A trade agreement, also called a trade pact or free trade agreement (FTA), is an international economic arrangement that usually lowers or eliminates tariffs and other forms of protectionist restrictions on goods traded between two countries. It may be unilateral, bilateral, multilateral or plurilateral and can include investment guarantees.
These arrangements can substantially lower the landed cost of imports, which spurs trade. The agreements typically include “rules of origin” that determine how much of a product needs to be made in a country party to the agreement for it to qualify for preferential treatment. For example, if wood is cut and shaped into a sled bed in a country party to the USMCA, such as Canada, to be eligible for USMCA preferences, it must also be manufactured in that country to meet rules of origin for that good.
Trade has a positive impact on the economy, though it often results in job losses in certain sectors. These losses are concentrated in industries that have been exposed to new competitors from trading partners.
In order to make trade more effective, Congress must set negotiating objectives through legislation before the executive branch can begin negotiations. Since 1934, when Congress first delegated negotiating authority to the president through the Reciprocal Trade Agreements Act, the administration has negotiated 14 free trade agreements and is actively pursuing additional ones. In addition, the Office of the USTR oversees advisory committees that include representatives from business, labor, agriculture, small businesses, service industries, nonfederal government agencies, retailers, environmental and conservation organizations and consumers to provide input on trade negotiation draft proposals.