A trade agreement (also known as trade pact) is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common trade agreements are of the preferential and free trade types, which are concluded in order to reduce (or eliminate) tariffs, quotas and other trade restrictions on items traded between the signatories.
The logic of formal trade agreements is that they outline what is agreed upon and the punishments for deviation from the rules set in the agreement. Trade agreements therefore make misunderstandings less likely, and create confidence on both sides that cheating will be punished; this increases the likelihood of long-term cooperation. An international organization, such as the IMF, can further incentivize cooperation by monitoring compliance with agreements and reporting third countries of the violations. Monitoring by international agencies may be needed to detect non-tariff barriers, which are disguised attempts at creating trade barriers.
Trade pacts are frequently politically contentious since they may change economic customs and deepen interdependence with trade partners. Regulatory changes may also be contentious. For instance, trade agreements have been used by nicotine- and alcohol-industry lobbyists to block, delay, and weaken public health measures like health warning labels. Free trade agreements have also attempted to regulate internet use, extend and strengthen legal monopolies, and change criminal law, privacy law, healthcare, labour law, and environmental law. Increasing efficiency through "free trade" is a common goal. For the most part, governments are supportive of further trade agreements.
There have been however some concerns expressed by the WTO. According to Pascal Lamy, Director-General of the WTO, the proliferation of regional trade agreements (RTAs) "...is breeding concern — concern about incoherence, confusion, exponential increase of costs for business, unpredictability and even unfairness in trade relations." The position of the WTO is that while the typical trade agreements (called preferential or regional by the WTO) are useful to a degree, it is much more beneficial to focus on global agreements in the WTO framework such as the negotiations of the current Doha round.
The anti-globalization movement opposes such agreements almost by definition, but some groups normally allied within that movement, e.g. green parties, seek fair trade or safe trade provisions that moderate real and perceived ill effects of globalization.
Classification of trade pacts
By number and type of signatories
There are three different types of trade agreements. The first is unilateral trade agreement, this is what happens when a country wants certain restrictions to be enforced but no other countries want them to be imposed. This also allows countries to decrease the amount of trade restrictions. That is also something that does not happen often and could impair a country.
The second is classified as bilateral (BTA) when signed between two sides, where each side could be a country (or other customs territory), a trade bloc or an informal group of countries (or other customs territories). Both countries loosen their trade restrictions to help businesses, so that they can prosper better between the different countries. This definitely helps lower taxes and it helps them converse about their trade status. Usually, this revolves around subsided domestic industries. Mainly the industries fall under automotive, oil, or food industries.
A trade agreement signed between more than two sides (typically neighboring or in the same region) is classified as multilateral. These face the most obstacles- when negotiating substance, and for implementation. The more countries that are involved, the harder it is to reach mutual satisfaction. Once this type of trade agreement is settled on, it becomes a very powerful agreement. The larger the GDP of the signatories, the greater the impact on other global trade relationships. The largest multilateral trade agreement is the North American Free Trade Agreement between the United States, Canada, and Mexico.
By geographical region
These are between countries in a certain area. The most powerful ones include a few countries that are near each other in a geographical area. These countries often have similar histories, demographics and economic goals.
The North American Free Trade Agreement (NAFTA) was established on January 1, 1989, between the United States, Canada, and Mexico. This agreement was designed to reduce tariff barriers in North America.