A trade agreement is a set of rules agreed upon by two or more countries that regulate their economic interactions. These agreements typically limit barriers to trade (such as tariffs, quotas, or internal taxes or regulations) and include commitments to reduce regulatory inconsistencies between trading partners. They also contain nontariff elements that support supply chain resilience and reduce the risk of corruption in international investment and trade, as well as provisions governing intellectual property protection and labor standards. The linchpin of most trade agreements is the Most-Favoured Nation (MFN) clause, which prevents one country from lowering barriers to its trading partners without also reducing them for all other trading partners. Trade agreements also provide a framework for ongoing negotiation of new rules that can improve the trading environment for all parties.
While there are critics who argue that these arrangements are not “free trade” in the sense of the free-market philosophy, they do have an anti-protectionism element that acts as a check on the ability of corporations to use lobbying efforts to extract government favors through tariffs, Buy National procurement requirements, agriculture subsidies, and other forms of costly, disguised protectionism. In fact, the core trade agreement approach has helped to shift the world in the direction of greater trade liberalization and created a rules-based system that keeps trade wars at bay.
There are various types of trade agreements, including bilateral Free Trade Agreements (FTAs), multilateral Comprehensive Trade Agreements such as the World Trade Organization’s General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization, and plurilateral trade agreements such as the Trans-Pacific Partnership and the United States-Mexico-Canada Agreement (USMCA). These agreements vary in scope from country to country, but in all cases they make it easier for U.S. businesses to enter foreign markets, compete effectively in those markets, and expand their global reach by lowering costs and eliminating barriers.
