Types of Trade Agreements: Preferential, Free Trade, and More

Introduction

A trade agreement is a contract, agreement, or pact that occurs between two or more countries concerning their trade relationship.  International trade is commonly regulated by barriers of several types, including tariffs, non tariff barriers, and prohibitions. Trade agreements are a way for countries to form an agreement on how they would cooperate to mutually benefit in their international trade and investments. 

Different types of  Trade Agreements

Preferential Trade Agreement (PTA)

• It is a trading bloc that gives preferential access to certain products from the participating countries.
• Done by reducing tariffs but not by abolishing them completely; Requires the lowest level of commitment to reducing trade barriers.
• Example: Mercosur preferential trade agreement, Asia pacific trade agreement.

Generalized System of Preferences (GSP)

• Preferential scheme granted by industrialized nations to developing countries.
• Involves reduced Most Favoured Nations (MFN) Tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries.

Free Trade Agreement (FTA)

• It is a trade bloc which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between member countries. 
• Example: SAFTA (South Asian PTA to FTA), ASEAN FTA.

Comprehensive Economic Cooperation Agreement (CECA)/Comprehensive Economic Partnership Agreement (CEPA)

• When the countries go beyond FTA and agree for a greater degree of economic integration which extends to capital and human resources, and to expand trade and investment.
• CECA comes first with elimination of tariffs, CEPA comes later including trade in services and investments.

Customs Union

• An agreement between member countries of a custom union remove trade barriers among themselves and adopt common external trade barriers.

Common Market: 

• Type of a custom union in which members remove internal trade barriers, adopt common policies, allow members to move resources among themselves freely.

Economic Union

• It is a type of a trade block which is composed of a common market with a customs union. 
• Members eliminate trade barriers among themselves, adopt common external barriers, allow free import and export of resources, adopt a set of economic policies, and use one currency. 
• Example: European union

Conclusion

• Various types of trade agreements, including free trade agreements, customs unions, and economic partnerships, aim to facilitate trade between countries by reducing tariffs, promoting investment, and harmonizing regulations. 
• These agreements can lead to increased economic growth, job creation, and consumer welfare by expanding market access and fostering competition. 

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