Free trade area
Encyclopedia
A free trade area is a trade bloc
whose member countries have signed a free trade agreement (FTA), which eliminates tariff
s, import quota
s, and preferences on most (if not all) goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border
. It can be considered the second stage of economic integration
. Countries choose this kind of economic integration if their economical structures are complementary. If their economical structures are competitive, they are more likely to form a customs union
.
, members of a free trade
area do not have a common external tariff
, which means they have different quotas and customs, as well as other policies with respect to non-members. To avoid tariff evasion (through re-exportation
) the countries use the system of certification of origin most commonly called rules of origin
, where there is a requirement for the minimum extent of local material
inputs and local transformations adding value
to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions.
Cumulation is the relationship between different FTAs regarding the rules of origin — sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact
) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree — if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade bloc
or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries) — then the new FTA will consist of the old FTA plus the new country (or countries).
Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariff
s or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.
The aim of a free trade area is to reduce barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage
. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.
and Colombia
. There was a lot of opposition to this. Arguments against it are:
Every customs union
, trade common market, economic union
, customs and monetary union
and economic and monetary union
has also a free trade area.
. An automated solution should be in place for an importer to solicit his/her suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the product's Harmonized System
number. Each free trade agreement will qualify an importer's products in different ways, however the basis of the qualification surrounds the idea that the finished product must have a minimum percentage of local/regional content.
Under the North American Free Trade Agreement
(NAFTA), qualifying rules include De Minimis, Regional Value Content, and Tariff Shift.
A finished good must qualify under one of these rules to be eligible for free trade under NAFTA. This is just one example of a qualification for a free trade agreement. If a certificate of origin is present from a supplier demonstrating that the good originated in a country under the associated free trade agreement, no further calculations are needed.
When qualifying products for an FTA, the use of an automated system allows importers to stay up-to-date on international compliance regulations, as well as solicit suppliers via the web instead of manually. A functional solution should also perform the required calculations for the associated FTA during the Bill of Material (BOM) analysis, ensuring correct eligibility.
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
whose member countries have signed a free trade agreement (FTA), which eliminates tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s, import quota
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
s, and preferences on most (if not all) goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border
Open border
An open border is a border that enables free movement of people between different jurisdictions with limited or no restrictions to movement. A border may be an open border due to intentional legislation allowing free movement of people across the border or a border may be an open border due to...
. It can be considered the second stage of economic integration
Economic integration
Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state...
. Countries choose this kind of economic integration if their economical structures are complementary. If their economical structures are competitive, they are more likely to form a customs union
Customs union
A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas...
.
Description
Unlike in a customs unionCustoms union
A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas...
, members of a free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
area do not have a common external tariff
Common external tariff
When a group of countries form a customs union they must introduce a common external tariff. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which country within the area they are entering...
, which means they have different quotas and customs, as well as other policies with respect to non-members. To avoid tariff evasion (through re-exportation
Re-exportation
Re-exportation can occur when one member of a free trade agreement charges lower tariffs to external nations to win trade, and then re-exports the same product to another partner in the trade agreement, but tariff-free. Re-exportation can be used to avoid sanctions by other nations...
) the countries use the system of certification of origin most commonly called rules of origin
Rules of origin
Rules of origin are used to determine the country of origin of a product for purposes of international trade. There are two common types of rules of origin depending upon application, the preferential and non-preferential rules of origin...
, where there is a requirement for the minimum extent of local material
Material
Material is anything made of matter, constituted of one or more substances. Wood, cement, hydrogen, air and water are all examples of materials. Sometimes the term "material" is used more narrowly to refer to substances or components with certain physical properties that are used as inputs to...
inputs and local transformations adding value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions.
Cumulation is the relationship between different FTAs regarding the rules of origin — sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact
Trade pact
A trade pact is a wide ranging tax, tariff and trade pact that often includes investment guarantees. The most common trade pacts are of the preferential and free trade types are concluded in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories.-By...
) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree — if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade bloc
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries) — then the new FTA will consist of the old FTA plus the new country (or countries).
Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.
The aim of a free trade area is to reduce barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.
Criticism of FTAs
In 2011 the EU signed a new FTA with PeruPeru
Peru , officially the Republic of Peru , is a country in western South America. It is bordered on the north by Ecuador and Colombia, on the east by Brazil, on the southeast by Bolivia, on the south by Chile, and on the west by the Pacific Ocean....
and Colombia
Colombia
Colombia, officially the Republic of Colombia , is a unitary constitutional republic comprising thirty-two departments. The country is located in northwestern South America, bordered to the east by Venezuela and Brazil; to the south by Ecuador and Peru; to the north by the Caribbean Sea; to the...
