A trade agreement is a set of rules that countries sign to govern their economic interactions. The agreements discipline how governments collect tariffs, open foreign markets for domestic businesses, address behind-the-border barriers to trade, and set standards on intellectual property, e-commerce, and other issues.
In addition to addressing the tariffs that governments collect on imported goods, many of these agreements establish rules to control special-interest government protectionism. These arrangements recognize the legitimate need for some government regulation and regulatory autonomy but establish rules to stop that protectionism from becoming costly, disguised tariffs or other distortionary measures that hurt consumers and businesses.
Trade agreements also include provisions to facilitate trade in services and help resolve issues that affect international supply chains, such as government procurement. In addition, trade agreements often establish rules to encourage investment and fuel economic growth by reducing the cost of capital.
Some critics have alleged that trade agreements are long and complicated, and contain “hidden” special-interest favors. While some of that cronyism doubtless exists, it is also true that the scheduled commitments in these agreements shift national trade policies toward freer trade and check special-interest demands for protectionist government action. Moreover, trade agreements often use neutral arbitration to settle disputes instead of relying on unilateral government retaliation. This reduces the risk of retaliation and ensures that the rules will actually be enforced in a way that benefits everyone. It also reduces the incentive for countries to game the system, a practice that Donald Trump has pushed to extremes.