A trade agreement is a contractual arrangement between government entities that establishes rules and obligations for the conduct of international trade. These arrangements can cover a variety of issues, including but not limited to tariffs, nontariff barriers, and other forms of protectionist economic policies. Often, these agreements are mutually beneficial and aimed at achieving goals such as economic growth and development. They may also aim to address issues such as market access, investment, and competition policy.
One of the most common types of trade agreements is the free trade agreement (FTA). FTAs generally remove barriers to trade between members by lowering or eliminating tariffs and other trade-distorting practices. These arrangements may be bilateral, regional, or multilateral.
In addition to eliminating tariffs, many FTAs contain provisions that allow countries to offer preferential treatment to some goods, known as Most-Favoured-Nation status. Most-Favoured-Nation benefits can be an incentive for governments to reduce subsidies that benefit certain domestic industries, and they can also help ensure that trading partners treat each other fairly. By establishing specific rules and procedures for determining whether or not a country is receiving most-favoured-nation status, the terms of an FTA can be enforced by neutral adjudicators rather than by a government’s unilateral determination.
Economists argue that the primary function of trade agreements is to set limits on protectionism through reciprocal, market-opening commitments. While this mercantilist approach falls short of the ideals of economists that favor unilateral free trade, it can make progress toward a liberalized world by balancing the interests of farmers, manufacturers, and service industries that want access to foreign markets against those of politically powerful entities that seek government protection from import competition.