[Full guide] What is a free trade agreement?

 Trade between countries is inevitable. There are so many reasons for this. One of the reasons is that a country is unlikely to produce every single product or service that its citizens need. Another important reason is that available products made in the country may not be able to meet citizens' market demand. Of course, the list is endless.

Countries trade with each other; That’s a fact. Many countries have introduced guidelines or trade barriers to regulating products back and forth within their borders. Not only do these guidelines hinder the free flow of goods, but they can also increase business costs.

For the sake of simplicity, many countries have introduced guidelines to reduce the "bureaucracy" between them and other countries. This policy is commonly referred to as a "free trade agreement" or a free trade agreement.

What is a free trade agreement?

A free trade agreement (FTA) or a treaty is an international agreement to form a free trade area between the contracting states. Free trade agreements are trade pacts that aim to relax the regulation, tariffs, and tariffs that governments impose on imports and exports.

In other words, any policy can be termed a Free Trade Agreement (FTA) if it is a "pact" between two or more countries to reduce some obligations affecting trade in goods and services. This also includes the protection of investors and intellectual property rights.

The general aim of free trade agreements is to promote international trade and promote a stable investment environment by reducing or removing barriers to trade.

In addition to concluding a preferential tariff agreement, free trade agreements often also include trade facilitation agreements in areas such as investment, intellectual property, public procurement, standards, health, and phytosanitary issues.

For manufacturers, investors, wholesalers, or retailers of goods, free trade agreements give access to consumers or companies in other countries. By creating access to the global market through, among other things, zero / reduced tariffs, free trade agreements make it easier and cheaper for you to export or import products and services to other countries.

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Types of free trade agreements

Trade agreements can take three forms: unilateral, bilateral, or multilateral.

• Unilateral trade agreement

One country alone can formulate a trade "agreement" to bind other countries. Such agreements are known as unilateral free trade agreements. This can happen when a government unilaterally relaxes trade restrictions. A country can conclude such free trade agreements because it wants to solve a specific need. It can also be to encourage foreign direct investment (FDIs).

• Bilateral trade agreements

In contrast to unilateral agreements, bilateral agreements involve two countries that agree to set guidelines that reduce trade restrictions or barriers. Products popularly involved in trade agreements include protected or state-subsidized domestic industries, particularly those in the automotive, oil, and food industries. Bilateral free trade agreements expand the business relationships or opportunities between the two countries.

• Multilateral trade agreements

Free trade agreements can also be broader and affect more than two countries. These are called multilateral agreements - and are usually the most complex to negotiate. This is undoubtedly because multilateral agreements cover a larger geographic area. All countries of the pact grant each other trade tariffs, conditions or concessions.

Levels of the free trade agreement

Free trade agreements are not only unilateral, bilateral, or multilateral but also differ depending on the form or type of agreement. Some of these are identifiable as:

1. Regional Trade Agreement (RTA) or "Free Trade Area";
2. Special trade agreements
3. Customs unions;
4. Common markets; and
5. Business unions.

• Regional trade agreements: These are a form of multilateral free trade agreements. Here, FTA states promote transparent trade with one another. They do this by making an international pact to facilitate the movement of goods and services between them.
• Special trade agreements: Most trade agreements cover a wide range of products or services. Special trade agreements are specific and only concern the dismantling or removal of barriers to trade for a particular product. A country can only agree to import the goods/products mentioned with another country.
• Customs unions: These are agreements between more than two countries to enable the free trade of goods within the customs union. A customs union differs from a regional trade agreement in that the parties agree on a “common external tariff” (CET) on imports from third countries.

An example of a customs union is the 2010 trade pact between Russia, Belarus, and Kazakhstan [1]. Note, however, that the simplicity of “regulations” applies to products; The policy of the customs union does not cover the free movement of capital and labor between the member countries.

• Common markets: Similar to customs unions, common markets work to dismantle tariff barriers between members and introduce collective external barriers to trade against non-members. In contrast to customs unions, however, the policy of the common market contains provisions such as the free movement of resources and labor between FTA countries. The economic policy of the Economic Community of West African States (ECOWAS) is a typical example of a common market.
• Economic union: this is undeniably the highest level of the free trade agreement. In an economic union, two or more countries agree to formulate policies that facilitate the free movement of goods and services and factors of production such as capital and labor. In addition, the FTA partners also share the usual financial and fiscal policies. Not only are common internal barriers and tariffs removed, but the FTA states also pursue a common economic policy and mutual external barriers. The European Union (EU) is a popular example of an economic union. 

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How do free trade agreements work?

The main aim of free trade agreements is to improve trade relations in the import and export of goods and services. The agreement is often initiated unilaterally or through the formal and mutual agreement of the FTA parties involved. In most cases, the enforcement of free trade agreements is managed by the World Trade Organization (WTO).

