A Trade Agreement is a treaty or international agreement between two or more countries designed to reduce or eliminate barriers to trade, with a Free Trade Agreement (FTA) being a common type that forms a free-trade area. The concept is rooted in the post-World War II global effort to liberalize trade, with the General Agreement on Tariffs and Trade (GATT 1994) originally defining FTAs for trade in goods. The problem solved was the high cost and complexity of international trade caused by protectionist measures like tariffs and quotas.
FTAs work by setting out rules for trade, with a key mechanism being the reduction or elimination of tariffs on goods and services between signatory countries. A crucial provision is the Rules of Origin, which defines the minimum domestic content a product must have to qualify for the preferential tariff benefits, preventing non-member countries from free-riding. More expansive agreements, such as a Comprehensive Economic Partnership Agreement (CEPA), go beyond goods to cover areas like services, investment, and intellectual property.
The entire framework connects to the World Trade Organization (WTO), where FTAs are permitted as a derogation from the Most Favoured Nation (MFN) principle under Article I of GATT. The formation of FTAs is specifically governed by Article XXIV of GATT for trade in goods. Recently, India has shown a renewed focus on FTAs, concluding the India-EFTA Trade and Economic Partnership Agreement (TEPA) on March 10, 2024. Furthermore, the India-UK FTA was finalized on May 6, 2025, and signed on July 24, 2025, aiming to eliminate tariffs on 99% of Indian exports.