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Definition: Trade Agreement
These are agreements that are used to regulate, i.e., either facilitate or restrict trade among nations. They are struck between or among Governments. Depending on the number of countries who are party to the agreement, it could be bilateral (signed between two sides) or multilateral (more than two sides involved). Trade agreements are a means of getting around d barriers erected by the state, such as tariffs and nontariff barriers. Barriers may have been created for economic reasons such as protecting the home country’s manufacturers. Noneconomic reasons such as national security and insulating the home culture from outside influences could also be present. A trade agreement has the following main features: reciprocity, a most favoured nation (MFN) clause and national treatment of nontariff barriers.
The reciprocity feature ensures that no one participant gains an undue advantage over the others during the course of the agreement. If any one party loses much more than it gains, then there would be no incentive for it to sign the agreement, e.g., a country would lower the trade barriers for import from another country only if that country promises to do the same.
The MFN clause ensures that one country favours a particular country over others and gives it more concessions and lee ways than it does to other states.
The third clause makes sure that tariffs are not replaced by a set of nontariff restrictions, such as selective excise taxes, health regulations, licensing requirements, and so on.
The World Trade Organization (WTO) is foremost body in the international arena for the formulation and regulation of trade agreements. It has played a key role in the drafting of agreements such as the North American Free Trade Agreement (NAFTA) and European Free Trade Agreement (EFTA).