 

By and large, free trade agreements allow countries or foreign markets to focus on producing or selling the goods they have in abundance; while allowing other manufacturers to import products that are scarce or unavailable in their country. Local goods production and foreign goods imports often work together to stimulate an FTA country's economy.

However, it is often argued that the best free trade policy can simply be the absence of any trade barriers. A country without barriers or restrictions has a “laissez-faire” or unilateral trade agreement to liberalize trade. Still, most countries already have conditions or the development of product standards for imports and exports to protect their local economies.

A free trade agreement can be implemented in two different ways:

• Dismantling of trade barriers such as tariffs and quotas; and
• Imposition of regulations or standards for products.

Governments with free trade policies or agreements do not necessarily give up all control over imports and exports or eliminate all protectionist policies. Also, one country can allow free trade with another country, with exceptions that prohibit some products. Conversely, the free trade agreement could have guidelines that exempt some products from tariffs.

It should be noted, however, that free trade agreements can also cover a wide variety of government activities and may include measures for the free movement of individuals. In the EU, for example, free trade agreements mean that people from the FTA countries can travel and work in any other EU country.

5 advantages and 3 disadvantages of the free trade agreement

Free trade agreements have their advantages and disadvantages, depending on where you look at them from. Here are some of the benefits of free trade agreements:

1. Economic Growth - Whether full free trade or reduced import and export barriers, free trade agreements generally lead to steady economic development.
2. Increases Consumer Chances - Restrictions such as tariffs and quotas are often imposed on goods imports to protect local businesses. While ideal, such restrictions can overinflate the value of incoming products. Free trade agreements increase competition, which will ultimately lead to cheaper products for consumers.
3. Technology and know-how transfer - products with higher technology and efficiency in other countries will be available. In addition to products, a free trade agreement also offers local workers the opportunity to be trained by multinational companies with new skills, technologies, and infrastructures.
4. Reduced government spending - The implementation of free trade policy will ultimately lead to a reduction in government spending, especially on necessary goods, which are subsidized by the government due to their high cost.
5. Increases Foreign Direct Investment (FDI) - Lower trade restrictions mean bigger relationships between local and overseas companies.

Like advantages, free trade agreements have several disadvantages. Some of the most important ones are highlighted here:

1. Outsourced Jobs or Business Opportunities - A major criticism of free trade agreements is that by reducing import restrictions instead of protecting local businesses, local jobs are being lost overseas.
2. The curse of technology and know-how transfer - tech transfer is an advantage, but it also has its disadvantages. Intellectual property rights in a developed country may not be as effective in less developed countries. Intellectual theft or "copycat" is the other side of the coin. Foreign companies with superior technology or expertise often struggle against competition with imitations or imitations of their products.
3. Reduced Revenue - Governments lose huge revenues in tariffs, taxes, or duties when they sign a free trade agreement. Developing countries with lower production capacities that rely on income from imported goods must find alternative means.

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Examples of free trade agreements

Almost every country has all kinds of free trade agreements. Most countries have implemented a unilateral free trade policy to allow the import of necessary products or services.

An example of bilateral free trade agreements is the trade pact that the USA signed with several countries in 2019 [2]. In addition, Australia and the US have an AUSFTA pact that removes tariffs on a number of agricultural and textile exports and imports between the two countries. Another prominent example of a bilateral trade agreement is that between China and the Association of Southeast Asian Nations (ASEAN) [3]. It is a regional trade agreement signed in 2002 and implemented in 2005.

As mentioned earlier, there are more than two countries involved in multilateral trade agreements. The North American Free Trade Agreement (NAFTA) is a popular example of a multilateral agreement. NAFTA was signed between the United States, Mexico, and Canada in 1992. [4]It enables the free movement of goods between FTA states without export or import duties.

Other significant regional or multilateral trade agreements exist between:

• Association of Southeast Asian Nations (ASEAN), which enables the free exchange of trade, services, labor, and capital between ten independent member states; [5]
• the Asia-Pacific Trade Agreement (APTA); [6]
• The Central American Free Trade Agreement (CAFTA) covers most of Central America's countries (Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador); [7]
• The United States-Mexico-Canada Agreement (USMCA) was signed to replace the North American Free Trade Agreement (NAFTA). [8]

References:

[1].UCA IPPA WP12 Trade Creation And Diversion

[2].Free trade agreements

[3].ita/fta hkasean 

[4].Trade agreements accords commerciaux

[5].Associationsoutheast Asian nations free trade area

[6].APTA

[7].Free Trade Agreements in Central America

[8].United States Mexico Canada Agreement