Free Trade Agreement vs Free Trade Area: Understanding the Key Differences
In today`s global economic landscape, international trade agreements have become an essential aspect of business operations. Two commonly used terms when discussing trade agreements are free trade agreement (FTA) and free trade area (FTA). Although both terms sound similar, they have distinct differences that businesses and policymakers need to understand.
What is a Free Trade Agreement?
A free trade agreement is a treaty between two or more countries that aims to remove or reduce trade barriers, including tariffs, quotas, and other restrictions, on goods and services traded between them. It is a bilateral or multilateral agreement that establishes the rules of trade between participating countries. The primary objective of an FTA is to promote trade liberalization and encourage economic growth by increasing market access and reducing trade costs.
Examples of free trade agreements include the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the European Union-South Korea FTA.
What is a Free Trade Area?
A free trade area is a group of countries that have agreed to remove trade barriers, such as tariffs, among themselves while maintaining their own external trade policies with non-member countries. Unlike an FTA, a free trade area does not create uniform trade rules. Instead, each member country is free to establish its trade policies with countries outside the FTA.
Examples of free trade areas include the European Union (EU), the Association of Southeast Asian Nations (ASEAN), and the Southern Common Market (MERCOSUR).
Key Differences Between FTA and FTA
One of the primary differences between an FTA and FTA is the level of integration between member countries. In an FTA, member countries agree to reduce or eliminate trade barriers on goods and services traded between them. However, they retain their autonomy in setting trade policies with non-member countries, which can lead to trade diversion and discrimination against non-member countries. In contrast, an FTA goes beyond removing trade barriers and establishes uniform trade rules among member countries, creating a more integrated trading bloc.
Another key difference is the scope of coverage. While FTAs typically focus on the exchange of goods and services, FTAs can also cover other trade-related areas such as investment, intellectual property, and government procurement.
Finally, the level of participation is another significant difference between the two trade agreements. FTAs usually involve a more comprehensive agreement among participating countries. In contrast, FTAs can involve a broader range of countries, including those with diverse economic structures and varying levels of development.
In conclusion, free trade agreements and free trade areas are both trade agreements that aim to promote economic growth by reducing trade barriers among participating countries. However, they differ in terms of their level of integration, scope of coverage, and level of participation. Businesses and policymakers need to understand these differences to take advantage of the benefits of free trade agreements and free trade areas while mitigating potential challenges.