A trade agreement is a legal arrangement between two or more countries that lowers tariff barriers (or eliminates them altogether) and increases market access for the participants. Modern trade agreements are broken into a few different categories, including regional (such as the United States-Mexico-Canada agreement, commonly known as USMCA) and multilateral.
A multilateral trade agreement, such as the World Trade Organization’s General Agreement on Tariffs and Trade (GATT) or the WTO, establishes common binding rules that are subject to neutral dispute settlement in case of disagreement. They also include provisions like “most-favored-nation status” and national treatment of nontariff restrictions.
These trade agreements can also involve special provisions that help businesses understand what’s at stake in a given pact, such as “rules of origin” that define how much of a product needs to be made in a participant country for it to receive preferential benefits. For instance, if a company makes a sled in Canada using wood imported from Finland, that product would not qualify for USMCA privileges because only the wooden frame would be made in Canada; the steel runners that attach to the frame need to come from Mexico or the United States.
While the trade agreements that have been negotiated since Trump began threatening sky-high tariffs on all U.S. trading partners are a bit different than the multilateral arrangements that have preceded them, they are still meant to provide predictable trade rules for business and protect consumers from unnecessarily high costs. This is why it’s important that we continue to build on our existing trade partnerships and work to preserve the global trade system.
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