Free trade area

A free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most goods between them.

It is the second stage of economic integration.

Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (trough re-exportation) the countries use the system of certification of origin most commonly called Rules of Origin, where there is a requierment for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requierments are not entitled for the special treatment envisioned in the free trade area provisions.

Cumulation is the relationship between different FTAs regarding the Rules of Origin - sometimes different FTAs suplement each other, in other cases there is no cross-cumulation between the FTAs.

The Free Trade Area is a result of a Free Trade Agreement (a form of trade pact) between two or more countries. Free Trade Areas/Agreements (FTA) are cascadable to some degree - if some countries sign agreement to form free trade area and choose to negotiate together (eighter as a trade bloc or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries) - then the new FTA will consist of the old FTA plus the new country (or countries).

A Free Trade Area is a region in which obstacles to unrestricted trade have been reduced to a minimum.

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 (other than those that distance imposes); 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 can and often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.

The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialisation, division of labour, and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) 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. However 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. The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers.

See also

• trade
• List of Free Trade Agreements
• List of Trade blocs
• free trade zone