A trade agreement is a negotiation between two or more countries regarding the terms of trade between them—tariffs, quotas, restrictions on imports and exports, and provisions, such as trade facilitation, intellectual property rights, and investment protection. For cross-border ecommerce retailers, trade agreements can provide greater access to markets in partner countries, allowing them to expand their customer base and increase their sales. It is important to be aware of trade agreements and the advantages they offer to the countries involved, namely, retailers and consumers exporting and importing goods.
Trade agreement are beneficial because they do the following:
- Mitigate geopolitical and trading barriers
- Encourage investments
- Improve economies
- Create jobs
- Expand the variety of goods available
- Enhance the standard of living
There may be requirements and/or restrictions to obtaining these benefits. However, once a country joins a trade agreement, trade among member countries can increase as they employ the benefits listed above.
Trade agreements play a big part in cross-border ecommerce and can drastically decrease the landed cost for imports, which spurs economic growth and international relationships. Trade agreements often offer preferential treatment (lowered duty or duty-free) based on what the product type and the country of origin (where they were produced). Preferential treatment, when utilized, can lower the import costs for a lot of cross-border trade.
Trade agreements are at the heart of the World Trade Organization (WTO), which is the only global international organization dealing with the rules of trade between nations. Trade agreements play a major role in how global trade has improved in the last few decades. The improvement is evident: world trade values have increased nearly 300 times since the 1950s, particularly due to the emergence of the WTO in 1995.
Types of trade agreements
While there are over 800 trade agreements in place around the world, most of them fall under one of three main types of trade agreements based on how many countries are involved:
Unilateral: one-sided, non-reciprocal trade preferences granted by developed countries to developing countries to help improve and expand exports and facilitate economic development for developing nations.
Example: The South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA)
Bilateral: a symbiotic partnership promoting the exchange of goods and services between two countries, which encourages economic cooperation and benefits both countries.
Example: The European Union (EU)-Japan Economic Partnership Agreement (EPA)
Multilateral: a trade agreement between multiple countries that simplifies and lowers the cost of trade among three or more countries.
Example: Members of the World Trade Organization (WTO) must abide by the most-favored-nation (MFN) clause
Popular trade agreement categories
Trade agreements can be further broken into a few different categories. Some of the main trade agreement categories practiced among countries today are regional trade agreements (RTAs), bilateral investment treaties (BITs), WTO agreements, suspension agreements, and intellectual property (IP) agreements. These agreement categories can be uni-, bi-, or multilateral agreement types.
RTAs
- Definition: A regional trade agreement (RTA) is a treaty signed by two or more regions that agree on certain commitments and responsibilities that affect the trading of goods and services among the regions. While RTAs vary from agreement to agreement, they generally reduce trade barriers and create more advantageous trading investments and environments. There are six kinds of RTAs:
Preferential Trade Areas
Free Trade Area
Customs Union
Common Market
Economic Union
Full Integration
Real-life example of an RTA: The United States (U.S.)-Mexico-Canada agreement, more commonly referred to as the USMCA (entered into force on July 1st, 2020).
Purpose, treatment, and permittance:
Economic growth: Member countries are able to expand their markets, reach investors, and create more opportunities.
Trade markets increase: Selling between the participating countries is clearer, and the competition is leveled out. Agreement policies make trading in new markets more functional and logical for member regions.
Access to funds: The free flow of goods and services between regions makes it possible for businesses to acquire funds to pay for investments.
Negotiating power: Signing a treaty and forming an agreement between regions allows for more negotiating power with non-member country trade agreements.
Competition to better products: Competition among markets intensifies as access increases. Competition encourages higher-quality production, variety, and innovation, which leads to more satisfied customers.
Job creation: Along with competition, there’s more demand for goods due to the wider audience of free trade. More production is needed, so more jobs are created, and jobs in member countries become more accessible.
BITs
Definition: Bilateral investment treaties (BITs) are designed to ensure that investors receive national or most favored nation treatment (MFN) (whichever is better) in the country of the other member of the agreement. BITs range from agreement to agreement, but they typically help broaden access between two countries’ markets to increase their economic growth by decreasing the total land cost.
Real-life example of a BIT: The treaty between the United States (U.S.) and the Republic of Turkey concerning the reciprocal support and security of investments (entered into force on May 18th, 1990).
Purpose, treatment, and permittance:
National or most favored nation (MFN) treatment exceptions: Members of a BIT have the authority to maintain or create exceptions to the national or MFN treatment contract.
