Trade between countries is inevitable. There are so many reasons for this. Among the reasons include the fact that it’s unlikely for a country to produce every single product or service that its citizens need. Another important reason is that available products produced in-country may not be able to satisfy the market demand of the citizens. Of course, the list is endless.
Countries trade with one another; that’s a fact. Many countries have put in place policies or trade barriers to regulate products to and fro within their borders. These policies not only inhibit the free flow of goods, but they may also make the cost of doing business higher.
For ease, many countries have introduced policies to lessen the ‘bureaucracy’ between them and other countries. This policy is generally known as a “free trade agreement” or a free trade treaty.
Table of Contents
A Free Trade Agreement (FTA) or Treaty is an international agreement to form a free-trade area between agreeing countries. FTAs are trade pacts that seek to ease the regulation, tariffs, and duties that governments impose on imports and exports.
In other words, any policy may be called a free trade agreement (FTA) if it is a ‘pact’ between two or more countries concerning the lessening of some obligations that affect trade in goods and services. This also includes protections for investors and intellectual property rights.
The general aim of FTAs is to encourage international trade and promote a stable investment environment by reducing or eliminating trade barriers.
Aside from establishing an agreement for preferential tariff treatment, free trade agreements also often include treaties on the facilitation of trade in areas such as investment, intellectual property, government procurements, standards, sanitary and phytosanitary matters.
For manufacturers, investors, wholesalers, or retailers of goods, FTAs will allow ease of access to consumers or businesses in other countries. By creating an entry for you into the global marketplace through zero/reduced tariffs, among other provisions, FTAs make it easier and cheaper for you to export or import products and services to other countries.
Trade agreements can be in three forms: unilateral, bilateral, or multilateral.
A country on its own can formulate a trade ‘agreement’ to bind other countries. These kinds of agreements are called unilateral free trade agreements. This may happen if a government unilaterally eases trade restrictions. A country may make these kinds of free trade agreements because they want to solve a particular need. It may also be to encourage foreign direct investments (FDIs).
Unlike unilateral agreements, bilateral agreements involve two countries that agree to set policies that ease trade restrictions or barriers. Products popularly involved in trade agreements include protected or government-subsidized domestic industries, especially those in the genre of automotive, oil, or food production industries. Bilateral free trade agreements expand business relationships or opportunities between the two countries.
Free trade agreements may also be on a broader scale and involve more than two countries. These are called multilateral agreements – and are usually the most complex to negotiate. This is, no doubt, because multilateral agreements cover a wider geographic area. All the countries in the pact grant one another mutual trade tariffs, terms, or concessions.
In addition to being unilateral, bilateral, or multilateral, FTAs also come in variations based on the form or nature of the agreements. Some of these are identifiable as:
One example of a customs union is the trade pact between Russia, Belarus, and Kazakhstan formed in 20101. However, note that the ease of ‘regulations’ is on products; customs unions policies do not cover the free movement of capital and labor among member countries.
The main goal of free trade agreements is to enhance trade relationships on the import and export of goods and services. The agreement is often initiated unilaterally or by the formal and mutual agreement of the FTA parties involved. In most cases, enforcements of FTAs are managed by the World Trade Organization (WTO).
On a large scale, FTAs allow countries or foreign markets to focus on producing or selling the goods they have in abundance; while allowing other producers to import products that are scarce or unavailable in their country. Local production of goods and foreign importation of goods often work together to boost the economy of an FTA country.
However, it is often argued that the best free trade policy may simply be the absence of any trade barrier. A country without barriers or restrictions can be said to be practicing a ‘laissez-faire’ or trade liberalization unilateral trade agreement. Nonetheless, most countries already have conditions or development of product standards on imports and exports to protect their local economy.
An FTA can be actualized through two distinct ways:
Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. Also, a country may allow free trade with another country, with exceptions that forbid some products. In reverse, the FTA might have policies that exempt some products from tariffs.
It should, however, be noted that free trade agreements can also cover a wide variety of government activities and include policies on the free movement of individuals. In the E.U, for instance, FTAs mean that individuals from the FTA countries can travel and work in any other EU country.
Free trade agreements have their pros and cons, depending on where you’re looking at them from. Here are some of the advantages of FTAs:
As with advantages, free trade agreements also have several disadvantages. Some of the major ones are highlighted here:
Almost every country has entered into all types of free trade agreements. Most countries have implemented unilateral free trade policies to allow for the importation of necessary products or services.
An example of bilateral FTAs is the trade pact the U.S made with several countries in 20192. Also, Australia and the U.S also have an AUSFTA pact that eliminates tariffs on a range of agricultural and textile exports and imports between the two countries. Another prominent example of a bilateral trade agreement is that of China and the Association of Southeast Asian Nations (ASEAN)3. It is a regional trade agreement signed in 2002 and implemented in 2005.
As said earlier, multilateral trade agreements involve more than two countries. The North American Free Trade Agreement (NAFTA) is a popular example of a multilateral treaty. NAFTA was signed in 1992 between the U.S., Mexico, and Canada.4 It allows free movement of goods, without export or import tariffs, among the FTA countries.
Other prominent regional or multilateral trade agreements exist between:
The existence of free trade agreements among countries means that you can sell your products to businesses or consumers in another country. This may even be at a higher profit compared to what you would sell them for locally.
To access foreign businesses, however, you need an e-commerce platform that eases the cost of doing business.
Alibaba.com is an international platform that offers you access to millions of international buyers. Alibaba.com provides you with the largest b2b platform to sell to millions of consumers and retailers worldwide. Sell your products here today.