Why Are Trade Agreements Important?

Trade agreements are treaties signed by two or more nations to encourage the free flow of goods and services between the members. These agreements, which can be bilateral or multilateral, reduce or eliminate trade barriers such as tariffs and quotas. As such, they lead to the creation of new markets for businesses, facilitate the production of high-quality goods and enhance economic growth.

Since trade agreements create favorable trading conditions, businesses in the member countries have a greater incentive to trade in new markets. For example, when the United States entered into a free trade agreement with Australia in 2005, businesses in both countries were able to export and import more goods without paying any tariffs. The Office of the United States Trade Representative reports that the U.S. exported $18.9 billion worth of goods to Australia in 2009, which represents a 33 percent increase from 2004. During this period, imports from Australia also increased by 3.5 percent.

With the expansion of markets comes increased business performance. In particular, small businesses can buy raw materials from other countries within the free trade area without incurring any additional costs and sell more goods in the expanded market. This leads to the creation of new jobs, as the businesses need more personnel to support growing operations. According to USTR, 6,000 new U.S. jobs are created for every $1 billion worth of exports.

Trade agreements open new markets for businesses, so competition increases. To withstand the competition, businesses are forced to build more quality into their products. If the U.S. signs a free trade agreement with Cuba, for instance, American cigar manufacturers would have to produce higher quality cigars to outsell Cuban cigars. Greater product quality means improved satisfaction for consumers. In addition, consumers have access to a wider variety of products and services.

In general, trade agreements boost economic growth in the member countries. With more job opportunities, the rates of unemployment go down and more people have a regular income they can use to empower their families. The expansion of markets gives rise to new businesses, so individual countries can earn more national revenue from business tax. Finally, trade agreements typically include investment guarantees, meaning investors -- especially those from developed nations -- can invest in developing countries with protection against political risk.