Fair treatment: BIT investors are treated as favorably as the BIT participant country’s domestic investors, or as well as it treats any other foreign investor in similar circumstances (whichever is better).
Host country transfers: The treaty ensures investors have the right to move reserves in and out of the host country with a free-use currency using a market exchange rate.
Residency: Each participant is required to permit investors to enter and live in that region to make or manage investments (subject to each BIT participant’s separate immigration laws).
Definition: WTO agreements established a legal foundation for international trade for over 160 economies. The agreement includes goods, services, intellectual property, standards, investors, and other issues regarding trade circulation.
Real-life example of a WTO agreement: The General Agreement on Tariffs and Trade (GATT) promotes international trade by reducing or eliminating trade barriers, such as tariffs or quotas (entered into force on January 1st, 1948). Other common WTO agreements include:
Purpose, treatment, and permittance:
Foundation: The WTO creates an effective multilateral structural example for governments to obtain greater freedom improve the process of international trade.
Fair and unbiased: There are regulations in place that prohibit participants from unfairly protecting domestic suppliers, goods, or services, or discriminating among foreign suppliers, goods, or services.
Accommodation: The WTO can adapt appropriately as the digital world progresses and global priorities emerge.
Developing countries: It recognizes the progressive economic trading needs of developing countries (especially the least-developed countries).
Transparency: Governments must be transparent and fair to avoid contentions among greedy and corrupt practices.
Utilizing technology: Members know the importance of using and encouraging the use of electronic mechanisms for expanding and facilitating international trade.
Encouraged to join: The WTO promotes acceptance and additions of non-WTO members.
Suspension agreement
Definition: A suspension agreement is when a foreign government agrees to modify their trading behavior to eliminate dumping or countervailing in order to protect the other country’s domestic businesses. Suspension agreements require continuous examination by the Department of Commerce to ensure compliance and validity.
Real-life example of a suspension agreement: The Government of Mexico suspended the anti-dumping (AD) and countervailing duty (CVD) investigations on sugar, which adjusted the prices for refined and other types of sugar in the U.S. The agreement also set export limits on sugar from Mexico (in force from December 2014-December 2017).
Purpose, treatment, and permittance:
Domestic growth: Suspension agreements allow domestic businesses to grow without having to compete with foreign markets.
CVD and AD: The countervailing duty (CVD) and anti-dumping (AD) provide businesses the opportunity to establish themselves in their own country.
Compliance: Suspension agreements are evaluated and investigated regularly to avoid unfairness, which has happened many times in the past. Some countries with suspension agreements charge very high CVD and AD fees, making it impossible for non-domestic competitors to ever sell within that country. The cost just to import the product would drive non-domestic sellers’ products way up in price, making domestic sellers' prices much more desirable for consumers.
IP agreements
Definition: Under an intellectual property (IP) agreement, ownership of a patent, copyright, or trademark remains with the creator, but other parties within the agreement have permission to use a portion or all of the IP rights for an allotted amount of time for a fee. The agreements generally include the specific time allowed and the procedures that will take place during that time. The agreement is a legal acknowledgement of the importance of the relationship between IP and trade and how necessary a balanced IP system is.
Real-life example of an IP agreement: World Intellectual Property Organization (WIPO) Geneva Act of the Lisbon Agreement on Appellations of Origin and Geographical Indications was deposited by the Government of the Czech Republic. The Geneva Act helps producers of quality products, in relation to the product’s origin, safeguard the specific designs of their goods in multiple regions (entered into force September 2, 2022).
Purpose, treatment, and permittance:
Protection: This agreement establishes strong protection for patents, trademarks, and copyrights that prevent theft of trade secrets, including cyber theft.
Creative trade: It helps facilitate trade of knowledge and creativity.
IP trading system: An innovative IP system is cultivated in terms of transferring technology and assisting less-developed countries.
Technological development: The agreement allows for exponential advancements within the technological world.
Equitable treatment: There are rules in place that promote transparency and fair treatment with respect to trademarks and IP that correspond with a specific location.
Market opportunity: Secure, fair, reasonable, and non-discriminatory markets are accessible for businesses that depend on IP.
Mandatory rules: Rules are enforced to protect trademarks, copyright privacy, and all IP. Elevated penalties are permitted when counterfeit goods endanger consumer health and/or safety.
Easy and secure: Businesses are able to register and protect their IP in new markets more simply and safely.
Frequently asked questions
How do I know what trade agreements are in force for a specific country?
Zonos has a number of country guides that outline countries' trade agreements as well as additional information about conducting trade with those countries.
