Free trade area

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Stages of economic integration around the World (each country colored according to the most integrated multilateral agreement that it participates in): .mw-parser-output .legend{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .legend-color{display:inline-block;min-width:1.25em;height:1.25em;line-height:1.25;margin:1px 0;text-align:center;border:1px solid black;background-color:transparent;color:black}.mw-parser-output .legend-text{} Economic and monetary union (ECCU/XCD, Eurozone/EUR, Switzerland-Liechtenstein/CHF) Economic union (CSME, EAEU, EU, GCC, Mercosur, SICA) Common market (EEA-Switzerland) Customs and monetary union (CEMAC/XAF, UEMOA/XOF) Customs union (CAN, EAC, EUCU, SACU) Multilateral free-trade area (AANZFTA, ASEAN, CEFTA, CISFTA, COMESA, CPTPP, EFTA, GAFTA, PAFTA, RCEP, SADCFTA, SAFTA, USMCA) .mw-parser-output .hlist dl,.mw-parser-output .hlist ol,.mw-parser-output .hlist ul{margin:0;padding:0}.mw-parser-output .hlist dd,.mw-parser-output .hlist dt,.mw-parser-output .hlist li{margin:0;display:inline}.mw-parser-output .hlist.inline,.mw-parser-output .hlist.inline dl,.mw-parser-output .hlist.inline ol,.mw-parser-output .hlist.inline ul,.mw-parser-output .hlist dl dl,.mw-parser-output .hlist dl ol,.mw-parser-output .hlist dl ul,.mw-parser-output .hlist ol dl,.mw-parser-output .hlist ol ol,.mw-parser-output .hlist ol ul,.mw-parser-output .hlist ul dl,.mw-parser-output .hlist ul ol,.mw-parser-output .hlist ul ul{display:inline}.mw-parser-output .hlist .mw-empty-li{display:none}.mw-parser-output .hlist dt::after{content:": "}.mw-parser-output .hlist dd::after,.mw-parser-output .hlist li::after{content:" * ";font-weight:bold}.mw-parser-output .hlist dd:last-child::after,.mw-parser-output .hlist dt:last-child::after,.mw-parser-output .hlist li:last-child::after{content:none}.mw-parser-output .hlist dd dd:first-child::before,.mw-parser-output .hlist dd dt:first-child::before,.mw-parser-output .hlist dd li:first-child::before,.mw-parser-output .hlist dt dd:first-child::before,.mw-parser-output .hlist dt dt:first-child::before,.mw-parser-output .hlist dt li:first-child::before,.mw-parser-output .hlist li dd:first-child::before,.mw-parser-output .hlist li dt:first-child::before,.mw-parser-output .hlist li li:first-child::before{content:" (";font-weight:normal}.mw-parser-output .hlist dd dd:last-child::after,.mw-parser-output .hlist dd dt:last-child::after,.mw-parser-output .hlist dd li:last-child::after,.mw-parser-output .hlist dt dd:last-child::after,.mw-parser-output .hlist dt dt:last-child::after,.mw-parser-output .hlist dt li:last-child::after,.mw-parser-output .hlist li dd:last-child::after,.mw-parser-output .hlist li dt:last-child::after,.mw-parser-output .hlist li li:last-child::after{content:")";font-weight:normal}.mw-parser-output .hlist ol{counter-reset:listitem}.mw-parser-output .hlist ol>li{counter-increment:listitem}.mw-parser-output .hlist ol>li::before{content:" "counter(listitem)"\a0 "}.mw-parser-output .hlist dd ol>li:first-child::before,.mw-parser-output .hlist dt ol>li:first-child::before,.mw-parser-output .hlist li ol>li:first-child::before{content:" ("counter(listitem)"\a0 "} .mw-parser-output .navbar{display:inline;font-size:88%;font-weight:normal}.mw-parser-output .navbar-collapse{float:left;text-align:left}.mw-parser-output .navbar-boxtext{word-spacing:0}.mw-parser-output .navbar ul{display:inline-block;white-space:nowrap;line-height:inherit}.mw-parser-output .navbar-brackets::before{margin-right:-0.125em;content:"[ "}.mw-parser-output .navbar-brackets::after{margin-left:-0.125em;content:" ]"}.mw-parser-output .navbar li{word-spacing:-0.125em}.mw-parser-output .navbar a>span,.mw-parser-output .navbar a>abbr{text-decoration:inherit}.mw-parser-output .navbar-mini abbr{font-variant:small-caps;border-bottom:none;text-decoration:none;cursor:inherit}.mw-parser-output .navbar-ct-full{font-size:114%;margin:0 7em}.mw-parser-output .navbar-ct-mini{font-size:114%;margin:0 4em} v t e Economic integration.svg
Stages of economic integration around the World (each country colored according to the most integrated multilateral agreement that it participates in):
   Economic and monetary union (ECCU/XCD, Eurozone/EUR, Switzerland–Liechtenstein/CHF)
   Economic union (CSME, EAEU, EU, GCC, Mercosur, SICA)
   Common market ( EEA–Switzerland)
   Customs and monetary union (CEMAC/XAF, UEMOA/XOF)
   Customs union (CAN, EAC, EUCU, SACU)
   Multilateral free-trade area (AANZFTA, ASEAN, CEFTA, CISFTA, COMESA, CPTPP, EFTA, GAFTA, PAFTA, RCEP, SADCFTA, SAFTA, USMCA)

