What is a Trade Agreement?

Published by Thomas Herold in Economics, Trading

'Trade Agreement' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Trade Agreement refers to a contract agreed upon and signed into force of law. These are made between two (or sometimes more) different countries regarding their trading relationship. It is entirely possible for such agreements to be either multilateral or merely bilateral. Multilateral trade agreements are those which exist with more than two nations.

In the majority of cases, international trade itself becomes regulated by a variety of one sided barriers. Among these different sorts of barriers are non-tariff barriers, tariffs, and restrictions on trade. A Trade Agreement is a way to lower such discouraging to trade barriers and restrictions. The generally held belief is that they will provide advantages which include more trade for all parties concerned.

It may come as a surprise to many that it is very complicated to successfully conclude a major Trade Agreement. The reasons for this are varied. There will always be coalitions of groups which do not want overseas competition to increase because of greater tariff-removed trade. Non-economic barriers to trade are also widespread in the world today. Some of them exist because of national security concerns. Still other government issues on trade concern the wish to protect a local culture and way of life from foreign “corruption,” as was the case with Communist Eastern Europe and the former Soviet Union empire.

There are typically three principle elements which one Trade Agreement will often have in common with another. These are the reciprocity rules, treatment of non-tariff barriers, and a clause for most favored trading nation. Reciprocity rules must be a part of any kind of a trade agreement. All parties in the deal must each benefit from this type of arrangement or there will not be any incentive to enact it in the first place. For any such agreement to happen, all sides must assume that they receive minimally as much as they will lose from the deal. Simply put, if Britain drops tariffs on Australian beef, then they will rightly expect Australia to drop tariffs on British London high street fashions.

The second idea, a common treatment of non-tariff barriers is a clause that becomes necessary in such a Trade Agreement. The reason for this is one nation may slyly decide to put up other barriers to trade in place of the tariffs they agreed to reduce or eliminate. As an example, they might institute sales or excise taxes on certain goods, quotas, so-called health requirements, specific license requirements, voluntary restrictions on imports, and also outright prohibitions on certain goods. Rather than attempt to spell out and make illegal any kind of non-tariff regulation, the treaty parties must sign off on a clause that they will provide the same kind of treatment to their trading nation’s businesses and goods as they would to those of their own country. Steel is one such industry example where this has occurred in the past.

Finally, there is the most favored trading nation clause. It mandates that one or more nations in the treaty must consent to not lowering barriers additionally on a non-participating country. It means that if Britain and Australia sign a reduced tariff agreement on beef, and then Britain agrees to a still lower tariff on beef with New Zealand, then Australia will automatically receive the same lower tariff on beef as New Zealand now enjoys.

Examples of several sweeping multilateral trade agreements do exist in the modern world. Two of the largest, best known, and most successful prove to be the European Free Trade Association from 1995 and the North American Free Trade Agreement (NAFTA) from 1993. Both of these deals became more possible because of the rules established by the World Trade Organization.

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The term 'Trade Agreement' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.