Trade agreements are complex sets of rules that govern economic relationships between countries. They can be bilateral or multilateral, between two countries or multiple countries. They include tariff reductions (or eliminations), non-tariff barriers, intellectual property protections and standards of treatment for government procurement contracts.
The most common trade agreement types are free trade agreements (FTAs) and preferential trade arrangements. Both reduce or eliminate tariffs and quotas, and often include investment guarantees. Moreover, both have provisions for “reciprocity”—in other words, that the trade benefits gained by one country must be offset by similar trade benefits to the other.
As a result of the work of global bodies like the General Agreement on Tariffs and Trade and its successor, the World Trade Organization, world tariff rates have dropped dramatically over time. These agreements also helped set key rules, including the principle of “most-favored nation” status and national treatment for nontariff restrictions on imports.
While there are many important trade benefits to a trade agreement, the specifics can be complicated and vary between countries. For example, the North American Free Trade Agreement (NAFTA) requires that a product be “essentially completed” in an FTA partner to qualify for the reduced or eliminated tariffs—meaning that for a company to sell sleds in Canada, it must first import wood from Finland and then mill and shape it into sleds there.
In order to ensure that Congress has an effective role in trade policy, the Trade Promotion Authority Act of 1993 established a process through which Congress can give its approval to these agreements. This expedited process allows the president to submit trade agreements for an up-or-down vote, with limited floor debate. It also establishes negotiating objectives for the executive branch and a requirement to consult with legislators throughout the negotiation process.