A trade agreement is any contractual arrangement between states concerning their trading relationships. It can be bilateral or multilateral. It typically involves reducing or eliminating tariffs and nontariff barriers to trade, lowering the costs of imports and encouraging exports. It may also involve rules of origin, intellectual property, investment, and economic security considerations.
There are different types of trade agreements: The most common type is a free trade agreement (FTA). These reduce or eliminate most tariffs and other forms of trade restrictions between the signatories. FTAs often include a most-favored-nation clause, which ensures that each country benefits as much as possible from the agreement. In addition, they typically contain provisions requiring each party to lower its barriers to the goods of the other, which is known as reciprocity. This requirement is vital to the success of any trade agreement because it ensures that each party gains as much as possible from the agreement, and that the concessions made by one are not offset by concessions made by another.
The United States has several comprehensive trade agreements, including free trade agreements with Canada, Mexico, and Central America and Dominican Republic. These are called “deep” trade agreements because they go beyond lowering tariffs and cover a broad set of policies that influence trade behind the border, such as regulatory standards, competition policy, and government procurement. They have been found to boost goods and services trade, foreign direct investment, and global value chain (GVC) participation significantly more than shallow trade agreements.