Trade Agreements

While the WTO sets global baseline rules, countries also negotiate regional and bilateral trade agreements that go further in reducing barriers between specific partners.

Types of Trade Integration

(From least to most integrated:)

1. Free Trade Agreement (FTA) — Eliminates tariffs between members, but each country keeps its own tariffs for outsiders. Example: USMCA
2. Customs Union — Free trade between members PLUS a common external tariff. Example: EU (partly), Mercosur
3. Common Market — Customs union PLUS free movement of labor and capital. Example: EU single market
4. Economic Union — Common market PLUS harmonized economic policies. Example: EU (eurozone)

There are currently over 350 regional trade agreements in force globally — almost every WTO member belongs to at least one.

Major Agreements

USMCA (United States-Mexico-Canada Agreement) — Replaced NAFTA in 2020. Covers $1.5+ trillion in trade between North America's three economies. Key features: stricter rules of origin for automobiles, digital trade provisions, labor protections for Mexican workers.

RCEP (Regional Comprehensive Economic Partnership) — The world's largest trade bloc by GDP ($26 trillion). 15 Asia-Pacific countries including China, Japan, South Korea, Australia, and ASEAN nations. Signed 2020, entered force 2022. Notably excludes the US and India.

EU Single Market — The deepest trade integration in the world. 27 EU countries (plus EEA members) with free movement of goods, services, capital, and people. A French engineer can work in Germany as easily as moving between states in the US.

CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) — 11 Pacific Rim countries. Originally the TPP, it continued after the US withdrew in 2017. The UK joined in 2023 — its first major post-Brexit trade deal.

AfCFTA (African Continental Free Trade Area) — Signed by 54 of 55 African Union members. Aims to create a single market of 1.3 billion people. Still in early implementation.

Worked Example: Why Rules of Origin Matter

Under USMCA, a car assembled in Mexico enters the US duty-free only if at least 75% of its content originates in North America (up from 62.5% under NAFTA).

Consider a $25,000 vehicle assembled in Mexico:

In Scenario B, missing the threshold by 5 percentage points triggers the standard 2.5% MFN car tariff — $625 per vehicle, or $6.25 million on 10,000 cars. This is why rules of origin, not just headline tariff rates, decide where multinationals build factories. USMCA's higher threshold was designed to pull auto supply chains back into North America and away from parts sourced in Asia.