Trade agreements can lower or eliminate tariffs and quotas, which open the door to new opportunities. They can also establish rules addressing intellectual property rights, investment flows, and labor practices, among other matters. In addition, they can provide for measures that go beyond the trade of goods and services (for example, facilitating the ability to sell to government procurement markets).
The most comprehensive trade agreements are multilateral plurilaterals—which typically involve three or more countries negotiating rules between themselves that do not extend to any other parties—and closed plurilaterals, which limit the scope of the benefits available to their signatories. The USMCA, the Comprehensive and Progressive Trans-Pacific Partnership, and the North American Free Trade Agreement are examples of these types of trade agreements.
Selective Optimizers
Economies that execute selective optimization trade agreements tend to have broad coverage and deep liberalization across their trade agreements, but they focus on key partners with whom they do a lot of trading and share strategic ties. For instance, the USMCA focuses on trade with two proximate and vital trading partners—Canada and Mexico.
These economies benefit from the broad coverage, deep liberalization, and robust enforcement that their trade agreements offer. Multiple assessments of FTAs in force have demonstrated clear benefits, including increased real GDP, jobs, and wages. Nevertheless, it is important to acknowledge that trade agreements can have negative impacts, especially when they distort trade by diverting production from more efficient nonmember exporters to less efficient member exporters (a phenomenon known as “trade diversion”). This undermines the foundation of the WTO’s rules on nondiscriminatory multilateral trade and can impose costs on consumers in importing countries.