trade agreement

trade agreement

Any contractual arrangement between states concerning their trade relations. Trade agreements may be bilateral or multilateral, that is, between two states or more than two. For most countries international trade is regulated by unilateral barriers, including tariffs, nontariff barriers, and government prohibitions. Trade agreements aim to reduce such barriers and thus provide all parties with the benefits of increased trade. Reciprocity is a necessary feature of trade agreements, since neither state will be willing to sign the agreement unless it expects to gain as much as it loses. Another common feature is a most-favoured-nation clause, which provides against the possibility that one of the parties to the current agreement will later offer lower tariffs to another country. Agreements often include clauses providing for “national treatment of nontariff restrictions,” meaning that both states promise not to duplicate the properties of tariffs with nontariff restrictions such as discriminatory regulations, selective excise taxes, quotas, and special licensing requirements. General multilateral agreements are sometimes easier to reach than separate bilateral agreements, since the gains to efficient producers from worldwide tariff reductions are large enough to warrant substantial concessions. The most important modern multilateral trade agreement was the General Agreement on Tariffs and Trade (GATT), which reduced world tariff levels and greatly expanded world trade. Such agreements continue under the aegis of the World Trade Organization (WTO), which replaced GATT in 1995. See also NAFTA.