Trade agreements are formed when two or more countries agree on trade conditions. These agreements establish the tariffs and taxes countries apply to imported and exported goods. Essentially, all trade agreements influence global trade dynamics.

Imports refer to goods and services produced abroad but purchased by country residents. This encompasses any item brought into the country, including those by foreign subsidiaries of domestic companies. If the customer is trained and the supplier is unfamiliar, the goods or service is an import.

However, exports are domestically produced products and services sold outside. This category includes any product or service from a local company to its overseas branches or affiliates.

Types of Trade Agreements

Generally, three types of free trade agreements are unilateral, bilateral, and multilateral.

Unilateral Trade Agreement

A Unilateral Trade Agreement happens when a country independently decides to implement trade restrictions, and no other nation responds in kind. A country might also choose to ease trade barriers, although this is less common as it could lead to a competitive disadvantage. This is one way developed nations like the US help underdeveloped nations. This approach strengthens critical sectors in developing economies that are not currently dangerous, helping their economic development and generating new possibilities for U.S. exporters.

Bilateral Trade Agreements

Bilateral trade agreements are partnerships between countries designed to reduce trade barriers and boost business interactions. In these agreements, both nations agree to reduce tariffs and grant each other preferred trading status. Negotiations often hit snags regarding heavily protected or subsidized domestic industries, typically in sectors like automotive, oil, or agriculture. A notable example was the Transatlantic Trade and Investment Partnership, a significant bilateral agreement between the United States and the European Union during the Obama era, which faced challenges and eventually stalled under the Trump administration.

Multilateral Trade Agreements

Multilateral trade agreements involving three or more countries present more complex negotiation challenges. Managing everyone's demands and interests gets more brutal as more nations are impacted. Once established, these agreements may be robust. They cover a larger geographical area, offering a substantial competitive edge to the member countries. Participants often grant each other the status of most-favored-nation, ensuring the best trade terms and lowest tariffs among themselves.

During the initial twenty years of a multilateral agreement, regional trade increased from USD 290 billion in 1993 to more than USD 1.1 trillion in 2016. These are among a number of forecasts predicting the yearly loss of about 15,000 jobs for the country’s economy. However, its economic impact cannot be denied.

The US is also among the countries that form the Dominican America-Central FTA. This eliminates about 80 percent of the U.S. nontextile manufactured goods export duties to Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

The biggest trade agreement is the TPP, which covers many areas including the broadest spectrum. In 2017, the US left the TPP during Trump’s presidency. President Biden may consider re-entering this pact. The US has 14 trade agreements with 20 nations, indicating a worldwide trading network.

The Role of the WTO in Trade Agreements

When trade agreements expand beyond regional scopes, they often require additional support and structure, which is where the World Trade Organization (WTO) comes into play. This international entity plays a crucial role in negotiating and enforcing global trade agreements.

An ambitious endeavor under the WTO was the Doha Round Trade Agreement. All WTO members' tariffs would have dropped dramatically if this deal passed, enabling free trade. The decade-long Doha round negotiations failed due to several hurdles.

A critical factor in the Doha Round's challenges involved the two major global economies: the United States and the European Union. A central sticking point was agricultural subsidies. The U.S. and EU feared reducing agricultural subsidies would cut food export prices compared to developing market nations. Such a situation may have put local farmers in these nations out of business. The Doha discussions stalled due to the U.S. and EU's refusal to cut subsidies, among other reasons.

The Doha Round's failure allowed China to strengthen its trade position. China has trading agreements with several African, Asian, and Latin American nations. These agreements often involve Chinese companies gaining rights to develop natural resources like oil in these countries. China offers loans, technical support, and business assistance in exchange, enhancing its global trade footprint and influence.

Impact of Trade Agreements

Trade agreements have pros and cons. By removing tariffs, these agreements cut import costs, benefiting consumers. Local industries may find this difficult, particularly those unable to compete with lower-cost nations. Consequently, these industries may face closure, negatively affecting their employees. Trade agreements often result in a balancing act between the interests of companies and consumers.

Conversely, specific domestic industries thrive under these agreements. They gain access to new markets for their products, now free from tariffs. This expansion may increase employment in these industries. Economists argue these trade-offs' effects.

Real-World Examples of Free Trade Agreements

The EU exemplifies free commerce. EU member countries trade nearly as a single entity, and most have adopted the euro. However, a Brussels-based regulatory authority handles trade concerns among member states.

U.S. Free Trade Agreements

The U.S. free trade agreements are, for example, NAFTA, which includes the US, Canada, Mexico, and many Central African States stipulated by the CAFTA. There are separate trade arrangements in which the US interacts with them, like with Australia and Peru.

These agreements free 50% of U.S. imports from tariffs. Industrial products in the U.S. average 2% tariffs. However, these agreements do not entirely reflect unfettered free commerce. American special interest groups have successfully fought for trade restrictions on steel, sugar, cars, milk, tuna, cattle, and denim.

Trans-Pacific Free Trade Agreement

Trans-Pacific partnership suggested the establishment of a trade pact amongst 12 countries in the Asia Pacific with the inclusion of Canada and Mexico among them. Most people within the two main political parties did not support it during the 2016 US Presidential election. In January 2017, Trump commanded his trade representative to withdraw the US from the pact. After that, the non-U.S. nations altered that treaty.