The General Agreement on Tariffs and Trade (GATT 1994) originally defined free trade agreements as covering only trade in goods. [5] An agreement with a similar objective, namely to promote the liberalization of trade in services, is referred to in Article V of the General Agreement on Trade in Services (GATS) as the “Economic Integration Agreement”. [6] In practice, however, the term is now often used [by whom?] to refer to agreements that concern not only goods, but also services and even investment. Environmental regulations have also become increasingly common in international investment agreements such as free trade agreements. [7]:104 In the modern world, free trade policy is often implemented by mutual and formal agreement between the nations concerned. However, a free trade policy may simply be the absence of trade restrictions. It should be noted that, when classified according to origin criteria, there is a difference in treatment between inputs originating inside and outside a free trade agreement. Normally, inputs originating in one Party to the Free Trade Agreement are considered to originate in the other Party if they are included in the manufacturing process of that other Party. Sometimes the production costs incurred in one party are also considered to be those incurred in another party. In preferential rules of origin, such a difference in treatment is generally provided for in the determination of cumulation or cumulation. Such a clause also explains the impact of a free trade agreement mentioned above on the creation of trade flows and the diversion of trade, since a party to a free trade agreement has an incentive to use inputs from another party to acquire originating status. [22] A free trade agreement (FTA) between two countries or a group of countries can be used to set the rules for how countries deal with each other when it comes to doing business together. The creation of free trade areas is considered an exception to the most-favoured-nation principle of the World Trade Organization (WTO), as preferences granted exclusively by parties to a free trade area go beyond their membership obligations.

[9] Although Article XXIV of the GATT allows WTO members to establish free trade areas or to conclude the interim agreements necessary for their establishment, there are several conditions relating to free trade areas or interim agreements leading to the formation of free trade areas. The second way in which free trade agreements are seen as public goods is related to the trend towards their “deepening”. The depth of a free trade agreement refers to the additional types of structural policies it covers. While older trade agreements are considered “flatter” because they cover fewer areas (such as tariffs and quotas), recent agreements deal with a number of other areas, from services to e-commerce to data localization. Since transactions between parties to a free trade agreement are relatively cheaper than transactions with non-contracting parties, free trade agreements are traditionally considered excludable. Now that deep trade agreements will improve regulatory harmonization and increase trade flows with non-parties, thereby reducing the exclusionability of free trade agreements, next-generation free trade agreements will acquire essential characteristics of public goods. [19] It is also important to note that a free trade agreement is a reciprocal agreement authorized under Article XXIV of the GATT. Autonomous trade arrangements for developing and least developed countries are permitted by the Decision on Differential and More Favourable Treatment, Reciprocity and Wider Participation of Developing Countries adopted by the Signatories to the General Agreement on Tariffs and Trade (GATT) 1979 (`the Enabling Clause`). This is the WTO`s legal basis for the Generalised System of Preferences (GSP).

[13] Free trade agreements and preferential trade agreements (as designated by the WTO) are considered exceptions to the most-favoured-nation principle. [14] In today`s commercial economy, most free trade agreements are implemented through a formal treaty-like agreement and include certain regulatory measures. In fact, very few trade agreements lead to full free trade. First, the customs duties and other rules maintained in each of the Parties to a free trade area and applicable to trade with non-Contracting Parties to such a free trade area at the time of the formation of such a free trade area are no more restrictive than the corresponding duties and other rules which existed in the same Contracting Parties before the formation of the free trade area. In other words, the creation of a free trade area to grant preferential treatment to its members is legitimate under WTO law, but parties to a free trade area must not treat non-contracting parties worse than before the creation of the territory. A second requirement set out in Article XXIV is that tariffs and other barriers to trade must be removed for all trade within the free trade area. [10] A free trade agreement (FTA) is an agreement between two or more countries in which, among other things, countries agree on certain obligations that affect trade in goods and services, as well as the protection of investors and intellectual property rights. For the United States, the main purpose of trade agreements is to break down barriers for the United States.