A free trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). 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 natural persons are also free to move between the countries, in addition to a free trade agreement, it would also be considered an open border. It can be considered the second stage of economic integration. [1]

Contents

Customs unions are a special type of free trade area. All such areas 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 third parties. 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 this requirement. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as deemed necessary. [2] 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. [3]

The term free trade area was originally meant by the General Agreement on Tariffs and Trade (GATT 1994) to include only trade in goods. [4] 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 Services (GATS) as an "economic integration agreement". [5] However, in practice, the term is now widely used to refer to agreements covering not only goods but also services and even investment.

Free-trade zones Free Trade Areas2.png
Free-trade zones

The formation of free trade areas is considered an exception to the most favored nation (MFN) principle in the World Trade Organization (WTO) because the preferences that parties to a free trade area exclusively grant each other go beyond their accession commitments. [6] Although Article XXIV of the GATT allows WTO members to establish free trade areas or to adopt interim agreements necessary for the establishment thereof, there are several conditions with respect to free trade areas, or interim agreements leading to the formation of free trade areas.

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 was 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. [7]

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. [8] Although a dispute arising within free trade areas is 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". [9]

Economic aspects of free trade areas

Trade diversion and trade creation

In general, trade diversion means that a free trade area would divert trade away from more efficient suppliers outside the area towards less efficient ones within the areas. Whereas, trade creation implies that a free trade area creates trade which may not have otherwise existed. In all cases trade creation will raise a country's national welfare. [10]

Both trade creation and trade diversion are crucial effects found upon the establishment of a free trade area. 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 area. [11] Such a shift will not benefit consumers within the free trade area 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. [12]

Free trade areas as public goods

Economists have made attempts to evaluate the extent to which free trade areas can be considered public goods. They firstly address one key element of free trade areas, which is the system of embedded tribunals which act as arbitrators in international trade disputes. This system as a force of clarification for existing statutes and international economic policies is affirmed within the trade treaties. [13]

The second way in which free trade areas are considered public goods is tied to the evolving trend of them becoming "deeper". The depth of a free trade area 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 a free trade area are relatively cheaper as compared to those with non-parties, free trade areas are conventionally found to be excludable. Now that deep trade deals will enhance regulatory harmonization and increase trade flows with non-parties, thus reduce the excludability of FTA benefits, new generation free trade areas are obtaining essential characteristics of public goods. [14]

