Free Trade Area
- A free trade area (FTA) is a type of trade bloc in which members have signed a free trade agreement.
- Free trade area members improve trade between each other by heavily reducing or completely removing barriers to trade in the form of tariffs and quotas.
- Producers can:
- Focus on producing goods and services which they are comparatively more efficient at making.
- Take advantage of a bigger market to export to.
- More access to foreign goods, which can be cheaper or higher quality.
- Increased living standards through encouraged economic development.
- Some industries may suffer if another member has a competitive advantage.
- For example, another country may have more fertile soil, and is able to produce and export crops for a cheaper amount than can be produced locally.
- An external tariff comprises of the tariffs and quotas applied to countries outside the free trade area.
- Countries inside the free trade area do not need to share the same external tariffs.
- A free trade area in which all countries do share the same external tariffs is called a customs union.
Rules of Origin
- If a country outside the FTA wants to export goods to a country inside the FTA it will be subject to external tariffs.
- However it is possible to get around this by:
- Exporting to the country inside the FTA with the lowest external tariffs
- Once the goods are inside the FTA, it can take advantage of tariff free trade to export to other countries
- Rules of origin are the method in which external tariffs are enforced.
- They do this by keeping track of which country a product originated from.
- If the product originated outside of the FTA then it is not eligable for the reduced internal tariffs when traded inside the FTA.
- However things can get more complicated if only part of the product was imported from outside of the FTA:
- A country inside the FTA may import raw materials from a country outside the FTA
- Once imported, the materials can be used to manufacture goods
- These goods will then originate from the country that imported them
- To change the origin of a product, a 'substantial transformation' must have been applied.
- Criteria for what counts as a substantial transformation can be complex.