Free Trade Agreement: Types and Examples

Definition, Types and Examples of U.S. Agreements

Free trade agreements
Free trade agreements allow you to buy these colorful threads from the Urgut market, Uzbekistan. Credit: Jamie Marshall - Tribaleye Images

Definition: Trade agreements are when two or more nations agree on the terms of trade between them. For this reason, when most people say trade agreements, they mean international trade agreements. Trade agreements determine the tariffs (taxes and duties) that countries impose on imports and exports.

Imports are goods and services produced in a foreign country and bought by U.S. residents. It includes all goods that are shipped into the U.S., even if produced by an American company.

If the consumer is a U.S. resident, and the provider is a foreign resident, then it is an import. Exports are any good or service that passes through customs from the United States to be sold overseas. It includes merchandise shipped from a U.S. based company to its foreign affiliate or branch.

Type of Agreements

There are many different types of trade agreements. Unilateral trade agreements are when one country either imposes trade restrictions, or loosens them, and no other country reciprocates. The United States and other developed countries often do this as a type of foreign aid to help emerging markets strengthen certain industries.

Bilateral agreements are between two countries. Both countries agree to loosen or remove trade restrictions to expand business opportunities. They typically involve lowering tariffs and conferring preferred trade status with each other. The sticking point usually centers around key protected or subsidized domestic industries, such as automotive, oil or food production.

The United States has 16 bilateral agreements. It's negotiating the world's largest agreement with the European Union -- the TTIP.

The most difficult to negotiate are multi-lateral trade agreements. These are among three countries or more. However, once negotiated, they are very powerful. That's because they cover a larger geographic area, conferring a better competitive advantage on the signatories.

Also, all countries in a multi-lateral agreement give each other most favored nation status. That means they treat each other equally.

The most well-known, and controversial, multi-lateral trade agreement is the North American Free Trade Agreement. It would have been replaced by the Trans-Pacific Partnership, but the United States pulled out of it. Most of the other U.S. regional trade agreements are also multi-lateral.

The Role of the WTO in Trade Agreements

Once agreements move beyond the regional level, they usually need help. That's where the World Trade Organization steps in. It is an international body helps negotiate global trade agreements. Once in place, the WTO enforces the agreement and responds to complaints.

The WTO currently enforces the General Agreement on Tariffs and Trade. The world almost received greater free trade from the next round, known as the Doha Round Trade Agreement. If successful, Doha would have reduced tariffs across the board for all WTO members. Unfortunately, the two most powerful economies refused to budge on a key sticking point. Both the U.S. and the EU resisted lowering farm subsidies. These subsidies made their food export prices lower than those in many emerging market countries.

These low food prices would have put many local farmers out of business, sending them to look for jobs in over-crowded urban areas. That doomed the Doha round, and possibly all future world multi-lateral trade agreements.

The failure of Doha allowed China to gain a global trade foothold. It has signed bilateral trade agreements with dozens of countries in Africa, Asia, and Latin America. In return for loans and technical or business support, Chinese companies receive rights to develop the country's oil and other commodities