Free Trade Area
It is a region in which countries have signed free trade agreements to keep trade obstacles to a minimum.
What is a Free Trade Area?
A free trade area is a region in which countries have signed free trade agreements to keep trade obstacles to a minimum.
Generally, such agreements involve cooperation between two countries but can involve more members.
They help reduce trade barriers, lower trade tariffs, eliminate quota limits, and enhance trade between member countries. In international trade, free trade agreements are crucial to allowing consumers to access a wide variety of goods and services.
Each country involved gains more access to its trading partner's markets, resulting in increased economic growth, reduced government spending as local governments can reduce subsidies, and increased foreign investment opportunities.
Also, the interaction between foreign markets facilitates the exchange of ideas and technology in every industry.
However, there are some drawbacks to free trade zones, including increased job losses and poorer working conditions for those who remain employed, and decreased government revenue due to the reduction of import duties.
Companies in industrialized nations might also try to exploit the natural resources of other countries, which could be destroyed. As a result, the level of environmental protection is often reduced.
Participating nations must establish the regulations governing how the new free trade area will function. For example, what are the procedures for customs in each country? What mechanisms will the member nations use to settle trade disputes and other issues?
The answers to these questions often depend on political sway inside nations and power dynamics between them. These factors determine the degree and scope of "free" trade.
The objective of an FTA is to create a free trade zone with a trade agreement that all participating nations can realistically fulfill.
Advantages of a Free Trade Area
A free trade zone has a number of advantages, including
- Increased Economic Growth: Countries' trade agreements reduce import tariffs. They should benefit customers and boost GDP by expanding product variety, improving quality, and lowering prices. The additional competition motivates firms to become truly global competitors.
- Intellectual Property Protection: Each country's independent intellectual property rights are protected and enforced inside the free trade agreement partner countries.
- Lower Government Spending: Many countries subsidize local sectors to secure their existence without free trade agreements. After trade agreements eliminate subsidies, these revenues can be used better.
- Attracting Investors: Investors should be treated fairly. They can treat foreign investors the same way free-trade agreement partners treat their own. Investors from any member country, and domestic investors, are given preferential treatment.
- Industry Expertise: When multinational corporations work with local businesses, they train their employees in the most effective methods and pass on their knowledge. This allows local businesses to learn and apply these new techniques. As a result, small firms in that industry become more proficient and competitive.
Disadvantages of a Free Trade Area
A free trade zone has a number of disadvantages, including
- Increased Job Outsourcing: Lower import tariffs help businesses expand to nations with lower manufacturing costs, but when enterprises relocate, jobs are lost. Without tariffs, it would be cheaper to import from a country with a lower cost of living, which would be a shock to local businesses, decreasing job opportunities.
- Unhealthy Working Conditions: Outsourcing work in developing countries has become a trend with the establishment of free trade zones. As a result, companies are relocating their operations to other countries. Then, because many countries lack adequate worker safety laws, workers may be forced to work in unhealthy and substandard conditions.
- Increased Competition: Enterprises are going to face stiffer competition with the establishment of FTAs. However, the firms that perform well will reap the rewards of higher revenues and access to more markets.
- Reduced Government Revenue: The government's tax revenues are reduced because member countries are exempt from paying import taxes under the free-trade agreement.
- Minimal Environmental Protection: Companies from developed countries may seek to exploit natural resources in other countries. These natural resources are then used to manufacture goods and provide services. Mining and logging are examples of such activities. Unfortunately, these practices are pretty harmful to the environment.
Examples of Free Trade Agreements
A few of the examples are:
1. The North American Free Trade Agreement (NAFTA)
The North American free-trade agreement (NAFTA) was established to help the United States, Canada, and Mexico trade more effectively. The agreement went into effect on January 1, 1994, and removed the majority of tariffs between the three countries.
Many tariffs were phased out between January 1, 1994, and January 1, 2008, mainly those concerning agricultural products, textiles, and vehicles.
2. Association of Southeast Asian Nations Free Trade Area (AFTA)
The ASEAN free trade area (AFTA) is an existing regional trade bloc established by the Association of Southeast Asian nations to promote local manufacturing inside every single ASEAN country.
On January 28, 1992, the ASEAN free trade area agreement was signed in Singapore. When it was signed, Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand were six participants of the ASEAN free trade agreement.
Vietnam joined in 1995, Laos, and Myanmar, joined in 1997, and Cambodia joined in 1999. Currently, 10 ASEAN nations are members of the ASEAN free trade area.
All four latecomers had to sign the ASEAN free trade area agreement to join ASEAN but were given more time to meet their tariff reduction responsibilities.
3. Southern Common Market (MERCOSUR)
Argentina, Brazil, Paraguay, and Uruguay founded the MERCOSUR regional integration initiative, which Venezuela and Bolivia later joined.
4. Common Market of Eastern and Southern Africa (COMESA)
The economic community of West African States (ECOWAS) was founded in December 1994 to replace the previous preferential trade area (PTA) founded in 1981.
COMESA is "an organization of free and independent sovereign states that have agreed to cooperate in the development of their natural and human resources for the benefit of all peoples."
COMESA has a broad set of objectives, including promoting regional peace and security.
