When two or more countries enter into a trade agreement, they formally reduce or eliminate trade barriers among themselves. These agreements can be classified according to the number of partners, such as bilateral and multilateral; or by level of economic integration, such as free trade area, customs union and economic union.
Bilateral Trade Agreements
A bilateral trade agreement occurs when two nations or trading blocs lower or completely remove trade barriers on certain goods and services. The United States, for instance, has bilateral free trade agreements with a number of countries as of 2015. One such agreement, with Australia, was signed in 2004 and went into effect in 2005. This AUSFTA pact eliminates tariffs on a range of agricultural and textile exports and imports between the U.S. and Australia.
As is the case with China and the Association of Southeast Asian Nations, a country and a trading bloc can also strike a bilateral trade treaty. The ASEAN–China Free Trade Area was signed in 2002 and implemented in 2005, creating a free trade area between China and ASEAN member countries.
Multilateral Trade Agreements
A multilateral trade agreement involves several countries. The North American Trade Agreement is a well-known example of a multilateral treaty. Signed in 1992 and implemented in 1994, NAFTA allows the U.S., Mexico and Canada to freely exchange various goods without facing any export or import tariffs. Under this treaty, barriers to investment are also eliminated. Other examples of multilateral agreements include ASEAN and the Asia-Pacific Trade Agreement, or APTA.
Customs and Economic Unions
A customs union is formed when members of a regional trading bloc agree to adopt a common tariff on imports from external countries. A famous example of a customs union is the European Union. While trade between the EU member countries is largely tariff-free, all imports from the rest of the world are subjected to common tariff.
The EU is also an example of an economic union. Economic unions are formed when two or more countries agree to allow the free movement of not only goods and services, but also factors of production such as capital and labor. The participating nations also share common monetary, social and fiscal policies.
Multilateral treaties and customs and economic unions are typically regional agreements. That is, partners are found within the same geographical area.
Special Trade Agreements
Countries, especially the developed ones, can create special trade programs to meet objectives other than just facilitating trade. The U.S.’s African Growth and Opportunity Act, for instance, is designed to encourage certain countries in sub-Saharan Africa to export certain products to the U.S. duty-free. Through this Act, the U.S. aims to improve economic and diplomatic relations with the African countries, as well as help them achieve increased economic development and growth.