25% discount for one year when you subscribe to any plan before 05/04/2020.
Use the code APRIL20

Dictionary
Debitoor's accounting dictionary
Free trade agreement (FTA)

Free trade agreement - What is a free trade agreement?

A free trade agreement (FTA) is an agreement between countries to eliminate or reduce trade barriers.

Does your company sell goods or services to other EU countries? Check out our blog on invoicing to other EU countries from the UK.

An FTA allows goods and services to be imported or exported between the member countries with reduced or removed tariffs, quotas, or restrictions. This helps to protect local companies and industries, and promote competition and economic integration. A free trade area describes the geographical areas that are included in the free trade agreement.

The benefits of free trade agreements

Free trade agreements essentially open the borders to trade, creating more competition between businesses. As a result, this creates many more options for consumers for higher quality and cheaper goods. FTA’s also allow for potential business growth as there is a much larger market to sell your goods and services.

What is the difference between a free trade agreement and a single market?

A free trade agreement reduces or eliminates tariffs and quotas from goods and services being traded within the area. A single market does the same but goes a lot further. A single market includes the free movement of goods, services, labour, and capital.

A great example of a single market is the EU single market which consists of 27 EU member states, and 5 non-EU member states. Like a free trade agreement, the EU single market ensures the free movement of goods and services. Unlike a free trade agreement, it also allows the movement of labour, land, and capital.

In an FTA, people are not permitted to work within the other countries without a valid visa, nor are companies allowed to purchase land for business purposes outside their own country without specific approval.

What is the difference between a free trade agreement and a customs union?

A customs union can often be confused with a free trade agreement, however, there is one key difference. A customs union is essentially a more advanced version of a free trade agreement.

Like a free trade agreement, a customs union allows the free movement of goods and services. In a customs union, the member states also agree upon a common tariff on products being imported from anywhere outside the union. This is to prevent a single country within the customs union from making better deals with outside countries, undercutting the other member states within the customs union.

Examples of free trade agreements

  • European Free Trade Association (EFTA)
  • North American Free Trade Agreement (NAFTA)
  • South Asian Free Trade Area (SAFTA)
  • Pacific Alliance
  • Bi-lateral free trade agreements between 2 countries

The European Free Trade Association consists of Iceland, Switzerland, Norway, and Liechtenstein. It was started in 1960 to promote economic integration and free trade between the member states.

The North American Free Trade Agreement consists of Canada, The United States, and Mexico. This trade bloc was established in 1994 which reduced or abolished the trade barriers between the countries.

The South Asian Free Trade Area consists of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. This agreement was reached in 2004, to promote competition in the free trade area and equalise benefits to all member states.

The Pacific Alliance consists of Mexico, Peru, Chile, and Colombia. This Latin American trade bloc was formed in 2011 to integrate the countries and ensure freedom of movement, goods, capital, and services.

There are several bilateral agreements between two countries, for instance, Australia and China, and the US and South Korea. This provides free access to the other countries market and promotes economic growth.