Qualifying for preferences under a free trade area

Unlike a customs union, parties to a free trade area do not maintain common external tariffs, which means they apply different customs duties, as well as other policies with respect to non-members. This feature creates the possibility of non-parties may free riding preferences under a free trade area by penetrating the market with the lowest external tariffs. Such risk necessitates the introduction of rules to determine originating goods eligible for preferences under a free trade area, a need that does not arise upon the formation of a customs union. [15] Basically, there is a requirement for a minimum extent of processing that results in "substantial transformation" to the goods so that they can be considered originating. By defining which goods are originating in the PTA, preferential rules of origin distinguish between originating and non-originating goods: only the former will be entitled to preferential tariffs scheduled by the free trade area, the latter must pay MFN import duties. [16]

It is noted that in qualifying for origin criteria, there is a differential treatment between inputs originating within and outside a free trade area. 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 a free trade area mentioned above, because a party to a free trade area has the incentive to use inputs originating in another party so that their products may qualify for originating status. [17]

Databases on free trade areas

Since there are hundreds of free trade areas currently in force and being negotiated (about 800 according to ITC's Rules of Origin Facilitator, counting also non-reciprocal trade arrangements), it is important for businesses and policy-makers to keep track of their status. There are a number of depositories of free trade agreements available either at national, regional or international levels. Some significant ones include the database on Latin American free trade agreements constructed by the Latin American Integration Association (ALADI), [18] the database maintained by the Asian Regional Integration Center (ARIC) providing information agreements of Asian countries, [19] and the portal on the European Union's free trade negotiations and agreements. [20]

At the international level, there are two important free access databases developed by international organizations for policy-makers and businesses:

WTO's Regional Trade Agreements Information System

As WTO members are obliged to notify to the Secretariat their free trade agreements, this database is constructed based on the most official source of information on free trade agreements (referred to as regional trade agreements in the WTO language). The database allows users to seek information on trade agreements notified to the WTO by country or by topic (goods, services or goods and services). This database provides users with an updated list of all agreements in force, however, those not notified to the WTO may be missing. It also displays reports, tables and graphs containing statistics on these agreements, and particularly preferential tariff analysis. [21]

ITC's Market Access Map

The Market Access Map was developed by the International Trade Centre (ITC) with the objectives to facilitate businesses, governments and researchers in market access issues. The database, visible via the online tool Market Access Map, includes information on tariff and non-tariff barriers in all active trade agreements, not limited to those officially notified to the WTO. It also documents data on non-preferential trade agreements (for instance, Generalized System of Preferences schemes). Up until 2019, Market Access Map has provided downloadable links to texts agreements and their rules of origin. [22] The new version of Market Access Map forthcoming this year will provide direct web links to relevant agreement pages and connect itself to other ITC's tools, particularly the Rules of Origin Facilitator. It is expected to become a versatile tool which assists enterprises in understanding free trade agreements and qualifying for origin requirements under these agreements. [23]

See also

Related Research Articles

<span class="mw-page-title-main">Trade agreement</span> Wide ranging taxes, tariff and trade treaty

A trade agreement is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common trade agreements are of the preferential and free trade types, which are concluded in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories.

<span class="mw-page-title-main">ASEAN Free Trade Area</span> Free trade area of the Association of South East Asian Nations

The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast Asian Nations supporting local trade and manufacturing in all ASEAN countries, and facilitating economic integration with regional and international allies. It stands as one of the largest and most important free trade areas (FTA) in the world, and together with its network of dialogue partners, drove some of the world's largest multilateral forums and blocs, including Asia-Pacific Economic Cooperation, East Asia Summit and Regional Comprehensive Economic Partnership.

In international economic relations and international politics, most favoured nation (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must nominally receive equal trade advantages as the "most favoured nation" by the country granting such treatment. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country.

<span class="mw-page-title-main">Central European Free Trade Agreement</span> International trade agreement

The Central European Free Trade Agreement (CEFTA) is an international trade agreement between countries mostly located in Southeastern Europe. Founded by representatives of Poland, Hungary and Czechoslovakia, CEFTA in 2006 expanded to Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Moldova, Montenegro, North Macedonia, Romania, Serbia, Slovenia and the UNMIK.

The Australia – United States Free Trade Agreement (AUSFTA) is a preferential trade agreement between Australia and the United States modelled on the North American Free Trade Agreement (NAFTA). The AUSFTA was signed on 18 May 2004 and came into effect on 1 January 2005.

