A free trade agreement is a treaty or agreement signed by nations to encourage and facilitate global trade by reducing trade barriers. Goods and services can be exported and imported with minimal or no tariffs, subsidies, quotas or prohibitions under a free trade policy, thereby helping nations trade competitively.
Trade agreements fall into three categories — unilateral, bilateral, and multilateral. In a unilateral agreement, a country imposes trade restrictions (and in rarer cases, loosens them), with no choice from other nations. It benefits that one country only. A bilateral agreement is one where two nations agree to eliminate trade restrictions. Finally, a multilateral trade agreement spans a sizeable geographical area and is signed by three or more nations to ease restrictions, thereby increasing competitive advantage among all signatories.
Here are some of the most important free trade agreements:
Regional Comprehensive Economic Partnership (RCEP)
The Regional Comprehensive Economic Partnership is the most recent free trade agreement in the world and, as of 2020, the largest trade bloc in history. It was signed on November 15, 2020 by 15 Asia-Pacific nations — Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam. The agreement was sealed by video conferencing. India was expected to join the RCEP but pulled out of negotiations in 2019.
RCEP nations account for a third of the world’s population and 29 percent of the world’s gross domestic product. According to the Peterson Institute of International Economics, the RCEP could boost global national income by $186 billion annually in the next ten years and add 0.2 percent to the economies of its signatories. It also represents the first free trade agreement among China, Japan, and South Korea. The pact aims to remove up to 90 percent of the import tariffs among its signatories over the next two decades and establish common rules for e-commerce, trade and intellectual property. In the short term, signatories hope the agreement will spur economic recovery from the COVID-19 pandemic.
United States-Mexico-Canada Agreement (USMCA)
The United States-Mexico-Canada Agreement (USMCA) was signed by the three North American nations as a successor to the erstwhile North American Free Trade Agreement (NAFTA). Touted as NAFTA 2.0, the USMCA came into effect on July 1, 2020, and included major overhauls in automobile trade, labour and environmental standards, protection of intellectual property and digital trade provisions.
According to the new trade pact, for automobiles to qualify for no tariffs, they must have 75 percent of their components manufactured in at least one of the three signatories. The deal also opened the Canadian dairy market to farmers in the U.S. The USMCA includes a sunset clause, according to which the terms of the agreement expire after 16 years. It is also subject to review every six years.
European Economic Area (EEA)
The European Economic Area is a free trade area established by the Agreement on the European Economic Area. It consists of all the members of the European Union (EU) — Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden — as well Iceland, Lichtenstein, and Norway. It aims to strengthen economic ties among its signatories by enabling the free movement of persons, goods, services, and capital within the member states.
Asia-Pacific Free Trade Agreement (APTA)
Signed in 1975, the Asia-Pacific Free Trade Agreement is the oldest preferential trade agreement between nations in the Asia-Pacific region. It was earlier known as the Bangkok Agreement until 2005. The agreement was the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), which serves as its secretariat. Its seven signatories include Bangladesh, China, India, South Korea, Laos, Sri Lanka, and Mongolia. It aims to promote the economic development of its members through mutually beneficial trade liberalisation measures.
African Continental Free Trade Area (AfCFTA)
The AfCFTA is the largest free trade area in terms of the number of participant countries since the formation of the World Trade Organisation. It was established in 2018 through the African Continental Free Trade Agreement, which was signed by 54 out of the 55 African Union states, with Eritrea being the exception. Its implementation is expected to begin in January 2021. As it comes into effect over time, it is expected to cover a market of over 1.2 billion people and a combined GDP of $3 trillion. It is predicted to boost Africa’s income by $450 billion by 2035(a gain of 7 percent). Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is an agreement signed by Australia, Canada, Brunei, Chili, Japan, Mexico, Malaysia, New Zealand, Peru, Singapore, and Vietnam in March 2018. During this time, the partnership’s member states accounted for over 13 percent of the global GDP. The CPTPP evolved from the earlier Trans-Pacific Partnership (TPP), which failed to materialise with the withdrawal of the United States in 2017. The CPTPP aims to completely liberalise all tariffs among its member states, with a few exceptions. For instance, the dairy industry of Canada as well as the rice industry of Japan is protected with the retention of tariffs.
Association of Southeast Asian Nations Free Trade Area (AFTA)
Better known as the ASEAN Free Trade Area, this trade bloc agreement was first signed by the original members of the ASEAN members — Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand — in January 1992. It later came to include Vietnam, Laos, Cambodia, and Myanmar. In 2019, the combined GDP of all the ASEAN nations amounted to USD 9.34 trillion, making it one of the biggest free trade agreements in the world. AFTA was signed to increase the competitive edge of ASEAN nations and attract more foreign direct investment. Since its inception, it has largely eliminated export and import duties, easing trade costs for businesses in the region.
South Asian Free Trade Area (SAFTA)
This free trade agreement was signed in January 2004 by the members of the South Asian Association for Regional Cooperation (SAARC) — India, Pakistan, Bangladesh, Afghanistan, Sri Lanka, Nepal, Bhutan, and the Maldives. As of 2019, its signatories made up 21 percent of the world’s population and USD 3.67 trillion of the global economy. SAFTA came into force in 2006 with the goal of eliminating customs duties on all goods by 2016. It succeeded the erstwhile SAARC Preferential Trading Arrangement of 1993.
Tariffs can hugely impact trade costs. Therefore, it is vital for any business looking to trade globally to understand how FTAs can be leveraged to compete in international markets.
This blog was originally published on Trademo.com/blog
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