Introduction

• 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.

Advantages

• 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.
  Consumers have:
  • More access to foreign goods, which can be cheaper or higher quality.
  • Increased living standards through encouraged economic development.

disadvantages

• 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.

External Tariffs

• 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.