With the world economy struggling, many countries are turning to trade agreements as a means of growing their economies and increasing international cooperation. These treaties provide benefits for both the economies that sign them and their private-sector stakeholders. They are an alternative to protectionism, which results in high prices for consumers and a limited range of domestic products and services. These trade agreements reduce the cost of exports, increase market access and allow countries to diversify their economies.
Modern trade agreements use neutral adjudication rather than government retaliation to resolve trade disputes. They contain detailed obligations and require that a country actually file a complaint instead of taking unilateral action, and they set limits on the level of retaliation that can be imposed. They also provide for a system of “most-favored nation” status, which gives signatory nations a lower tariff than the lowest existing tariff of a non-signatory nation in any given market.
In addition to tariff reductions, modern FTAs contain provisions for reduced or eliminated nontariff barriers to trade. These restrictions include regulations, sales taxes, special excise or customs requirements, quotas, licensing requirements and other governmental restraints on imports and exports. National treatment clauses in trade agreements require that countries treat imported goods the same as they would domestically produced ones.
For services, FTAs typically cover four different modes of supply for a service: (1) cross-border consumption; (2) commercial presence abroad; (3) business activity in a commercial location; and (4) commercial supply from a natural person’s residence outside the country of supply. Each of these modes requires its own negotiated schedule.