What Is a Free Trade Agreement (FTA)?

A free trade agreement is an arrangement where two or more countries commit to opening up their ♓markets to one another by lowering or removing tariffs, quotas, and other trade barriers, making it easier for goods a🍸nd services to move between them.

The concept of free trade is the opposite of trade 澳洲幸运5官方开奖结果体彩网:protectionism or economic isolationism.

How a Free Trade Agreement (FTA) Works

Free trade policy is often implemented by a formal and mutual agreement of the nations involved. A free-trade policy may s🔯imply be the absence of any trade restrictions, however.

A government doesn't have to take specific action to promote free trade. This hands-off stance is referred to as “澳洲幸运5官方开奖结果体彩网:laissez-faire trade” or trade liberalization.

Governments with free-trade policies or agreements in place don't necessarily abandon all control of imports and exports or eliminate all protectionist policies. Few free trade agreements (FTAs) result in completely free trade in modern international trade.

💫For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approv🐲ed by its regulators, animals that have not been vaccinated, or processed foods that do not meet its standards.

It might also have policies in place that exempt specific products from🐻 tariff-free sta⛄tus to protect home producers from foreign competition in their industries.

The Economics of Free Trade

Free trade on the international level is no different from trade between neighbors, towns, or states. It allows businesses in each country or location to focus on producing and selling the goods that best use their resources. Other businesses import goods that are scarce or unavailable domestically. This mix of local production and foreign trade allows countries to experience faster growth while better meeting t🅷he needs of their consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.

Free Trade Models

澳洲幸运5官方开奖结果体彩网: Free trade ca🌊n be applied based on two models.

Mercantilism

Global trade was dominated by the theory of mercantilism before the 1800s. This theory placed priority on having a favorable balance of trade relative to other countries and accumulating more 🦄gold and silver.

Countries would often place trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods to attain a favorable balance of trade. This incentivized consumer🐓s to purchase locally-made products and support domestic industries.

Comparative Advantage

Ricardo introduced the law of comparative advantage, which states that countries can attain the maximum benefits through free trade. Ricardo demonstrated that countries would be able to produce more goods in total than they would by limiting trade if they prioritized producing the goods that they could produce more cheaply than other countries, and where they have a comparative advantage.

Advantages and Disadvantages of Free Trade

Free trade comes with both pros and cons.

Rapid Development

Free trade has allowed many countries to attain rapid economic growth. Many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers by 澳洲幸运5官方开奖结果体彩网:focusing on exports and resources where they have a strong cꦆomparative advantage.

Lower Global Prices

Free trade creates a competitive environment for consumers where countries strive to provide the lowest possible prices for their resources. This, in turn, allows manufacturers to provide lower prices for finished꧙ goods and ultimately increases th🅺e buying power of all consumers.

Unemployment and Business Losses

There are, non𒈔etheless, some economic losers when a country opens its borders to free trade. Domestic industries might be unable to compete with foreign competitors, causing local unemployment. Large-scale industries might move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Increased Dependency on the Global Market

Free trade can also make countries more dependent on the global market. The prices of some goods may be lower in the world market, but there are strategic benefits for a country that produces those goods domestically. The country might be forced to rebuild these industries from scratch in the🍃🐎 event of a war or crisis.

Public Opinion on Free Trade

Re🐠search suggests that economists in the U.S. support free-trade policies at෴ significantly higher rates than the general public.

American economist 澳洲幸运5官方开奖结果体彩网:Milton Friedman said, “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies haven't been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The View From Financial Markets

The financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers. It's an integral part of the financial system and the investing world. American investors have access to most foreign financial markets and a wider range of securities, currencies, and other financial products.

Completely free trade in the financial markets is unlikely in our times, however. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision, the International Organization of Sec🍬urities Commissions (IOSCO), and th🌳e Committee on Capital Movem▨ents and Invisible Transactions.

Examples of Free Trade Agreements

The U.S. and the Europe💦an Union provide notable examples of free trade.

European Union

The member nations of the 澳洲幸运5官方开奖结果体彩网:European Union form an essentially borderless single entity for trade, and the adoption of the euro by most of those nations smooths the way further.

It should be noted that this system is regulated by a central bureaucracy that must manage the many trade-related issues that come up between representatives of member nations.

U.S. Free Trade Agreements

The United States has several free trade agreements in place. They include multi-nation agreements such as the 澳洲幸运5官方开奖结𒁏果体彩网:United States-Mexico♈-Canada Agreement (USMCA), which covers Canada and Mexico, and the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. There are also separate trade agreements with nations from Australia to Peru.

These agreements mean that about half of all industrial goods entering the U.S. come in free of tariffs, according to government figures. The average import tariff on industrial goods is 2%.

These agreements collectively still don't add up to free trade in its most laissez-faire form. American special interest groups have successfully lobbied to impose trade restrictions on hundreds of imports, including steel, sugar, automobiles, milk, tuna, beef, and denim.

The Bottom Line

Free trade refers to policies that permit inexpensive imports and exports without tariffs or other trade barriers. A group of countries agrees to lower their tariffs or other barriers in a free trade agreement to facilitate more exchanges with their trading partners. This allows all countries to benefit from lower prices and gives them access to each other's resources.