Trade agreements are essential for countries to increase their economic cooperation, promote free trade, and minimize barriers to trade. These agreements are pacts between two or more countries that help streamline the process of trade between them. There are at least three types of trade agreements that countries can enter into. Let`s take a closer look at them.
1. Free Trade Agreements
Free trade agreements remove restrictions such as tariffs and quotas, which are taxes or fees imposed on imported and exported products between countries. Once a free trade agreement has been enacted, products originating from member countries can be traded without tariffs or quotas until they reach their final destination. This type of agreement encourages trade and reduces the cost of goods and services.
Some examples of free trade agreements include the North American Free Trade Agreement (NAFTA) and the European Free Trade Association (EFTA). These agreements help to increase the movement of goods and services between countries by eliminating trade barriers.
2. Customs Unions
Customs unions are agreements between countries that establish a common external tariff or trade policy among member nations. It means that once goods and services have entered a customs union, they are considered domestic products and can be traded freely between countries. This type of agreement is beneficial as it offers protection to local industries from competition from outside.
The most famous example of a customs union is the European Union (EU). The EU has been able to build an economic and political union between its member nations by establishing common policies, including a common trade policy.
3. Common Markets
Common markets go beyond customs unions by allowing the free flow of goods, services, and capital between member countries. Unlike customs unions, there are no internal trade tariffs or restrictions on labor mobility. This type of agreement allows for the movement of goods, services, and people between countries, creating a more open and integrated market.
The most significant example of a common market is the Common Market of the South (MERCOSUR). MERCOSUR is a trade bloc that includes countries such as Brazil, Argentina, Uruguay, and Paraguay. It is designed to encourage economic integration between the countries involved and to minimize barriers to trade.
In conclusion, these three types of trade agreements are essential for countries to boost their economic growth, increase their trade cooperation, and minimize barriers to trade. When countries work together to establish these agreements, it creates a more favorable environment for businesses to operate and encourages economic development.