Free trade area

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Free trade area

Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union.

Description

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 (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements 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 supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree — if some countries sign agreement to form free trade area and choose to negotiate together (either 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).

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 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.

List of free trade areas

This is list of free trade areas between three or more countries, mainly notified to the General Agreement on Tariffs and Trade/World Trade Organization and in Force. Every customs union, trade common market and economic and monetary union has also a free trade area. Smaller agreements, that are part of larger one are not listed.

Agreement Date (in force)

AANZFTA — ASEAN+3                             signed, but yet to be ratified by all countries
African Free Trade Zone (AFTZ)                  signed, but yet to be ratified by all countries
Asia-Pacific Trade Agreement (APTA)              06/17/76
Central European Free Trade Agreement (CEFTA)    05/01/07
Commonwealth of Independent States Free Trade

Agreement (CISFTA) 12/30/94

Dominican Republic – Central America Free

Trade Agreement (DR-CAFTA) 03/01/06
Economic and Monetary Community of Central

Africa (CEMAC)                                  06/24/99
European Economic Area (EEA)                     01/01/58
-EC — Andorra                                   07/01/91
-EC — CARICOM                                   11/01/08
-EC — OCTs                                      01/01/71
-EC — Switzerland and Liechtenstein            01/01/73

-EC — Turkey 01/01/96
Economic Community of West African

States (ECOWAS) 07/24/93

EFTA — SACU                                     05/01/08
Greater Arab Free Trade Area (GAFTA)             01/01/98
Latin American Integration Association (ALADI)   03/18/81
North American Free Trade Agreement (NAFTA)      01/01/94
South Asia Free Trade Agreement (SAFTA)          12/07/95
South Pacific Regional Trade and Economic

Cooperation Agreement (SPARTECA) 01/01/81
Trans-Pacific Strategic Economic

Partnership (P4) 05/28/06

Qualifying for a Free Trade Agreement

To determine eligibility for a free trade agreement (FTA), importers must obtain product information from the all suppliers within the supply chain. An automated solution should be in place for an importer to solicit his/her suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the products Harmonized Schedule Number. Each free trade agreement will qualify an importer's products in different ways, however the basis of the qualification surrounds the idea that the finished product must have a minimum percentage of local/regional content.

Under NAFTA, qualifying rules include De Minimis, Regional Value Content, and Tariff Shift.

De Minimis states that the finished good must be less than or equal to 7% of the transaction value of the product
Regional Value Content is a calculated percentage of the value of the product that represents its North American content
Tariff Shift is a substantial transformation that takes place in a NAFTA country
A finished good must qualify under one of these rules to be eligible for free trade under NAFTA. This is just one example of a qualification for a free trade agreement. If a certificate of origin is present from a supplier demonstrating that the good originated in a country under the associated free trade agreement, no further calculations are needed.

When qualifying products for an FTA, the use of an automated system allows importers to stay up-to-date on international compliance regulations, as well as solicit suppliers via the web instead of manually. A functional solution should also perform the required calculations for the associated FTA during the Bill of Material (BOM) analysis, ensuring correct eligibility.