A trade agreement (also a trade pact or trade accord) is an international economic arrangement that sets rules for a broad range of issues related to trading partners’ economies. These include commitments to keep protectionism within agreed levels, clarifications about how to identify protectionism in domestic laws and regulations, and enforcement mechanisms for these commitments and rules.
Typical trade agreements, of the free trade agreement and preferential trade agreement types, reduce tariff barriers (taxes, quotas) on goods traded between the signatories. They also establish rules for behind-the-border policies that impact trading, such as competition policy, intellectual property rights, foreign investment and government procurement.
These rules are meant to limit special-interest political favors by corporations. For example, they establish the criteria for what constitutes a “disguised” protectionist subsidy. They also classify these subsidies in a specific category that is penalized harshly, and they constrain governments’ ability to provide these corporate benefits through a Buy National policy or other government-driven efforts to limit competition and raise profits above market levels.
In addition, trade agreements discipline how governments collect and apply tariffs by establishing rules for determining a good’s country of origin and customs classification in order to calculate the appropriate tariff rate. They may also contain a most-favoured-nation clause, which requires that the lowest tariff rate agreed to with one partner be extended to all other signatories in the World Trade Organization. They are also a vehicle for regional trade agreements, which are growing in size and scope.