direction of freer trade and have reduced the level of protectionist interference with market forces.
