A trade agreement is a legal pact between two or more countries that defines the rules and regulations for trade. Its main aim is to reduce or eliminate government barriers – such as tariffs and quotas — that prevent or restrict international trade between countries. It can also include rules aimed at promoting foreign investment and other issues such as food health and safety standards, intellectual property protection, or labor and environmental standards.
Trade agreements are usually multilateral in scope, covering the entire membership of an organization such as the World Trade Organization (WTO). They often share common binding rules and dispute settlement mechanisms. These arrangements can have major impacts on trade flows by reducing tariffs or eliminating barriers to substantially all trade among the parties, and they may also have important spillover effects on non-member countries.
A more limited type of international economic arrangement is a bilateral free trade agreement (FTA), between two countries. Such agreements are often characterized by their mutually beneficial terms, and by the principle of reciprocity, which requires that each party benefit at least as much as it loses from trade with the other parties to the agreement.
FTAs can offer many benefits to businesses, including reduced or eliminated duties and more predictable rules for imports. These factors can lower the overall landed cost of goods and services that are sold across borders, making them more competitive in the market. They can also make it easier to participate in government procurement and establish more stable business conditions for companies in the country where the FTA applies.
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