3 Types & Impact of Free Trade Agreements

3 Types & Impact of Free Trade Agreements

3 Types & Impact of Free Trade Agreements: When two or more countries settle on the terms and items of trade, the legal process and paperwork are known as ‘trade agreement.’ It defines all the taxes and tariffs, import and export duties imposed whereas successful execution gives way to international trade.

That said, ‘imports’ refer to goods and services produced and shipped from a foreign country and bought by the domestic market. It can include anything being shipped into the country even if it’s a foreign subsidiary of a domestic firm. In case the consumer is within a country’s border whereas the importer or the provider is across, the good or service is an import.

On the contrary, exports are goods and services made within a country and sold across that can be anything shipped from a national organization to the foreign affiliate, a franchise or branch. The coming of digital technology into the trade sector made the process more streamlined, quick and efficient which termed as smart trade’.

3 Types & Impact of Free Trade Agreements

Types of Trade Agreements

There’re three different types of trade agreements that are defined below;

  1. Unilateral

When a country imposes certain trade restrictions, and no other state intervenes in between, it’s known as ‘unilateral trade agreement.’ But then a country can also go easy on trade restrictions one-sidedly. However, it rarely happens. Such an agreement or situation puts a country at a competitive disadvantage, but advanced and developed countries execute the practice as a type of foreign aid to help emerging markets strengthen their strategic industries that are too small.

  • Bilateral

As the term implies, ‘bilateral trade agreement’ happens between two countries when they ease trade restrictions as a means to expand corporate opportunities. The tariffs are thus lowered to prefer smooth trade between both nations whereas it all leads to one thing, protection and subsidizing domestic industries.

For countries that are in automotive, oil and food production industries, bilateral trade agreements take place between them. Example of the world’s most significant bilateral trade agreements in Obama’s rule was the Transatlantic Trade and Investment Partnership with the EU.

  • Multilateral

Perhaps the most difficult to negotiate are multilateral trade agreements that take place between three or more countries. The higher the number of participants, difficult the negotiations due to differences because each state has its particular needs and unique requests.

But on successful negotiation and agreement, these can be extremely powerful since they cover a large geographic area, more significant competitive advantage and cater to the nation’s prosperity on a much bigger level. The terms and conditions on which multilateral agreement takes place are equal for all participant countries thus reducing conflict and other such hindrances.

Trade Agreement Effects

Removing tariffs lower the import costs which favor consumers however leaving domestic industries to suffer as they’re incompetent to the international standards in terms of quality and lifestyle. As a result, the trades are likely to go out of business which leaves the employees to suffer.

Apart from all these are facts, trade agreements also have the most excellent benefits for the domestic industries as joint ventures also introduce new employment opportunities which even better up the skill set of existing employees.

The Role of World Trade Organisation (WTO)

Once the agreement thrives and goes above the regional level, they need to manage, and this is where the World Trade Organisation steps in. For those who’re unfamiliar with the WTO, it’s a foreign organisation that helps to improve the global trade agreements and responds to complaints.

Key Difference from Domestic Trade

Another difference is the production such as labor and capital that are typically more mobile within a nation than across the border. It is one reason for certain restrictions in goods and services being imported from another country. Trading in certain products and services can empower a country’s economy whereby establish good relations between the participating nations especially if it’s ‘smart trade’ due to extreme convenience.

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