Trade agreement

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A trade agreement (also known as trade pact) is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common trade agreements are of the preferential and free trade types, which are concluded in order to reduce (or eliminate) tariffs, quotas and other trade restrictions on items traded between the signatories.

The logic of formal trade agreements is that they outline what is agreed upon and specify the punishments for deviation from the rules set in the agreement.^[1] Trade agreements therefore make misunderstandings less likely, and create confidence on both sides that cheating will be punished; this increases the likelihood of long-term cooperation.^[1] An international organization, such as the IMF, can further incentivize cooperation by monitoring compliance with agreements and reporting third countries of the violations.^[1] Monitoring by international agencies may be needed to detect non-tariff barriers, which are disguised attempts at creating trade barriers.^[1]

Trade pacts are frequently politically contentious, as they might pit the winners and losers of an agreement against each other. Aside from their provisions on reducing tariffs, contentious issues in modern free trade agreements may revolve around regulatory harmonization on issues such as intellectual property regulations, labour rights,^[2] and environmental and safety regulations.^[3] Increasing efficiency and economic gains through free trade is a common goal.

The anti-globalization movement opposes trade agreements almost by definition, although some groups normally allied within that movement, such as leftist parties, might support fair trade or safe trade provisions that moderate real and perceived ill effects of globalization. In response to criticism, free trade agreements have increasingly over time come with measures that seek to reduce the negative externalities of trade liberalization.^[4]