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Trade Agreements

Trade Agreements

Do you ever think about how you get your groceries? How about the items that you order online? Practically everything that you purchase, either at the store or online, goes through some trading process. No country on this planet is able to produce everything and anything within its own borders! Countries will have to engage in trade with one another to get the products and services that you enjoy on a day-to-day basis! Curious how this all works out? Continue reading to learn more about trade agreements!

Trade Agreements Definition

Let's begin by going over the definition of trade agreements. Trade Agreements are treaties in which a country promises to engage in fewer trade protections with another country (or countries) to engage in more trade. A trade agreement can be between two countries or between many countries.

Trade agreements are treaties in which a country promises to engage in fewer trade protections with another country or multiple other countries to engage in more trade.

Unilateral trade agreements are one-sided arrangements that a country makes to lower trade barriers for other countries. This is usually a preferential arrangement that a developed country makes for imports from developing countries.1

Bilateral trade agreements are agreements between two countries to lower trade barriers with each other.

Multilateral trade agreements are agreements between multiple countries to lower trade barriers with one another.

To clarify, let's go over some examples of what a trade agreement might look like between countries!

Trade Agreements Examples

Before discussing trade agreement examples, let's review the three trade agreements we might see: unilateral, bilateral, and multilateral trade agreements. Let's break down each one separately to get a better understanding.

Unilateral Trade Agreement

A unilateral trade agreement will see a country (typically a developed one) lowering trade restrictions to help foster more trade. For example, the United States has a unilateral trade deal with developing countries in the form of the Generalized System of Preferences. This is done to give developing countries the opportunity to grow and develop their economies by making it easier for their exports to enter the United States.2

Bilateral Trade Agreement

A bilateral trade agreement will see two countries make a deal with one another to lower trade restrictions together. For example, the European Union and Japan recently signed a trade deal that will reduce tariffs on most traded goods between these two economies. This agreement is considered the largest bilateral trade deal as of 2018!3

Multilateral Trade Agreement

A multilateral trade agreement will see multiple countries making a deal to lower trade restrictions together. The United States-Mexico-Canada Agreement (USMCA) is an example of a multilateral trade agreement. It is the successor to the North American Free Trade Agreement (NAFTA) and involves three countries trading with one another.4

Trade Agreements Cargo Ship StudySmarterFig. 1 - A cargo ship carrying goods across the ocean.

Advantages and Disadvantages of Trade Agreements

What are the advantages and disadvantages of trade agreements? Let's discuss this in further detail.

Advantages of Trade Agreements

The advantages of trade agreements are that it facilitates trade between countries. But what about trade is so good? Through trade, each country can allocate its resources properly by specializing in the products each country can produce more efficiently.

If each country does this, then no country is "wasting" resources producing a good that has a higher opportunity cost. For every good that country A has a higher opportunity cost for, country B or C is bound to have that same good at a lower opportunity cost! This way, countries can gain from trading with one another since they can focus their resources on producing the goods in which they have a lower opportunity cost.

Trade also helps build cooperation and good relations with other countries. If the United States relies heavily on Mexico for the import of all vegetables, then it is in the best interest of both countries to remain conciliatory with one another and not break out into a conflict. If a conflict, or even a war, broke out, then the United States would miss out on imported goods, and Mexico would miss out on exporting goods. Nobody wins in such a conflict!

Curious to learn more about how trade enables specialization? You can find out more from our explanations:

- Opportunity Costs

- Comparative Advantage

- Comparative Advantage vs Absolute Advantage

- Specialisation

Disadvantages of Trade Agreements

Let's now discuss the disadvantages of trade agreements. The more trade agreements there are, the more each country specializes in one particular good or service. This is good for lowering costs and obtaining goods at a cheaper rate, but there could be potential downsides to this as well.

What would happen if each country is so specialized and only produces one or two goods each? Each country is highly dependent on one another for its own economy. If any event were to happen to break down the supply chain, like a pandemic, then so many countries' economies will be affected because they all depend on one another. There is minimal self-reliance within each country when trade agreements are everywhere!

Another potential problem with trade agreements is job loss. Trade agreements lower trade barriers between countries and encourage specialization. Specialization means that some productions will shut down and move to other countries.

Let's say that the United States and Canada agree to a trade agreement. The United States has a comparative advantage in cars, and Canada has a comparative advantage in motorcycles. Previously, each country produced its own cars and motorcycles in their country, respectively. Now, the United States will mainly focus on cars and Canada will mainly focus on motorcycles. Subsequently, the motorcycle production facilities in the United States and car production facilities in Canada will be shut down. The workers who work in those facilities will lose their jobs and have to look for new ones.

You can find out more about trade protectionism from our explanation: Protectionism.

Trade Agreements Act of 1979

The Trade Agreements Act of 1979 is a US law that governs trade agreements between the US and other countries. To begin, let's recall that a trade agreement's goal is to increase trade by lowering trade restrictions. The law builds upon the Trade Act of 1974 and promotes growth by encouraging international trade. The stated purposes of the Trade Agreements Act of 1979 are the following:

  1. Approve and implement the trade agreements negotiated under the Trade Act of 1974;
  2. Foster the growth and maintenance of an open world trading system;
  3. Expand opportunities for the commerce of the United States in international trade;
  4. Improve the rules of international trade and provide for the enforcement of such rules, and for other purposes as well.5

Types of Trade Agreements

Let's go over the types of trade agreements that are out there. The types of trade agreements we will be taking a look at are: free trade agreements, World Trade Organization agreements, and regional trade agreements.

