What Is A Free Trade Agreement?

What Is A Free Trade Agreement?

It is a binding international agreement between two or more states. Its purpose is to guarantee full or partial free trade in goods, products, and services.

The term free trade agreement is a generic term. It includes several stages of joint actions and economic activities of the participating states. It defines several levels of cooperation between trading partners.

  • ASEAN free trade agreement. It removes trade barriers between member countries. However, each country remains independent and can raise its own tariffs on trade with non-alliance countries.
  • The customs union is also subject to a free trade agreement. If some countries agree on a customs union, they apply the same tariffs to non-alliance countries.
  • Domestic market. In the domestic market, the next stage of the free trade agreement, cooperation extends to all factors of production. In addition to trade in goods, the domestic market also includes trade or exchange of services, labor, and capital.
  • An economic union is a union of individual states with similar economic conditions, pursuing a common economic policy.
  • A monetary union can be seen as the highest form of cooperation between different states. As a result of this merger, the economic union is expanded at the expense of the monetary union. All member states introduce the same currency in their respective countries; this includes the fact that a single exchange rate and monetary policy are pursued in addition to the general economic policy.

The subject matter of the ASEAN free trade agreement. The subject matter of the respective agreement depends on the countries’ interests wishing to conclude an agreement. It can be, for example, free trade, that is, the duty-free exchange of a certain category of goods (for example, agricultural products), but it can also extend to free trade in all goods and products produced in the respective country.

States that would like to conclude such an alliance negotiate with each other, with the result that each country will naturally take into account its interests. Besides, a free trade agreement can also cover the areas of services, capital flows, and even the labor market. All facets of economic cooperation are possible here.

ASEAN free trade agreement objectives

ASEAN free trade agreement objectives

By answering the question, what is a free trade agreement? It is necessary to understand the purposes of these agreements between states.

The prerequisites and goals that states associate with the conclusion of an agreement are varied and differ depending on the partners. Some of the most important reasons are:

  • Such a free trade agreement usually has a positive impact on economic development.
  • The market for homemade products is growing. If the resulting additional growth exceeds the effect of the reduction in non-competitive products, then the free trade agreement has achieved its goal.
  • Additional markets and the associated increase in sales in free trade zones usually strengthen the participating countries’ economies.
  • With the abolition of customs duties and a significant reduction in the bureaucracy associated with trade in goods, the economy is becoming more interconnected. If properly managed, this provides the participating States with many economic benefits.

Improving the well-being of the population

The strengthening of the economy, eliminating customs duties, and reducing trade barriers to exports and imports have strengthened trade between states. As a rule, this has a positive effect on the well-being of the population. Then the government of the state participating in the agreement must ensure that this trump card is also in the pockets of the population. The tools can be price reductions, which will lead to cheaper products due to the abolition of tariffs. But newly created jobs also improve the economic situation of the population.

Peacekeeping

Close interaction and cooperation with another state also significantly reduces the risk of armed conflict. Peacekeeping is usually not the primary goal, but the effect is visible. In this respect, it can be said that a free trade agreement always contributes to ensuring peace.

Insulation from third countries

Sometimes agreements can also serve as joint protection against third countries that are not alliance members; this is because preference is given to the movement of goods between countries, which automatically makes it difficult to exchange with third countries.

Free trade agreement advantages and disadvantages

Free trade agreement advantages and disadvantages

Here are some free trade agreement advantages and disadvantages.

The benefits include:

  • Usually, a country that joins a trade agreement has a larger market for its products, or new markets may open up in the alliance states, thereby creating more free trade zones.
  • An increase in product performance can lead to advantages and rationalization of production, leading to further competitive advantage.
  • The abolition of customs duties makes imported goods cheaper. Exported goods are more likely to be sold in new markets or free trade zones, not least due to lower prices.
  • There is also a peace-making effect because trading partners communicate more intensively and are more economically dependent on each other due to a closer form of cooperation.
  • Due to the resulting production advantages, various goods and goods can be produced so profitably that they are in great demand in the global market. In countries that are not parties to the free trade agreement, additional markets can be opened as a result.
  • When a free trade agreement is concluded, if it covers the desired sectors of the economy, positive development of the participating countries can almost always be expected.

Flaws:

  • Avoiding producing parts that are no longer cost-effective can result in manufacturing competence in some areas being almost irretrievably lost.
  • If national security is necessary to preserve unprofitable subareas, such as the agricultural sector, this can often only be achieved through subsidies. Subsidies can be used to support costs in this area so that prices can be traded at market levels. However, this is only possible if permitted by the agreement.
  • You are more dependent on your partners; you also lose some of your sovereignty.
  • Another severe flaw can arise when partners are not equal.
  • In addition, there is a risk that industry will increasingly settle in economically weaker states located in the free trade zone. On the one hand, this means that the need to produce goods for export as cheaply as possible means that they suffer from poor working conditions. On the other hand, such job relocation threatens jobs in more economically developed countries since wage costs are much lower in less developed economies.

Free trade agreement advantages and disadvantages are significant for understanding the terms of the agreement.

FAQ

What is an example of a free trade agreement?

One example of free trade is the agreement between the United States, Mexico, and Canada, known as the North American Free Trade Agreement (NAFTA). NAFTA was established on January 1, 1994, between the United States, Mexico, and Canada.

What is the purpose of a free trade agreement?

The primary purpose of such treaties between countries is to reduce barriers to exports, protect interests that compete abroad, and strengthen the rule of law in the country or partner countries.

What is a free trade zone?

A free trade zone is a type of international integration, in which the member states abolish customs duties, taxes, and fees, as well as quantitative restrictions on mutual trade in accordance with an international treaty.

What is Free Trade Agreement?

Such agreements are an exception to the most-favored-nation regime established by the World Trade Organization, thanks to which all WTO members grant each other a single non-discriminatory treatment.
 

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