Under this system of government, each member polity rules itself and has its own laws, but all polities have signed a trade agreement. This agreement promises not only free trade between all the member polities but also serves as a mutual peace treaty. The different polities avoid interfering with each other's internal affairs. In some cases, if one polity is attacked, the others will join it to fight the common enemy.
Trade federations are delicate and easily upset, since each member is in the federation for a profit. If a planet or a group of planets decides it can do better on its own or with another group, it may pull out of the federation. An example of a trade federation was the European Common Market of Information Age Earth, and the early Non Coercive Zone of the late First Federation period.