<span class="mw-page-title-main">Trade creation</span> Economic effect of customs unions

Trade creation is an economic term related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union. The issue was firstly brought into discussion by Jacob Viner (1950), together with the trade diversion effect.

<span class="mw-page-title-main">Free trade areas in Europe</span> EU, EFTA, CEFTA, CISFTA, GUAM, BAFTA

At present, there are six multi-lateral free trade areas in Europe, and one former free trade area in recent history. Note that there are also a number of bilateral free trade agreements between states and between trade blocks; and that some states participate in more than one free trade area.

<span class="mw-page-title-main">Preferential trading area</span> Type of trade bloc

A preferential trade area is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. It is the first stage of economic integration.

<span class="mw-page-title-main">Economic integration</span> Unification of policies between states

Economic integration is the unification of economic policies between different states, through the partial or full abolition of tariff and non-tariff restrictions on trade.

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: bilateral and multilateral. 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.

<span class="mw-page-title-main">Market access</span> Ability to sell goods and services across borders

In international trade, market access refers to a company's ability to enter a foreign market by selling its goods and services in another country. Market access is not the same as free trade, because market access is normally subject to conditions or requirements, whereas under ideal free trade conditions goods and services can circulate across borders without any barriers to trade. Expanding market access is therefore often a more achievable goal of trade negotiations than achieving free trade.

<span class="mw-page-title-main">Certificate of origin</span> International trade document

A Certificate of Origin or Declaration of Origin is a document widely used in international trade transactions which attests that the product listed therein has met certain criteria to be considered as originating in a particular country. A certificate of origin / declaration of origin is generally prepared and completed by the exporter or the manufacturer, and may be subject to official certification by an authorized third party. It is often submitted to a customs authority of the importing country to justify the product's eligibility for entry and/or its entitlement to preferential treatment. Guidelines for issuance of Certificates of Origin by chambers of commerce globally are issued by the International Chamber of Commerce.

<span class="mw-page-title-main">International Trade Centre</span> Multilateral agency

The International Trade Centre (ITC) is a multilateral agency which has a joint mandate with the World Trade Organization (WTO) and the United Nations (UN) through the United Nations Conference on Trade and Development (UNCTAD).

<span class="mw-page-title-main">Rules of origin</span> Rules to attribute a country of origin to a product

Rules of origin are the rules to attribute a country of origin to a product in order to determine its "economic nationality". The need to establish rules of origin stems from the fact that the implementation of trade policy measures, such as tariffs, quotas, trade remedies, in various cases, depends on the country of origin of the product at hand.

<span class="mw-page-title-main">European Union Customs Union</span> EUs common customs area

The European Union Customs Union (EUCU), formally known as the Community Customs Union, is a customs union which consists of all the member states of the European Union (EU), Monaco, and the British Overseas Territory of Akrotiri and Dhekelia. Some detached territories of EU states do not participate in the customs union, usually as a result of their geographic separation. In addition to the EUCU, the EU is in customs unions with Andorra, San Marino and Turkey, through separate bilateral agreements.

The spaghetti bowl effect is the multiplication of free trade agreements (FTAs), supplanting multilateral World Trade Organization negotiations as an alternative path toward globalization. The term was first used by Jagdish Bhagwati in 1995 in the paper: “US Trade policy: The infatuation with free trade agreements”, where he openly criticized FTAs as being paradoxically counter-productive in promoting freer and more opened global trades. According to Bhagwati, too many crisscrossing FTAs would allow countries to adopt discriminatory trade policies and reduce the economic benefits of trade.

<span class="mw-page-title-main">Australia–Korea Free Trade Agreement</span>

The Korea–Australia Free Trade Agreement (KAFTA) is a bilateral agreement seeking to reduce trade and investment barriers between Australia and South Korea. The agreement, which came into effect on the 12th of December 2014 provides Australian goods exporters, service providers and investors with significantly improved access to the South Korean market. The trade agreement stems from decades of bilateral relations, encompassing security, trade and diplomatic ties from 1962, when then President Park Chung-Hee introduced a series of five-year plans designed to spur globalisation efforts and industrial development in Korea following the end of the Korean War.

