Free Trade Area

Posted in Finance, Accounting and Economics Terms, Total Reads: 530
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Definition: Free Trade Area

A designated group of countries that have few price controls in the form of tariffs, preferences and quotas etc. between each other to facilitate movement of goods and services. It is a kind of a trade bloc. Countries choose such an integration if they believe their economies are complementary rather than competitive, in which case they may opt for a customs union.


FTA arrangements allow the member nations to focus on the comparative advantages of their respective nations and to carryout economic activities that they are more efficient than others at producing, hence effectively raising the efficiency and profitability of each nation. The theory of comparative advantage states that in a market which is unrestricted, at equilibrium, each country would specialize in the activity where it has comparative advantage rather than absolute advantage. The net result is supposed to be a net increase in income as well as wealth and thus the well-being of all those member countries. However, this increase only happens at an aggregate level and there will be huge gainers as well as losers in each country. Economists argue that the aggregate benefits received can be used for wealth transfer to the losing parties in order to compensate them.


One of the world’s most popular and largest free trade areas was created in 1994 January by the signing of the North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico.


Advantages:

• Consumers benefit from increased access to cheaper and better quality foreign goods

• Producers might see an expansion in their reach and markets that they can serve

• Raise economic standards at an aggregate level of the member countries


Disadvantages:

• Producers may have to face increased competition

• Because of overall emphasis and shift towards efficiency and low costs, flight of production to such regions take place and will lead to loss of jobs in some countries



The ASEAN–India Free Trade Area (AIFTA) refers to the free trade area comprising the ten member countries of the Association of Southeast Asian Nations (ASEAN) and India. The FTA came into effect from 1st January 2010. As of 2011-12, the trade between India and ASEAN stood at $79.86 Billion, crossing the initially laid target of $ 70B.

 

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