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A free trade agreement ( FTA) or treaty is an agreement according to international law to form a free-trade area between the cooperating states. There are two types of trade agreements: Bilateralism and Multilateralism. Bilateral trade agreements occur when two countries agree to loosen trade restrictions between the two of them, generally to expand business opportunities. Multilateral trade agreements are agreements among three or more countries, and are the most difficult to negotiate and agree. Free Trade Agreement, ICC Academy
FTAs, a form of trade pacts, determine the tariffs and duties that countries impose on imports and exports with the goal of reducing or eliminating trade barriers, thus encouraging international trade. Such agreements usually "center on a chapter providing for preferential tariff treatment", but they also often "include clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues".
Important distinctions exist between and free-trade areas. Both types of trading bloc have internal arrangements which parties conclude in order to liberalize and facilitate trade among themselves. The crucial difference between customs unions and free-trade areas is their approach to . While a customs union requires all parties to establish and maintain identical external tariffs with regard to trade with non-parties, parties to a free-trade area are not subject to such a requirement. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as they deem necessary. In a free-trade area without harmonized external tariffs, to eliminate the risk of trade deflection, parties will adopt a system of preferential rules of origin.
The General Agreement on Tariffs and Trade (GATT 1994) originally defined free-trade agreements to include only trade in goods. An agreement with a similar purpose, i.e., to enhance liberalization of trade in services, is named under Article V of the General Agreement on Trade in Service (GATS) as an "economic integration agreement".
After the WTO's World Trade Organization - which has been considered by some as a failure for not promoting trade talks, but a success by others for preventing trade wars - states increasingly started exploring options to conclude FTAs.
Firstly, duties and other regulations maintained in each of the signatory parties to a free-trade area, which are applicable at the time such free-trade area is formed, to the trade with non-parties to such free-trade area shall not be higher or more restrictive than the corresponding duties and other regulations existing in the same signatory parties prior to the formation of the free-trade area. In other words, the establishment of a free-trade area to grant preferential treatment among its member is legitimate under WTO law, but the parties to a free-trade area are not permitted to treat non-parties less favorably than before the area is established. A second requirement stipulated by Article XXIV is that tariffs and other barriers to trade must be eliminated to substantially all the trade within the free-trade area.
Free trade agreements forming free-trade areas generally lie outside the realm of the multilateral trading system. However, WTO members must notify to the Secretariat when they conclude new free trade agreements and in principle the texts of free trade agreements are subject to review under the Committee on Regional Trade Agreements. Although a dispute arising within free-trade areas are not subject to litigation at the WTO's Dispute Settlement Body, "there is no guarantee that WTO panels will abide by them and decline to exercise jurisdiction in a given case".
A free trade agreement is a reciprocal agreement, which is allowed by Article XXIV of the GATT. Whereas, autonomous trade arrangements in favor of developing and least developed countries are permitted by the Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries adopted by signatories to the General Agreement on Tariffs and Trade (GATT) in 1979 (the “Enabling Clause”). It is the WTO's legal basis for the Generalized System of Preferences (GSP). Both free trade agreements and preferential trade arrangements (as named by the WTO) are considered as derogation to the MFN principle.
Both trade creation and trade diversion are crucial effects found upon the establishment of an FTA. Trade creation will cause consumption to shift from a high-cost producer to a low-cost one, and trade will thus expand. In contrast, trade diversion will lead to trade shifting from a lower-cost producer outside the area to a higher-cost one inside the FTA. Such a shift will not benefit consumers within the FTA as they are deprived the opportunity to purchase cheaper imported goods. However, economists find that trade diversion does not always harm aggregate national welfare: it can even improve aggregate national welfare if the volume of diverted trade is small.
The second way in which FTAs are considered public goods is tied to the evolving trend of them becoming “deeper”. The depth of an FTA refers to the added types of structural policies that it covers. While older trade deals are deemed “shallower” as they cover fewer areas (such as tariffs and quotas), more recently concluded agreements address a number of other fields, from services to e-commerce and data localization. Since transactions among parties to an FTA are relatively cheaper as compared to those with non-parties, FTAs are conventionally found to be Excludability. Now that deep trade deals will enhance regulatory harmonization and increase trade flows with non-parties, thus reducing the excludability of FTA benefits, new generation FTAs are obtaining the essential characteristics of public goods.
It is noted that in qualifying for origin criteria, there is a differential treatment between inputs originating within and outside an FTA. Normally inputs originating in one FTA party will be considered as originating in the other party if they are incorporated in the manufacturing process in that other party. Sometimes, production costs arising in one party is also considered as that arising in another party. In preferential rules of origin, such differential treatment is normally provided for in the cumulation or accumulation provision. Such clause further explains the trade creation and trade diversion effects of an FTA mentioned above, because a party to an FTA has the incentive to use inputs originating in another party so that their products may qualify for originating status.
At the international level, there are two important free-access databases developed by international organizations for policy-makers and businesses:
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