Trade agreement


A trade agreement 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 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. 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 "...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 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 when signed between two sides, where each side could be a country, a trade bloc or an informal group of countries. 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 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.

U.S. regional trade agreements

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 usually have similar histories, demographics and even economic goals.
North American Free Trade Agreement January 1, 1989 was when it was put into effect, this is between United States, Canada, and Mexico this agreement was designed to get rid of tariff barriers between the separate countries.
Regional trade agreements are very hard to establish and commit to when the countries are more diverse.
Association of Southeast Asian Nations this was formed in 1967 between the countries of Indonesia, Malaysia, the Philippines, Singapore, and Thailand the reasoning was so that they could engage political and economic encouragement and it helps them all keep regional stability.

By level of integration

There are a variety of trade agreements; with some being quite complex, while others are less intensive. The resulting level of economic integration depends on the specific type of trade pacts and policies adopted by the trade bloc:
  1. Separate
  2. *Trade and Investment Framework Agreement
  3. *Bilateral Investment Treaty
  4. *Preferential Trade Arrangement –limited scope and depth of tariffs reduction between the customs territories.
  5. **Free Trade Agreement establishing a Free Trade Area –extensive reduction or elimination of tariffs on substantially all trade allowing for the free movement of goods and in more advanced agreements also reduction of restrictions on investment and establishment allowing for the free movement of capital and free movement of services
  6. ***Common market–FTA with significantly reduced or eliminated restrictions on the freedom of movement of all factors of production, including free movement of labour and of enterprise; and coordination in economic policy
  7. *Currency union–sharing the same currency
  8. Composite
  9. *Customs union–FTA with common external tariffs of all signatories in respect to non-signatory countries
  10. **Customs and monetary union–Customs union with Currency union
  11. **Economic union–Customs union with Common market
  12. ***Economic and monetary union –Economic union with Currency Union
  13. ****Fiscal Union–common coordination of substantial parts of the fiscal policies

    Special agreements

Typically the benefits and obligations of the trade agreements apply only to their signatories.
In the framework of the World Trade Organization, different agreement types are concluded, whose terms apply to all WTO members on the so-called most-favored basis, which means that beneficial terms agreed bilaterally with one trading partner will apply also to the rest of the WTO members.
All agreements concluded outside of the WTO framework are called preferential by the WTO. According to WTO rules these agreements are subject to certain requirements such as notification to the WTO and general reciprocity where unilateral preferences are allowed only under exceptional circumstances and as temporary measure.
The trade agreements called preferential by the WTO are also known as regional, despite not necessarily concluded by countries within a certain region. There are currently 205 agreements in force as of July 2007. Over 300 have been reported to the WTO. The number of FTA has increased significantly over the last decade. Between 1948 and 1994, the General Agreement on Tariffs and Trade, the predecessor to the WTO, received 124 notifications. Since 1995 over 300 trade agreements have been enacted.
The WTO is further classifying these agreements in the following types: