Free Trade Agreement (FTA)

A group of countries that invoke little or no price control in the form of tariffs or
quotas between each other. Free trade areas allow the agreeing nations to focus on
their competitive advantage and to freely trade for the goods they lack the
experience at making, thus increasing the efficiency and profitability of each
country.

One of the most well known free trade areas was created because of the signing of
the North American Free Trade Agreement (NAFTA). This agreement was made
between Canada, the United States and Mexico and encourages trade between
these North American countries. The agreement was signed on January 1, 1994
and has since created one of the world's largest free trade areas

OBJECTIVES FOR FREE TRADE AREA:

1.create favourable conditions for greater economic cooperation and promote fair
competition;

2. progressively liberalize and eliminate barriers to trade in, and facilitate the
cross-border movement of goods and services between the territories of the Parties
on a reciprocal basis as well as create a transparent, liberal and facilitative
investment regime; and

3. explore new areas and develop appropriate measures for closer economic
cooperation between the Parties.

Measures for Comprehensive Free Trade Area (FTA)

The Parties agree to expeditiously negotiate for establishing FTA with a view to
strengthening and enhancing liberalization of trade through the following:

progressive elimination of tariffs and non-tariff barriers in substantially all trade in

goods between the Parties;
progressive liberalization of trade in services between the Parties with substantial
sectoral coverage;

establishment of an open and competitive investment regime that facilitates and

promotes investment within and between the Parties;

establishment of effective trade and investment facilitation measures, including,

but not limited to, simplification of customs procedures and development of
mutual recognition arrangements;

expansion of economic co-operation in areas as may be mutually agreed between

the
Parties that will complement the deepening of trade and investment links between
the
Parties and formulation of action plans and programmes in order to implement the
agreed sectors/areas of cooperation; and

establishment of appropriate mechanisms for the purposes of effective

implementation of this Agreement.

ADVANTAGES:

Free trade area is a trade block that allows traders to transact business without any
sort of interference or intervention from the government. It is believed that free
trade area leads to mutual benefits for both the trading partners. It differs from
other forms of trade in that there is no creation of artificial prices, or a false
demand and supply of products. In a protectionist trade economy, government
intervenes in the form of subsidies, taxes, tariffs, etc to lower prices of goods or
adjust supply of products. Free trade area overcomes all this and gives a true
picture of the actual demand and supply. To understand how free trade area creates
a better market and trade environment, let’s take a look at its benefits.

COMPARATIVE ADVANTAGE
In 1776 Adam Smith stated, "If a foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy it of them with some part of the
produce of our own industry, employed in a way in which we have some
advantage." Smith's comment states the largest advantage of free trade: countries,
by specializing in goods that have lower opportunity costs, lead to an increase in
the economic welfare of all countries. The theory is self-explanatory. Each country
does what it is best in and trades with other for its needs. In this manner the market
represents true supply and demand, and trade benefits all the countries.

ECONOMY OF SCALE

When countries specialize in certain goods that they can produce, they can take
advantage of economy of scale and produce these goods at lower average costs.
This is more useful to industries where the fixed cost of production is very high or
where the investment required is very high. By specializing in such products, the
industry can ultimately gain from economy of scale and lower production costs.
This would transfer to the consumer as lower prices for the finished goods.

.Consumer Satisfaction

. Because free trade area leads to a global market, consumers benefit from the
competition and variety brought to the market. When other countries produce some
items cheaper, the consumer purchases products for less.

Another benefit to consumers is increased innovations. As free trade expands,

competition also expands. To stay competitive, companies must seek ways to
create the comparative advantage. This leads to increased innovation that improves
products.

Employment and Economic Growth

. Although free trade may cause jobs in one particular industry to wind up
overseas, jobs in the exporting and importing sides will increase. When
productivity increases in importing and exporting, wages also tend to rise.
 As the U.S. has lowered its trade restrictions, the gross domestic product has risen.
Since consumers can purchase quality products for cheaper, they have more
expendable income.

Effective use of raw materials:

Free trade not only brings about economic growth but also effectively uses raw
materials, especially highly valuable and highly limited raw materials. For
instance, the Middle East is a rich source of oil, but there isn’t much else in these
countries. Trade is what ensures that this limited resource is distributed to different
countries which lack this resource and the Middle East, in turn, gets the products
necessary for their day-to-day living and business.

Foreign Exchange Gains and Decreased Poverty

When a country purchases a product from another country with money, they
essentially send the exporting country non-interest IOUs in exchange for real
goods. The exporting country, though, must use the money within the country that
imported the products. For example, the United States purchases steel from China
with U.S. money at the current market value. China will later use the U.S. money
to purchase computer programs from the United States at the future market value.

