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All About Free Trade Agreements

Jul 13, 2021 - 12:54 PM Author - Alex Pardin


What Is A Free Trade Agreement?

A free trade agreement or FTA is an arrangement between two or more countries to reduce trade barriers to encourage easier imports & exports. Under an FTA, a group of countries signs a trade agreement according to which goods & services can be imported and exported with little or no government tariffs, import quotas, or subsidies, etc. Here, two or more countries agree on certain obligations that affect the trading of goods & services across the borders and determine tariffs & duties on imports & exports. The main agenda of an FTA is to facilitate uninterrupted trade and commercial ties between participating nations. To put it simply, free trade agreements are treaties to regulate tariffs, taxes, and duties that are imposed by countries on their imports & exports.

Types Of Trade Agreements 

There are usually three types of trade agreements which are:

1. Unilateral
2. Bilateral
3. Multilateral

1. Unilateral Trade Agreement - A unilateral agreement is a type of agreement that is imposed by a nation without regard to others. In simple words, it takes place when a country imposes trade restrictions without entertaining the responses of other countries. It only benefits the imposing country and is not negotiable.

2. Bilateral Trade Agreements - As the name implies, it is an agreement that involves two countries where they both agree on loosening trade barriers to encourage & expand their trading opportunities globally. They lower tariffs, import quotas, export restraints, and other trade barriers that further promote trade & investments. 

3. Multilateral Trade Agreements - It can be understood by its name as it involves three or more countries. But since the number of participating countries has increased, it makes the negotiations difficult. They are more complex than bilateral agreements as each country differs in needs, & opinions.

Free Trade Area vs. Customs Union vs. Single Market

Regional trading agreements can vary depending on the level of agreement on policies and the arrangements among the member countries.

1. Free Trade Area - As is mentioned above, in a free trade agreement, all trade barriers like tariffs & subsidies are reduced or eliminated to promote trade & investments between countries. It means that the participating countries can freely buy & sell goods & services across the borders by removing trade obligations or regulations. Plus, another thing about an FTA agreement is that imports from outside this area don’t benefit from this. For example, the US & Mexico who are members of FTA can trade goods without imposing tariffs but if the US imports goods from South America, it would bear tariffs.

2. Customs Union - Similar to FTA, a customs union also removes trade hurdles between its member countries, but it also adopts common external trade barriers to non-members on imported and exported goods. The main difference between an FTA & a custom union is the presence of more compliance under an FTA.

3. Single Market - It is also similar to an FTA but in comparison, it goes a lot deeper. It encourages frictionless trading ie. in addition to the free movement of goods & services, it also allows the movement of labor, land, and capital.

Advantages of Free Trade Agreements 

An FTA has several advantages including:

1. Economic Advancement - The member or participating countries in an FTA agreement can benefit from the arrangement especially in the form of the generation of more job opportunities, decreased unemployment rates, and market acceleration. Since FTAs come with investment guarantees, investors who are willing to invest in developing nations are protected against political risk.

2. Competitive Advantage - Another good thing about free trade agreement is that it boosts competition that further results in a country’s increased efficiency towards surviving in the market. Goods & services are available at a lower cost.

3. Increased Quality & Variety of Goods - Since free trade agreements eliminate tariffs & other trade barriers, it allows participating countries to access & cover new markets, further resulting in increased competition. It enables businesses to produce better quality products that lead to more variety for consumers & increased satisfaction.

4. No Monopoly - Since FTAs remove tariffs & quotas, monopolies are also removed as more participants can access new markets.

5. Lowered Prices - When there is competition on a global level, the prices go down and allows customers to enjoy increased purchasing power.

6. Utilization of Government Funds - Many governments provide subsidies to local industries to encourage trade & investments. Since FTA reduces these subsidies, the funds can be used better.

7. Technological Advancements - Many local companies get access to the latest technologies from their partners that increase job opportunities.

Disadvantages of Free Trade Agreements

An FTA has several disadvantages including:

1. Threat to Intellectual Property - As FTA allows countries to free trade goods & services, it also makes it easier for the domestic producers to copy those products and sell them as original without any fear of legal action. Plus, several countries don’t have laws to protect patents, inventions & new technologies.

2. Poor Working Conditions -Multi-national companies can outsource jobs to new market countries without sufficient labor protection. The laborers may be forced to work in unhealthy & poor work environments.

3. Down Turn of Natural Resources - Many emerging markets do not have environmental protections and FTA can lead to a lack of timber, minerals, and other natural resources.

Free Trade Agreements have their own pros & cons. By eliminating tariffs, the import prices get lower and benefit consumers. Countries can find new markets for their tariff-free products and boost their economy.