What Is a Free Trade Area?
A free trade area is where nations have signed a trade agreement and have minimal tariffs or quotas. Free trade areas promote international commerce, the division of labor, and specialization, but they have been criticized for increasing economic integration costs and artificially restricting free trade.
Understanding Free Trade Areas
Countries agree to reduce or eliminate trade obstacles such as tariffs or quotas in a free trade area. Free-trade regions boost international trade and enable member nations to specialize in their comparative advantages.
Participating nations must adopt regulations to create a free trade area. What customs and processes must each country follow? If approved, what tariffs and costs? What will the participating countries do about trade disputes? Trade goods transportation: how? Protecting and managing intellectual property rights: how? How a free trade agreement answers these problems depends on the country’s politics and power dynamics. How “free” commerce is depends on this. The aim is a trade strategy that all free trade area nations can agree on.
Benefits
Free-trade regions give customers access to cheaper and higher-quality imported items and lower costs by reducing or eliminating tariffs. Producers may significantly increase their clientele and supply base. Free-trade regions boost national economies, raising living standards for some.
Costs
Some nations and sectors may lose employment and experience challenges when production transfers to cheaper, more efficient places due to comparative advantage or home market impacts. Fixed physical and human capital investments may lose value or become sunk expenses. Increased competition may hurt producers.
Free Trade Area Pros and Cons
Although international trade agreements have a long history, their present acceptability dates back to the Bretton Woods Conference following World War II. Proponents of free market economics argue that free trade enhances access to high-quality, low-cost goods, economic growth, efficiency, innovation, competitiveness, and justice.
Others argue that accessible trade areas threaten domestic jobs and industries by allowing production to migrate overseas, making an economy too dependent on a few products, preventing the growth of infant industries that need economic protection, endangering security if a country imports too many vital resources, and forcing governments to lower environmental standards to compete.
Recently, President Trump implemented tariffs as economic warfare, departing from free trade accords. President Biden has not lifted these tariffs.
Note: According to The New York Times, U.S. political parties have shifted away from reflexively supporting free trade policies.
Free Trade Areas and America
The U.S. will have 14 free trade regions with 20 nations in 2022. On January 1, 1994, the North American Free Trade Agreement (NAFTA) established a significant and notable free trade region. A trade deal between Canada, the U.S., and Mexico promoted commerce among three North American nations.
The three nations inked USMCA in 2018 to replace NAFTA. The USMCA entered effect on July 1, 2020. Besides the USMCA, the Central American Free Trade Area-Dominican Republic (CAFTA-DR) comprises the Dominican Republic, Costa Rica, El Salvador, Nicaragua, Honduras, and Guatemala. The U.S. has specific FTAs with Australia, Bahrain, Chile, Colombia, Panama, Peru, Singapore, Israel, Jordan, Korea, Oman, and Morocco.
In March 2010, the U.S. started negotiating the Trans-Pacific Partnership (TPP) to establish a high-standard, broad-based trade deal in the Asia-Pacific. President Donald Trump withdrew from the agreement on January 30, 2017, one of his first official acts, and it continued without the U.S.
T-TIP, a free trade deal with the E.U., aimed to complement TPP.The discussions failed in 2016 after Greenpeace revealed 248 secret papers. In August 2020, the E.U. and U.S. reduced tariffs to “increase market access for hundreds of millions of dollars in U.S. and E.U. exports.” There is no free-trade agreement between the two countries.
What Is a Free Trade Area?
Like-minded nations create a free trade area by reducing trade obstacles like tariffs and quotas. It promotes member-country commerce.
Advantages of a Free Trade Area
The benefits include lower pricing, more access to low-cost, high-quality items, manufacturing efficiency and innovation, economic development and living standards, and economic growth.
Free trade area disadvantages?
It can cause jobs to migrate to countries with lower production costs, hurt the growth of new industries, make an economy dependent on too few products, endanger security if a country imports a vital resource, and lower environmental standards to compete with other countries.
Bottom Line
Nations in a free trade area agree to remove or abolish trade obstacles like quotas and tariffs. Member nations may benefit from enhanced access to high-quality, low-priced commodities and economic growth, but they may also lose jobs and become dependent on a few goods. The U.S. has 14 free-trade agreements with 20 nations.
Conclusion
- Free trade zones are groups of nations that have agreed to reduce or abolish trade restrictions.
- Free trade regions encourage free commerce and the international division of labor, but their terms and extent are susceptible to politics and international relations.
- Free-trade regions have pros and cons, advocates, and detractors.
