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Trade Agreements and How They Affect the U.S. Economy

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Trade Agreements and How They Affect the U.S. Economy

(Credit: Justin Sullivan / Getty Images)

Definition: Trade agreements are when two or more nations agree on the terms of trade between them. For this reason, when most people say trade agreements, they mean international trade agreements. Trade agreements determine the tariffs, or taxes and duties, countries impose on imports and exports.

Imports are goods and services produced in a foreign country and bought by U.S. residents. It includes all goods that are shipped into the U.S., even if produced by an American company. If the consumer is a U.S. resident, and the provider is a foreign resident, then it is an import. Exports are any good or services that passes through customs from the U.S. to be sold overseas. This includes merchandise shipped from a U.S. based company to its foreign affiliate or branch.

There are many different types of trade agreements. Bilateral trade agreements are between two countries. As you would guess, they are relatively easy to negotiate, and so are the most numerous.

More difficult to negotiate are multi-lateral trade agreements. These are between three countries or more. However, once negotiated, they are very powerful. That's because they cover a larger geographic area, conferring a better competitive advantage on the signatories. In addition, all countries in a multi-lateral agreement give each other most favored nation status. This means they treat each other equally.

The most well-known, and controversial, multi-lateral trade agreement is the North American Free Trade Agreement, or NAFTA. Most of the other U.S. regional trade agreements are also multi-lateral.

Once agreements move beyond the regional level, they usually need help. That's where the World Trade Organization (WTO) steps in. It is an international body helps negotiate global trade agreements. Once in place, the WTO enforces the agreement and responds to complaints.

The WTO currently enforces the GATT round of global trade agreements. The world almost received greater free trade from the next round, known as the Doha Round Trade Agreement. If successful, Doha would have reduced tariffs across the board for all WTO members. Unfortunately, the two most powerful economies refused to budge on a key sticking point. Both the U.S. and the EU resisted lowering farm subsidies. These subsidies made their food export prices lower than those in many emerging market countries. These low food prices would have put many local farmers out of business, sending them to look for jobs in over-crowded urban areas. This doomed the Doha round, and possibly all future world multi-lateral trade agreements.

The failure of Doha allowed China to gain a global trade foothold. It has signed bilateral trade agreements with dozens of countries in Africa, Asia and Latin America. In return for loans and technical or business support, Chinese companies receive rights to develop the country's oil and other commodities.

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