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    Trade Agreements

    A trade agreement or trade pact is when regions or countries agree upon a system or solution that benefits the countries involved in terms of international trade.

    Free trade is when there are no restrictions on imports and exports for the exchange of goods and services between countries. The government does not intervene in the exchanges and does not place tariffs or subsidies on imports or exports. Free trade is based on the economic theory of comparative advantage, which is the ability of a party to produce goods or services at a lower marginal cost than another party. Free trade will allow each country to specialize in their own comparatively advantageous goods and trade for other goods. In this way, efficiencies are taken advantage of and each country profits by being able to consume outside of their own autonomous production possibilities. 

    Trade barriers can be part of a trade agreement where governments set up economic policy of protectionism, which is when international trade is limited. Governments may engage in such policies to shield the domestic economy from the negative consequences of international trade; certain domestic industries may be unable to compete with more developed international firms. Types of protectionism include tariffs, banning the import of a specific good, restricting the number of goods imported, and requiring foreign governments to make a payment for the right to import goods.

    There are pros and cons to each side of international exchange and the effects of free trade and trade barriers are important to understanding how trade agreements work and how the international economy functions.

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