Types of Trade Agreements: Free Trade Agreements

Free trade agreements are trade agreements where the main goal is to eliminate trade barriers to facilitate trade. Trade barriers can include tariffs, quotas, and other non-tariff barriers. By agreeing to a free trade agreement, countries are lowering these restrictions to allow for more exports and imports in the international relations system. An example of this type of agreement is the Australia Free Trade Agreement.6 This agreement was made by the United States and Australia to promote more trade between the two countries.

Learn more about this from our explanation: Free Trade Zones

Types of Trade Agreements: World Trade Organization Agreements

Let's now look at World Trade Organization (WTO) agreements. World Trade Organization agreements are agreements that develop a legal trade system for all WTO member countries. World Trade Organization agreements do not just cover the trade of goods, but anything that might affect trade in some way. This could include intellectual property and investments as well. An example of a World Trade Organization agreement is the Agreement on Trade-Related Aspects of Intellectual Property Rights.7

Check out our explanation: WTO.

Types of Trade Agreements: Regional Trade Agreements

Regional trade agreements are trade agreements that take place within one particular region in the world.

The United States-Mexico-Canada Agreement (USMCA), the successor to the North American Free Trade Agreement (NAFTA), is a trade agreement that covers the North American region.8 This agreement is between these three countries, and therefore, would be considered a regional trade agreement.

The European Union (EU) would also be considered a regional trade agreement. The EU is its own free-trade zone which allows for the free movement of goods, services, capital, and labor. The EU countries have a common tariff system for goods coming into the EU from other countries. The EU countries have a high level of economic integration and common economic policies in areas like agriculture, transportation, and business practices. As of 2022, 19 out of the 27 EU countries share a common currency: the euro.

Trade Agreements - Key takeaways

  • Trade Agreements are treaties in which a country promises to lower trade barriers with another country (or countries).
  • Trade agreements can be either unilateral, bilateral, or multilateral.
  • An advantage of trade agreements is that countries can specialize and gain from trade.
  • Disadvantages of trade agreements: they can lead to reliance on foreign supply chains and loss of domestic jobs.

References

  1. European Commission Trade Department, "Unilateral trade arrangements." https://trade.ec.europa.eu/access-to-markets/en/content/unilateral-trade-arrangements
  2. Office of the United States Trade Representative, Generalized System of Preferences, https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp
  3. Alanna Petroff and Ivana Kottasová, EU and Japan sign trade deal covering a third of the world's economy, https://money.cnn.com/2018/07/17/news/economy/eu-japan-trade-deal/index.html
  4. U.S. Customs and Border Protection, USMCA, https://www.cbp.gov/trade/priority-issues/trade-agreements/free-trade-agreements/USMCA
  5. Office of Law Revision Counsel, "Trade Agreements Act of 1979." https://uscode.house.gov/view.xhtml?path=/prelim@title19/chapter13&edition=prelim
  6. International Trade Administration, Free Trade Agreements, https://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_002771.asp
  7. International Trade Administration, World Trade Organization Agreements, https://www.trade.gov/wto-agreements
  8. U.S. Customs and Border Protection, USMCA, https://www.cbp.gov/trade/priority-issues/trade-agreements/free-trade-agreements/USMCA

Frequently Asked Questions about Trade Agreements

To lower trade barriers and promote tradde with one another. 

Unilateral, bilateral, and multilateral trade agreements are three types of trade agreements. 

Four international trade agreement examples are NAFTA, Central American-Dominican Republic Free Trade Agreement, European Union, and Regional Comprehensive Economic Partnership. 

NAFTA is an example of a trade agreement. 

Five major trade agreement examples are the North American Free Trade Agreement, Central American-Dominican Republic Free Trade Agreement, the European Union, Arab Cooperation Council, and Regional Comprehensive Economic Partnership. 

The World Trade Organization seeks to lower trade barriers and promote trade between its member countries. 

Final Trade Agreements Quiz

Question

What is a trade agreement?

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Answer

Treaties in which a country promises to engage in fewer trade protections with another country (or countries) to engage in more trade.

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Question

This type of trade agreement occurs when only one country makes an agreement to lower trade restrictions.

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Answer

Unilateral trade agreement.

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Question

This type of trade agreement occurs when only two countries make an agreement to trade with one another.

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Answer

bilateral trade agreement.

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This type of trade agreement occurs when multiple countries make an agreement to trade with one another.

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Answer

multilateral trade agreement.

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Question

Trade agreements _______ trade barriers to increase trade.

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Answer

lower.

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Question

Job loss is a ________ effect of trade agreements.

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Answer

negative.

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Specialization is a _______ effect of trade agreements.

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Answer

Positive.

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Increasing trade barriers will ______ the amount of trade.

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Answer

decrease.

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Question

True or False: Trade agreements cannot be regional.

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Answer

False.

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True or False: Trade agreements cannot exceed more than three countries.

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Answer

False

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True or False: The general goal of a trade agreement is to increase trade.

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Answer

True

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Question

The United States and Iceland both agree to lower trade barriers with each other. Which type of trade agreement is this?

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Answer

bilateral.

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Question

Canada decides to decrease trade barriers to facilitate trade with developing countries without expecting reciprocal actions. What type of trade agreement is this?

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Answer

unilateral.

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True or False: Trade agreements usually are not effective.

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Answer

False

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Question

True or False: A trade agreement has not been done since the 1990s.

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Answer

False

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