India is party to free trade agreements (FTAs) and other trade agreements with many countries and trade blocs, and is negotiating with many others. As of 2022, India has preferential access, economic cooperation and FTA with more than 50 individual countries.

<span class="mw-page-title-main">Commonwealth of Independent States Agreement on the Establishment of a Free Trade Area (1994)</span>

The Agreement on the Establishment of a Free Trade Area is an international agreement on the intention to create a free trade regime in goods signed by 12 post-Soviet states on 15 April 1994, at a meeting of the Commonwealth of Independent States (CIS) Council of Heads of State in Moscow and entered into force on December 30, 1994. Article 1 indicated that this was "the first stage of the creation of the Economic Union", but on 2 April 1999 the countries agreed to remove this phrase from the agreement. Article 17 also confirmed the intention to conclude a free trade agreement in services.

References

  1. ↑ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action . Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.  453. ISBN   0-13-063085-3.{{cite book}}: CS1 maint: location (link)
  2. ↑ Krueger, Anne (1995). "Free Trade Agreements versus Customs Unions" (PDF). NBER Working Paper No. 5084– via NBER.
  3. ↑ "Rules of Origin Facilitator". ITC. Archived from the original on 2019-06-23. Retrieved 2019-06-06.
  4. ↑ "The basic rules for goods". WTO.
  5. ↑ "General Agreement on Trade in Services". WTO.
  6. ↑ "Most-Favored-Nation Treatment Principle" (PDF). METI. Retrieved 5 June 2019.
  7. ↑ "General Agreement on Tariffs and Trade" (PDF). WTO. Retrieved 5 June 2019.
  8. ↑ "The Committee on Regional Trade Agreements". WTO.
  9. ↑ Todeschini-Marthe, Céline. "Dispute Settlement Mechanisms Under Free Trade Agreements and the WTO: Stakes, Issues and Practical Considerations: A Question of Choice?". @Viewbag.citationjournaltitle. @ViewBag.citationvolume (@ViewBag.citationissue).
  10. ↑ "International Trade Theory and Policy". Internationalecon. Steven Suvanovic. Retrieved 5 June 2019.
  11. ↑ "Trade creation and trade diversion".
  12. ↑ Cheong, Juyoung (2010). "Free Trade Area and Welfare:Is A Bigger Trade Diversion More Detrimental?" (PDF). ETSG 2010 Lausanne Twelfh Annual Conference– via ETSG.
  13. ↑ Mavroidis, Petros C. (2012-08-01). "Free Lunches? WTO as Public Good, and the WTO's View of Public Goods". European Journal of International Law. 23 (3): 731–742. doi: 10.1093/ejil/chs055 . ISSN   0938-5428.
  14. ↑ Mattoo, Aaditya; Mulabdic, Alen; Ruta, Michele (2017-10-12). "Deep trade agreements as public goods". VoxEU.org. Retrieved 2019-03-12.
  15. ↑ "Rules of origin". Institute for Government.
  16. ↑ "Customs unions and FTAs Debate with respect to EU neighbours" (PDF). EU Parliament Policy Briefing. Retrieved 5 June 2019.
  17. ↑ "Comparative Study on Preferential Rules of Origin" (PDF). WCO. Retrieved 5 June 2019.
  18. ↑ "Acuerdos". Latin American Integration Association. ALADI. Archived from the original on 3 December 2020. Retrieved 5 June 2019.
  19. ↑ "FTAs". Free Trade Agreements. ARIC. Retrieved 5 June 2019.
  20. ↑ "Negotiations and agreements". European Commission.
  21. ↑ "RTAIS". Regional Trade Agreements Information System. WTO. Retrieved 5 June 2019.
  22. ↑ "MacMap". Market Access Map. ITC. Retrieved 5 June 2019.
  23. ↑ "ROOF". Rules of Origin Facilitator. ITC. Retrieved 5 June 2019.
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