Trade Agreements: Definition, Examples & Types (2024)

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

Trade agreements examples are:

• unilateral
• bilateral
• multilateral

Let's break down each one separately to get a better understanding.

Trade Agreements Examples: Unilateral

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

Trade Agreements Examples: Bilateral

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

Trade Agreements Examples: Multilateral

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

Fig. 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!

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.

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.

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

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.

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.