A free-trade area is the region encompassing a trade bloc whose member
countries have signed a free trade agreement. Such agreements involve
cooperation between at least two countries to reduce trade
barriers—import quotas and tariffs— and to increase trade of goods and services
with each other. 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.
Description Unlike 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 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 between two or more
countries. Free-trade areas and agreements are cascadable to some degree
– if some countries sign agreements to form a free-trade area and choose to
negotiate together another free-trade agreement with another country – then
the new FTA will consist of the old FTA plus the new country.
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 tariffs or import quotas; there
are usually no delays as goods pass from one part of the country to another;
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 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 each source of production will tend to specialize in that activity
where it has comparative 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. But 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. Lists of free-trade areas
List of bilateral free trade agreements. List of multilateral free trade
agreements Every customs union, trade common
market, economic union, customs and monetary union and economic and monetary
union also has a free-trade area, but these are each listed in their own
articles only. Qualifying for a free-trade agreement
To determine eligibility for a free-trade agreement, importers must
obtain product information from all the suppliers within the supply chain. 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,
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. 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
analysis, ensuring correct eligibility. See also
EU-ACP Economic Partnership Agreements United States free trade agreements
European Union free trade agreements Euro-Mediterranean free trade area
Free trade areas in Europe Free trade zone
International trade References
External links bilaterals.org – "Everything that's not
happening at the WTO" GPTAD – "World Bank and the Center for
International Business, Tuck School of Business at Dartmouth College Global
Preferential Trade Agreement" FTAs submitted to the WTO
Americas FTAs EU FTAs
EU-ACP countries Economic Partnership Agreements 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 Trade/World
Trade Organization Arshiya International FTWZ, India's
first Free Trade and Warehousing Zone. The largest multi-product Free trade
area in India.