Ratchet clause

In a “ratchet clause” the parties to a trade agreement commit to maintaining any further openings in their respective markets that they may unilaterally decide upon. Such opening would be "locked in" i.e. there can be no step backwards. 

Example: if a party, in a trade agreement, commits to allowing 30% foreign ownership in domestic companies and later on decides unilaterally to allow 40%, the party cannot roll-back from 40% foreign ownership. 

Since commitments normally reflect existing levels of market openness, a ratchet clause ensures that a free trade agreement is forward-looking and remains up-to-date by capturing the unilateral liberalisation that the other party may undertake in the future.

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