A trade agreement (also called a trade pact or trade deal) is a wide-ranging tax, tariff and trade treaty that reduces or eliminates duties, quotas, and other trade restrictions. This makes it easier and cheaper for your company to export goods and services to trading partner countries.
The primary function of trade agreements is to limit protectionism via reciprocal market-opening commitments and a system of disciplines on government actions that distort trade. This mercantilist approach falls short of economists’ unilateral free-trade ideal, but it does move trade policy in the direction of liberalization by balancing the interests of politically powerful groups of farmers, manufacturers and service providers who want access to foreign markets against those of politically powerful groups that want protection from import competition.
These disciplines include limiting the amount of tariffs that governments can collect by setting “bound rates” for specific types of goods. This means that if a country agrees to a lower tariff with a trading partner, it must likewise offer that same benefit to all other WTO member nations. Trade agreements also impose obligations to define which measures are trade-distorting and require that they be treated more harshly than non-trade-distorting measures.
Another important function of trade agreements is to streamline administrative procedures and facilitate the movement of goods and services. For example, trade agreements establish rules to simplify import, export, transit and transshipment procedures as well as provisions to speed up the collection of customs duties. They may also provide for arbitration mechanisms for exceptional situations where diplomatic channels fail to resolve a dispute.