A free trade area, the second stage of regional integration, refers to a "region in which a group of countries has signed a free trade agreement"93 which "seal(s) the
88 Economics Online date unknown
https://www.economicsonline.co.uk/Global_economics/Economic_integration.html.
89 Economics Online date unknown
https://www.economicsonline.co.uk/Global_economics/Economic_integration.html.
90 Economics Online date unknown
https://www.economicsonline.co.uk/Global_economics/Economic_integration.html.
91 Economics Online date unknown
https://www.economicsonline.co.uk/Global_economics/Economic_integration.html.
92 Economics Online date unknown
https://www.economicsonline.co.uk/Global_economics/Economic_integration.html.
93 Anon 2019 https://www.investopedia.com/terms/f/free_trade_area.asp.
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economic cooperation"94 between the different countries, especially neighbouring countries or those within the same geographical region. The main aim of free trade areas is to:
... [b]ring down barriers in trading, specifically tariffs and import quotas, and encourage the free trade of goods and services among its member countries.95
The General Agreement on Tariffs and Trade defines a free trade area as:
... [a] group of two or more customs territories in which the duties and other restrictive regulations of commerce… are eliminated on substantially all the trade between the constituent territories in products originating in such territories.96
In order to establish a free trade area, the participating countries will have to determine the rules applicable to trade within the region. These rules vary from regulating tariffs to determining customs procedures and resolving trade disputes.97 A free trade area is mainly concerned with eliminating tariffs and non-tariff barriers on goods traded among member countries. The members "grant each other exclusive tariff preferences"98 which require rules of origin to identify goods entitled to such preferential treatment. The free trade agreement must:
... [s]pecifically identify the duties and tariffs that are to be imposed on member countries when it comes to imports and exports...99
A free trade area holds numerous advantages for member countries. One of the most fundamental effects of free trade is increased competition as "domestic firms will face more competition from abroad."100 The highly competitive market will lead to increased efficiency as products and services will increase in quality without being too expensive in order to be on par with competitors. The competitive market will also lead countries to specialise in the production of certain goods as such products
94 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
95 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
96 A XXIV (8)(b) of the General Agreement on Tariffs and Trade (1986).
97 Anon 2019 https://www.investopedia.com/terms/f/free_trade_area.asp.
98 TRALAC Erasmus Ratification of the AfCFTA Agreement: What happens next? 13.
99 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
100 Pettinger 2019 https://www.economicshelp.org/trade2/benefits_free_trade/.
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"take less time to complete and their output is higher."101 Through such specialisation, countries will "benefit from economies of scale and lower average costs".102 A highly competitive market, especially on a global scale, will lower prices and ensure consumers enjoy a higher purchasing power. Since the market spans over the entire free trade area, producers will have access to a greatly expanded market of potential consumers or suppliers.103 The expanded market will also result increased employment opportunities. Furthermore, monopolies are often eliminated in free trade areas, especially when there are no tariffs and quotas, as "more players can come in and join the market."104 Due to the low cost and ease of imports and exports, a wider variety of products will become available.105 In essence, free trade areas can encourage economic development as whole, which will see increased living standards and the eventual promotion of socio-economic rights.
However, as any form of regional integration, the formation of a free trade area may potentially disadvantage member states in its initial stages. The highly competitive market can cause domestic producers to suffer. The threat to intellectual property is increased as domestic producers can easily access, copy and sell someone else's ideas as their own.106 Yet this can be solved through effective protection of intellectual property rights. Workers may also "be forced to work in unhealthy and substandard work environments",107 especially in developing countries where outsourcing jobs are common. This issue can be solved through effective and well- developed labour laws. The greatest disadvantage concerns the loss of import tax and member countries will have to find other means to make up the lost tax revenue.108 However, this initial loss of tax revenue is trivial compared to the long- term economic gains achieved through the formation of free trade areas.
101 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
102 Pettinger 2019 https://www.economicshelp.org/trade2/benefits_free_trade/.
103 Anon 2019 https://www.investopedia.com/terms/f/free_trade_area.asp.
104 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
105 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
106 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
107 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
108 CFI 2020 https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/.
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