Trade agreement is an international trade treaty that enables businesses to buy and sell goods and services more easily. A trade agreement reduces restrictions on trade, such as tariffs and quotas. This can make it easier and cheaper to import materials and equipment for production, or sell services overseas — such as website development or marketing services — with fewer data sharing restrictions.
There are several types of trade agreements. Preferential trade agreements (PTAs) reduce or eliminate some or all tariffs between the trading partners in the PTA. These types of agreements are different from multilateral trade agreements, which establish global rules on goods and services through a set of agreements and annexes called the World Trade Organization (WTO), agreed to by 166 WTO member governments.
Multilateral trade agreements, including the Comprehensive and Progressive Trans-Pacific Partnership and United States-Mexico-Canada Agreement (USMCA), are the most common type of trade agreements. Some of these agreements are comprehensive, reducing or eliminating barriers to substantially all trade between the countries in the agreement. Other agreements are limited in scope, reducing or eliminating only certain trade barriers.
Some trade agreements, such as the Canada-United States Free Trade Agreement and Central American Free Trade Agreement (CAFTA), include provisions requiring that goods be made entirely in the parties’ territory to qualify for preferential treatment. These “rules of origin” are designed to ensure that the products traded in the agreement are genuinely domestic. They also help protect local manufacturers against unfair competition from imported products whose components are made outside the USMCA’s territory.
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