Trade agreements set preferential rules for buying and selling goods and services, reducing restrictions that can make it harder to invest and sell. They are a key part of the global business environment, and the way they impact businesses is critical for the economy.

Most trade agreements are multilateral and involve more than two countries. These include the Comprehensive and Progressive Trans-Pacific Partnership agreement and the United States-Mexico-Canada Agreement (USMCA).

The USMCA and other multilateral agreements typically establish a “most-favored-nation” principle that guarantees all members of an organization the same benefits when they negotiate with one another. This arrangement tries to ensure that governments don’t raise tariffs unnecessarily and provides consistency for companies trying to plan for their business environment.

Many agreements also discipline how governments collect tariffs. By specifying that tariffs are based on the country of origin and the customs category of each shipment, these arrangements try to avoid over-imposing tariffs. They also set out other rules to discourage government abuses of protectionist policies such as quotas, special “health” requirements and “voluntary restraints on imports.”

In addition, the agreements often address nontariff barriers by requiring signatories to treat domestically produced goods like their imported counterparts in national-treatment clauses. This helps to level the playing field between domestic and foreign producers and encourages manufacturers to focus on innovation, efficiency, and quality. The agreements can also cover procurement, and many of them require that governments open their procurement to international competition. Nevertheless, the overall impact of these deals falls short of economists’ unilateral free trade ideal, as they do not fully reduce government-induced protectionism.