Essentially, FTAs are designed to reduce the barriers to trade between two or more countries, which are in place to help protect local markets and industries. Trade barriers typically come in the form of tariffs and trade quotas. One such example is Japan’s tariff on Australian beef, which under the new deal will be cut from 38.5 per cent to 19.5 per cent over 18 years.
FTAs also cover areas such as government procurement, intellectual property rights, and competition policy. Lowering trade barriers helps industries access new markets, boosting their reach and the number of people they can sell their products to. FTAs are also ultimately designed to benefit consumers. In theory, increased competition means more products on the shelves and lower prices.
The aim of a free-trade area is to reduce barriers to exchange so that trade can grow as a result of specialization, division of labor, and most importantly via 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. But 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. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.
Free Trade Agreements (FTAs) have proved to be one of the best ways to open up foreign markets to U.S. exporters. Trade Agreements reduce barriers to U.S. exports, and protect U.S. interests and enhance the rule of law in the FTA partner country. The reduction of trade barriers and the creation of a more stable and transparent trading and investment environment make it easier and cheaper for U.S. companies to export their products and services to trading partner markets. In 2014, 47 percent of U.S. goods exports went to FTA partner countries. U.S. merchandise exports to the 20 FTA partners with agreements in force totaled $765 billion, up 4
percent from 2013. The United States also enjoyed a trade surplus in manufactured goods with our FTA partners totaling $55 billion in 2014.
With which countries does the United States have an FTA? As of January 1, 2015, the United States has 14 FTAs in force with 20 countries. The United States is negotiating a regional FTA, the Trans-Pacific Partnership (TPP), with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The United States and the European Union launched negotiations on the Transatlantic Trade and Investment Partnership (T-TIP) in June 2013.
Free trade area
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 people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration.
Benefits of FTAs
- FTAs foster freer trade flows and create stronger ties with our trading partners.
- FTAs don’t just eliminate tariffs, they also address behind-the-border barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other issues, such as intellectual property, e-commerce and government procurement.
- FTAs can increase Australia’s productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation.
- FTAs promote regional economic integration and build shared approaches to trade and investment, including through the adoption of common Rules of Origin and through broader acceptance of product standards.
- FTAs can enhance the competitiveness of a country’s exports in the partner market, and add to the attractiveness of its investment destination.
- FTAs can deliver enhanced trading opportunities that contribute to the sustainable economic growth of less-developed economies.
- FTAs can continue to provide benefits to parties as the agreements are implemented, including through phase-ins and in-built agendas that encourage ongoing domestic reform and trade liberalisation.
What are the advantages of FTA?
How each Free Trade Agreement will benefit your business will depend on the type of goods or services that you offer and the terms of each particular FTA.
Some advantages include:
- Increasing goods exports to a market or commencing exports into a new market
- Accessing new and often larger services markets
- Lower tariffs on exported goods, although this often occurs over time and in a staggered manner
- Removal or relaxation of quotas on certain goods that can be imported
- Access to other Government procurement markets, for example in the United States
- Access to cheaper inputs for which can assist in making goods and services more competitive
- Potential investment in business by offshore investors
- Increase economic growth. The U.S. Trade Representative Office estimates that FTA increased U.S. economic growth by .5% a year.
- More dynamic business climate. Often, businesses were protected before the agreement.
These local industries became stagnant, and non-competitive on the global market. With the protection removed, they have the motivation to become a true global competitor. - Lower government spending. Many governments subsidize local industry segments. When these are removed after the trade agreement, those funds can be put to better use.
- Foreign direct investment. Investors will flock to the country, adding much needed capital to expand local industries and boost domestic businesses. It also brings in much needed U.S. dollars to many formerly isolated countries.
Disadvantages
The biggest criticism of free trade agreements is that:
1. Increase jobs outsourcing. Why would that happen? Reducing tariffs on imports allows foreign companies to expand and hire workers. Low-cost imports make it difficult for companies in those same industries to compete, so they reduce their workers. Many U.S. manufacturing industries that can’t compete did, in fact, lose business and lay off workers. In fact, one of the biggest criticisms of NAFTA is that it sent jobs to Mexico.
2. Theft of intellectual property. Many developing countries don’t have the same protection for patents, inventions and new processes. The laws they do have aren’t always strictly enforced. Companies that take advantage of free trade agreements in these countries often
have their ideas stolen. They must then compete with lower-priced domestic knock-offs.
3. Crowd out domestic industries. Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can’t compete with subsidized agri-businesses in the developed countries. As a result, they lose their farms and
must look for work in the cities, aggravating unemployment, crime and poverty.
4. Poor working conditions. Multi-national companies relocate jobs to emerging market countries that don’t have adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions.
5. Degradation of natural resources. Emerging market countries find their timber, minerals and other natural resources depleted as the multi-nationals move in. Without environmental protections, deforestation and strip-mining reduce their jungles and fields to wastelands.
6.Destruction of native cultures. As development moves into former pristine areas, tribal cultures vanish as local peoples are uprooted, and often killed.
7. Reduced tax revenue. Without import tariffs and fees, many smaller countries must find ways to replace that revenue