. There was a lot of opposition to this. Arguments against it are:
- It would reward the Colombian and Peruvian government while they are known to violate human rights. The environment for trade unionists in Colombia is very dangerous and threatening: the assassination of 49 union leaders was accounted for in 2010, and a constant state of personal death threats and assassination attempts has been reported in the past years.
- Increase investments that also increase land grabbingLand grabbingLand grabbing is the contentious issue of large-scale land acquisitions; the buying or leasing of large pieces of land in developing countries, by domestic and transnational companies, governments, and individuals. While used broadly throughout history, land grabbing as used today primarily refers...
and forced displacement of people from their homes. - Undermine the rights of indigenous citizens
- Undermine the regional integration in Latin America's oldest regional trading block
- Prevent Peru and Colombia from boosting employment in local industries.
Lists of free trade areas
- List of bilateral free trade agreements
- List of multilateral free trade agreements
Every customs union
Customs union
A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas...
, trade common market, economic union
Economic union
An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production and a common external trade policy.The countries...
, customs and monetary union
Customs and Monetary Union
An customs and monetary union is a type of trade bloc which is composed of a customs union and a currency union. The participant countries have both common external trade policy and share a single currency....
and economic and monetary union
Economic and monetary union
An economic and monetary union is a type of trade bloc which is composed of an economic union with a monetary union. It is to be distinguished from a mere monetary union , which does not involve a common market. This is the fifth stage of economic integration...
has also a free trade area.
Qualifying for a free trade agreement
To determine eligibility for a free trade agreement (FTA), importers must obtain product information from all the suppliers within the supply chainSupply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
. An automated solution should be in place for an importer to solicit his/her suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the product's Harmonized System
Harmonized System
The Harmonized Commodity Description and Coding System of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization , an independent intergovernmental organization with over 170...
number. Each free trade agreement will qualify an importer's products in different ways, however the basis of the qualification surrounds the idea that the finished product must have a minimum percentage of local/regional content.
Under the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...
(NAFTA), qualifying rules include De Minimis, Regional Value Content, and Tariff Shift.
- De Minimis states that a finished good will not be disqualified from preferential treatment if the non-originating content of that finished good is 7% or less of the transaction value of the good on an FOB basis (or its weight, depending on the type of good).
- Regional Value Content is a calculated percentage of the value of the product that represents its North American content
- Tariff Shift is a substantial transformation that takes place in a NAFTA country
A finished good must qualify under one of these rules to be eligible for free trade under NAFTA. This is just one example of a qualification for a free trade agreement. If a certificate of origin is present from a supplier demonstrating that the good originated in a country under the associated free trade agreement, no further calculations are needed.
When qualifying products for an FTA, the use of an automated system allows importers to stay up-to-date on international compliance regulations, as well as solicit suppliers via the web instead of manually. A functional solution should also perform the required calculations for the associated FTA during the Bill of Material (BOM) analysis, ensuring correct eligibility.
See also
- List of free trade agreements
- List of bilateral free trade agreements
- EU-ACP Economic Partnership AgreementsEconomic Partnership AgreementsEconomic Partnership Agreements are a scheme to create a free trade area between the European Union and the African, Caribbean and Pacific Group of States . They are a response to continuing criticism that the non-reciprocal and discriminating preferential trade agreements offered by the EU are...
- United States free trade agreementsUnited States free trade agreementsThe United States is party to many free trade agreements worldwide.Beginning with the Theodore Roosevelt administration, the United States became a major player in international trade, especially with its neighboring territories in the Caribbean and Latin America...
- European Union free trade agreementsEuropean Union free trade agreementsEuropean Union has concluded free trade agreements with many countries world-wide and negotiating with many others.-Free trade agreements in force:-Pending:Economic Partnership Agreement are being implemented for ACP countries.-Negotiating:* India...
- Euro-Mediterranean free trade areaEuro-Mediterranean free trade areaThe European Union-Mediterranean Free Trade Area , also called the Euro-Mediterranean Free Trade Area or Euromed FTA, is based on the Barcelona Process and European Neighbourhood Policy...
- Free trade areas in Europe
External links
- bilaterals.org - "Everything that's not happening at the WTO"
- fightingftas.org
- FTAs submitted to the WTO
- Americas FTAs
- EU FTAs
- EU-ACP countries Economic Partnership Agreements (EPA) Negotiations: Where do we stand?
- Singapore official FTA site
- EFTA official site
- Australia's FTAs
- About.com's Pros & Cons of U.S. Free Trade Agreements
- Bilateral and Regional Trade Agreements Notified to the WTO: developed by WorldTradeLaw.net and Bryan Mercurio
- ptas.mcgill.ca
- Agreements notified to the General Agreement on Tariffs and TradeGeneral Agreement on Tariffs and TradeThe General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
/World Trade OrganizationWorld Trade OrganizationThe World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948... - Arshiya International FTWZ, India's first Free Trade and Warehousing Zone. The largest multi-product Free trade area in India.