The Definition of Free Trade Agreement


Free Trade Agreement Basics

A free trade agreement is a trade treaty between two or more countries that specifies what goods member countries will buy from, and sell to, each other and what each country can and can't do while they trade these goods. Free trade agreements facilitate trade among member countries by cutting through existing laws, regulations and processes that act as barriers to trade, such as overly high or inequitably applied customs duties and cumbersome or discriminatory governmental regulation.

As of January 2015, the United States was partner to 14 free trade agreements with 20 member nations. These agreements are entered into, administered and enforced by the Office of the United States Trade Representative.

What Free Trade Agreements Mean for You


If you're a U.S. business owner and you want to sell your products outside the United States, chances are an existing free trade agreement between the U.S. and that country will make it much easier and more profitable. The terms of a free trade agreement regularly address tariffs, either reducing them or eliminating them altogether on goods coming from the United States. This is critical to your profit margin because less money spent on taxes means more money for your business.

Intellectual Property Rights

Free trade agreements often have provisions protecting your company's intellectual property rights, which means no one in the countries that make up the trade partnership can use your trademark, copy any printed material you have copyright protected or make a product exactly like yours in violation of your patent rights. If you have a protected right in the U.S. to any trademark, copyrighted material or patent, your rights to these assets are as protected in the partner country as they are in the U.S., and you can sue for any infringements that happen in the partner country.


If your goods, or any bank accounts your business maintains, are frozen by the partner country, the terms of the free trade agreement will usually give you a means of doing something about it. Free trade agreements often address protection of foreign investment by setting out an agreed-upon process for getting your goods back or at least getting compensation for them. The point of this negotiated process is to make dealing with these situations less complicated, expensive and time intensive than it would be without the agreement.

Types of Free Trade Agreements

Many types of agreements exist to address specific problems two or more countries may have in doing business with each other, but a few of the most common types of free trade agreements are:

  • Trade and investment framework agreements: These address how the partner countries will expand the trade between them over time and how legal disputes that arise because of the process will be resolved.
  • Bilateral investment treaties: These encourage and protect foreign investment in countries where investor's rights aren't afforded other protections. For example, they provide a process for getting confiscated goods or money back from the partner government.
  • Preferential trade agreements: With these, each partner country gives preferential treatment to the goods coming from the other partner countries. This has particular significance when countries have quotas on certain types of products. In these instances, goods from partner countries are accepted before those from non-partner countries, which risk having their goods turned away, impounded or more heavily taxed once the quota has been met. In other instances quotas for partner countries are lifted. Sometimes this preferential treatment only exists in certain zones within the partner countries, turning this type of agreement into a regional trade agreement.

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