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Glance into basics of Trade Agreements

Glance into basics of Trade Agreements

Trade agreement is any contractual arrangement between states concerning their trade relationships. Trade agreements may be bilateral or multilateral—that is, between two states or more than two states.

For most countries international trade is regulated by unilateral barriers of several types, including tariffs, nontariff barriers, and outright prohibitions. Trade agreements are one way to reduce these barriers, thereby opening all parties to the benefits of increased trade.

Reciprocity is a necessary feature of any agreement. If each required party does not gain by the agreement as a whole, there is no incentive to agree to it. If agreement takes place, it may be assumed that each party to the agreement expects to gain at least as much as it loses.

Unilateral, bilateral, and multilateral trade agreements are three types of trade agreements.

The World Trade Organization (WTO) which has more than 140 member countries oversees four international trade agreements: the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and agreements on trade-related intellectual property rights and trade-related investment (TRIPS and TRIMS, respectively).

As a multilateral trade agreement, the GATT requires its signatories to extend most-favored-nation (MFN) status to other trading partners participating in the WTO. MFN status means that each WTO member receives the same tariff treatment for its goods in foreign markets thereby ruling out preferences for, or discrimination against, any member country.

Although the WTO embodies the principle of non-discrimination in international trade, article 24 of the GATT permits the formation of free-trade areas and “customs unions” among WTO members. A free-trade area is a group of countries that eliminate all tariffs on trade with each other but retain autonomy in determining their tariffs with non-members. A customs union is a group of countries that eliminate all tariffs on trade among themselves but maintain a common external tariff on trade with countries outside the union. The GATT also permits free-trade areas (FTAs).

Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalisation pending the conclusion of FTA negotiation. It is primarily a confidence building measure.

Types of Trading Agreements

1. Preferential Trade Agreement (PTA)- This agreement requires the lowest level of commitment to reducing trade barriers, though member countries do not eliminate the barriers among themselves. Also, preferential trade areas do not share common external trade barriers. Example, India-Chile Preferential Trade Agreement.

2. Free Trade Agreement (FTA)- In a free trade agreement, all trade barriers among members are eliminated, which means that they can freely move goods and services among themselves. When it comes to dealing with non-members, the trade policies of each member still take effect. In an FTA tariff reduction is generally undertaken with reference to the base rate i.e. from the applied MFN tariffs. However, the WTO negotiations are always based on “bound duty rates” and not the MFN applied duties. For example, North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States of America.

In a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced.

3. Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc. For example, India-ASEAN/UAE CEPA, India-Australia Economic Cooperation & Trade Agreement (ECTA).

A Comprehensive Economic Cooperation Agreement (CECA) or a Comprehensive Economic Partnership Agreement (CEPA) is different from a traditional Free Trade Agreement (FTA) on two counts.

Firstly, CECA/CEPA are more comprehensive and ambitious that an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA is more ambitious in terms of a holistic coverage of many areas like services, investment, competition, government procurement, disputes etc.

Secondly, CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA. It is on account of this that it encompasses Mutual Recognition Agreements (MRAs) that covers the regulatory regimes of the partners. An MRA recognises different regulatory regimes of partners on the presumption that they achieve the same end objectives.

4. Customs Union- Member countries of a customs union remove trade barriers among themselves and adopt common external trade barriers. For example, East African Community (EAC), Southern African Customs Union (SACU).

5. Common Market– A common market is a type of trading agreement wherein members remove internal trade barriers, adopt common policies when it comes to dealing with non-members, and allow members to move resources among themselves freely. For example, European Union (EU).

6. Economic Union- An economic union is a trading agreement wherein 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. For example, Caribbean Community (CARICOM) Single Market Economy (CSME), Eurasian Economic Union (EAEU), Gulf Cooperation Council (GCC).

There are trade agreements which are a mixture of economic and monetary union (ECCU/XCD, Eurozone/EUR, Switzerland–Liechtenstein/CHF), or, custom and monetary union (CEMAC/XAF, UEMOA/XOF).

Exclusion List or Negative List is a list of all items on which no tariff concessions/ any other form of barrier reduction have been offered by individual Parties.

Barriers to Trade

There are major two kinds of barriers to trade namely, tariff and non-tariff barriers.  Some of the other non-tariff measures (NTM) that figure in FTA chapters are customs procedures; import licencing procedures; trade documentation; and, pre-shipment inspections. Further, types of NTM are quotas, import licensing, SPS, and TBT.

‘Sanitary and Phytosanitary’ (SPS) measures broadly includes measures for the protection of plant, animal and human health. ‘Technical Barriers to Trade’ (TBT) includes standards, technical regulations and conformity assessment procedures as defined in WTO’s TBT Agreement.

As they have the potential to limit the trade, steps are undertaken under FTAs and otherwise by the department of the government that looks after trade. To ensure smooth trade between nations, individual entrepreneurs are empowered if they encounter NTMs (including SPS and TBT measures) can bring these to the notice of the territorial divisions of the concerning department of trade and commerce.


The concept of review of the Agreement has been put in place to take stock of the operation of the Agreement and based on this suggest the future course of action. The Agreement is operationalized and implemented through a Joint Committee. The Joint Committee meets biennially to review the Agreement with a purpose of considering additional measures to further enhance the Agreement.

Consultation and Cooperation for Dispute Resolutions

The parties shall resolve dispute through consultations and negotiations, failing which they may resort to an arbitral panel, which shall consist of three members. Each party to the dispute shall appoint a member and the third member who would be the Chair of the panel, shall be appointed by mutual agreement.

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