8. Countries that open their trade barriers to allow free trade have the chance to
enter the global market, which will increase income for the country. In the 1990s,
developing countries that lifted trade restrictions tended to grow three times faster
than countries that restricted trade.

Increased Export

9. Countries with stringent trade restrictions often cause animosity with other
countries. Therefore, the country with the restrictions also limits its own ability to
export. When a country removes their trade restrictions, other countries are more
willing to accept the exports.

Minimizes War
 As countries work together professionally, mutual respect for the countries'
customs and cultures increase. Fears and prejudices diminish, and countries are
less likely to fight each other.

Good government and peaceful international ties:

Free trade blocks prevents the need for protectionist government policies. It is such
policies that lead to corruption among the government officials. Thus, a free trade
biock economy promotes healthier governance. A healthy government also works
towards a healthier economy. This ensures smoother and healthier trade and
political relationships between countries. Thus, free trade area leads to healthier
domestic governance and peaceful international ties.

DISADVANTAGES:

Free trade refers to the removal of any barriers, taxes, tariffs, quotas or any other
governmental restrictions on international trade which would allow the involved
countries to more easily exchange particular commodities. For the most part, free
trade is considered a good thing because the lack of trade barriers makes
exportation easy and relatively inexpensive. In this way, a country can focus its
resources more efficiently and achieve a higher real income. Despite the overall
benefit of free trade to a nation's economy, there can be some significant
disadvantages to the establishment of free trade agreements.

Expense

Even though free trade is primarily meant to lower costs on items, it can actually
end up being quite expensive. There are complicated rules and contract conditions
that go into the making of free trade agreements to protect the interests of the
countries involved. As such, there is usually the need to establish several
committees and working groups to handle the free trade agreements. For example,
the NAFTA agreement involved a contract that was more than 1,000 pages long
and more than 25 committees. In essence, free trade can be resource intensive,
requiring multiple agreements, ways of enforcing rules and compliance among the
partner countries.
Competition

The removal of international trade barriers can open up some domestic industries
to unsustainable competition. Some international markets are not on the same level
as the domestic industry and are able to produce a certain commodity way below
cost. As such, this surplus commodity gets flooded into the local market at much
cheaper prices and essentially takes over that industry. Many local industries, even
efficient ones, may be unable to compete under these conditions. For example, the
low labor costs in third world countries mean that goods such as clothing is
produced at a much lower cost and therefore, able to be sold at a much lower price
than clothing made in the U.S.

Domestic Instability

Free trade can also increase domestic economic instability as the local markets
become dependent on global imports. It basically decreases the self-sufficiency of
a nation so that a crisis in a significant trade partner country can directly affect the
economy of the home country. In addition, it can encourage pollution and other
environmental problems as imports and exports are encouraged, and environmental
concerns are not a priority in a lot of countries with cheap labor.

Destruction of Domestic Industries

Trade agreements boost competition. While some producers manage to conquer

foreign markets, others prove unable to compete internationally, lose market share,
and eventually disappear. As a result, the economy becomes dependent on a
limited number of industries, while many important sectors of the economy are
"outsourced" abroad.

Unemployment

Because many domestic industries are hammered by foreign competitors,

unemployment rises. Even though some foreign firms move their operations into
the country, the net effect is often negative, as foreign producers prefer to employ
their own workers rather than provide employment to foreign ones. Generally,
work moves to countries with lower labor costs, while countries with relatively
high wages import unemployment.

Loss of National Identity

As international trade increases, national identity decreases. The world's diversity

suffers as a result of trade agreements and subsequent rises in cross-border trade.
Indigenous peoples adopt Western ways of life, watch Hollywood blockbusters and
dine at McDonald's. While the general standard of living rises, local culture and
national identity withers away.

Conclusion:

The principal point of Free Trade Agreements is to secure trade liberalisation.

While the traditional debate about FTAs is the danger that they can divert rather
than create trade, the record to date suggests there has been little diversion and that
FTAs and regional agreements have been effective in encouraging wider trade
liberalisation. A practical advantage of FTAs is that they are quicker and easier to
negotiate than multilateral agreements because fewer parties are at the table.
Parties can secure advantages that are harder to win in bigger forums.

The disadvantages are twofold. If FTAs are not set up within the right framework
of policies, they can diminish rather than enhance economic welfare. The second
disadvantage is that they are not good vehicles for liberalising trade in sectors on
which parties outside the agreement have a major influence.