What about the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP)?
The TPP was a proposed trade deal between the United States, Canada, Mexico, and 11 other Asia-Pacific countries (the remaining countries that formed the CPTPP). The Obama administration made that claim about made-in-American products that it would have eliminated over 18,000 tariffs on Made-in-America products.
A comprehensive trade agreement between the European Union (E.U.) and the United States, called the Transatlantic Trade and Investment Partnership (TTIP), was put forth to foster trade and economic expansion.
The Trans-Pacific Partnership (TPP), which the United States withdrew from in 2017, would have been a companion deal to the TIPP.
At the time, it was touted as the largest trade deal ever negotiated, but talks stalled in 2016 and were not resolved.
Free Trade Areas and the United States
Trade agreements are one of the most effective ways American exporters access other markets. The U.S. has signed 14 Free Trade Agreements (FTAs) with 20 countries.
The following is information on each FTA:
| Other member countries | Name |
|---|---|
| Australia | Australia Free Trade Agreement (AUSFTA) |
| Bahrain | Bahrain Free Trade Agreement (BHFTA) |
| Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic | The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) |
| Chile | Chile Free Trade Agreement (CLFTA) |
| Colombia | Colombia Trade Promotion Agreement (COTPA) |
| Israel | Israel Free Trade Agreement (FTA) |
| Jordan | Jordan Free Trade Agreement (JOFTA) |
| Mexico, Canada | North American Free Trade Agreement (NAFTA), which was replaced by the U.S. – Mexico – Canada Agreement (USMCA) |
| Morocco | Morocco Free Trade Agreement (MAFTA) |
| Oman | Oman Free Trade Agreement (OMFTA) |
| Panama | Panama Trade Promotion Agreement (PATPA) |
| Peru | Peru Trade Promotion Agreement (PETPA) |
| Singapore | Singapore Free Trade Agreement (SGFTA) |
| South Korea | Korea Free Trade Agreement (KORUS) |
Free Trade Area FAQs
The RCEP is the world's largest free-trade zone.
Building upon Australia's current free trade agreements with 14 other Indo-Pacific nations, the Regional Comprehensive Economic Partnership (RCEP) is a regional free trade deal.
Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand, and Vietnam are among the ten nations subject to the RCEP, which went into effect on January 1, 2022.
Australia was the founding party to the agreement. On February 1, 2022, the RCEP will take effect for Malaysia; on March 18, 2022, it will take effect for the Republic of Korea.
It is a cutting-edge and all-encompassing free trade agreement.
The agreement addresses trade in goods, services, investment, and economic and technical cooperation. In addition, it establishes new regulations for e-commerce, intellectual property, public procurement, competition, and small and medium-sized enterprises.
The Regional Comprehensive Economic Partnership (RCEP) negotiations began in November 2012.
It is between the Association of Southeast Asian Nations (ASEAN) and partners in the ASEAN Free Trade Area (Australia, China, India, Japan, New Zealand, and South Korea).
The ASEAN includes Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
The ASEAN Free Trade Area partners include Australia, China, India, Japan, New Zealand, and South Korea. Ministers from 15 different nations signed the agreement on November 15, 2020.
Tariffs and trade are addressed by both free trade zones and customs unions. They are, however, very different in many ways.
When several nations band together and decide to eliminate tariffs or quotas on their traded goods, they establish a free-trade zone.
However, most free trade regions do not include the unrestricted movement of labor or money. Therefore, the agreement may also have some liberalization of trade in services.
A customs union is a more sophisticated type of free trade zone. It likewise eliminates tariffs amongst its members and establishes a standard external tax on imported and exported commodities for non-members.
Consequently, buying and selling across borders is even simpler than in a free-trade area because businesses know that if their produce meets standards in their home country, it can be sold elsewhere.
This is done to prevent any member from agreeing to a better deal with a non-member and undercutting the rest.
A customs union is exemplified by the European Union (E.U.). No tariffs are imposed on the movement of goods between E.U. members (duty-free). Additionally, all E.U. members impose the same levies on imported goods from non-member nations.
Single Market:
With a single standard, the market goes much farther; in addition to quotas and tariffs, it also aims to eliminate other trade restrictions. Also, It includes the free movement of goods, services, capital, and people.
For instance, member nations agree to harmonize product standards throughout their markets, such as those governing the alcohol content of beverages or the fuel efficiency of automobiles, as failure to do so could allow nations to impose trade restrictions.
The strategy also covers other areas. For example, a unified external tariff policy is required to stop one member from undercutting the other members.
Next, it may be possible for cartels or monopolies to create private trade barriers. Thus it is in the best interests of global commerce for all member states to agree on a standard competition policy.
Members could direct favorable policies toward their own companies to reduce production costs, such as tax incentives, subsidies, or softer labor or environmental regulations.
As of July 2022, The US is a member of twenty free trade agreements. The North American Free Trade Agreement (NAFTA), signed on January 1, 1994, resulted in establishing one of the most well-known and substantial FTAs.
A free trade zone is often established within a single nation, although there are a few outliers, like the Syrian/Jordanian Free Trade Zone, where an accessible location may transcend a national border.
Reviewed and Edited by Sara De Meyer | LinkedIn
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