Free Trade Agreement Definition and Purpose: Explained
International trade plays a crucial role in today`s economy, with countries conducting business transactions with each other to boost their growth. As the world becomes more globalized, nations are signing free trade agreements to remove barriers and boost trade between them. In this article, we will delve into the concept of free trade agreement definition and purpose.
What is a Free Trade Agreement (FTA)?
A free trade agreement (FTA) is a pact between two countries or regions that reduces or eliminates tariffs, quotas, and other trade restrictions on goods and services flowing between them. The primary goal of an FTA is to boost trade and economic ties between the signatory countries by reducing barriers that hinder free trade.
The agreement aims to eliminate customs duties and other non-tariff barriers and facilitate greater market access for businesses operating in the signatory countries. By reducing trade barriers, businesses can easily enter and exit markets, increase production, and become more competitive while consumers enjoy a broader range of goods at more affordable prices.
What is the Purpose of Free Trade Agreements?
The purpose of FTA is to establish an open and transparent trade relationship between signatory countries. The following are some of the significant objectives of FTAs:
1. Increase Economic Growth: FTAs promote economic growth by removing trade barriers and opening up new markets for businesses to expand.
2. Promote Investments: FTAs encourage foreign investment by providing investors with more comprehensive protection and transparency.
3. Create Employment Opportunities: The elimination of trade barriers leads to increased trade and the creation of new jobs in various sectors.
4. Increase Competitiveness: FTAs encourage innovation and competition by providing businesses with more opportunities to trade and develop new products and services.
5. Promote Peaceful Relations: FTAs encourage peaceful relations and promote cooperation between signatory countries by agreeing to resolve disputes through dialogue and negotiation.
Examples of Free Trade Agreements
There are numerous examples of free trade agreements worldwide. The most notable ones are as follows:
1. North American Free Trade Agreement (NAFTA): This agreement is between the United States, Canada, and Mexico. It was signed in 1994 and replaced the prior bilateral trade agreements with Mexico and Canada.
2. European Union (EU): The EU is an economic and political union of 27 member states, all located in Europe. It has various FTAs with multiple countries worldwide.
3. Trans-Pacific Partnership (TPP): It was a trade agreement between the United States and eleven other Pacific Rim countries, including Japan, Australia, Canada, and New Zealand to lower trade barriers.
Conclusion
In conclusion, FTAs have revolutionized the way countries trade with one another. By reducing trade barriers and increasing economic cooperation, free trade agreements have enabled businesses worldwide to tap into new markets, become more competitive and innovative. While there are challenges that come with FTAs, such as job loss in some sectors, the long-term benefits outweigh the short-term drawbacks. Overall, FTAs promote economic growth, enhance international trade, and build stronger relationships between signatory countries.