A trade agreement is a legal agreement between two countries that reduces or eliminates barriers to international trade. Examples include the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), United States-Mexico-Canada Agreement (USMCA) and bilateral Free Trade Agreements between individual countries.
Trade agreements offer businesses predictability and stability by binding governments to a set of rules. By promising not to raise tariffs or other protectionist measures, they enable businesses to invest with confidence and consumers to fully reap the benefits of competition – choice and lower prices.
Modern trade agreements also discipline how governments collect tariffs on imported goods. Instead of imposing them unilaterally, they specify detailed obligations, require that complaints be brought to independent adjudicators and authorize retaliation against non-compliance. This limits the potential for a government to act in bad faith and to impose excessive tariffs.
As for services, modern trade agreements define four modes of supply and include a wide range of specific obligations. They also establish a framework for adjudicating disputes that might arise over domestic regulations that inhibit foreign service providers’ activities in the country.
The extent to which trade agreements are deployed varies between economies. Free-Trade Stalwarts — such as the European Union, Chile, Singapore and Mexico — tend to execute broad-based, multilateral agreements with their most important trading partners. Selective Optimizers — such as the United States and Gulf Cooperation Council states — execute fewer trade agreements but have high scores across measures of coverage, liberalization and enforcement.