What Is A Free Trade Agreement?

At its most basic, a Free Trade Agreement (FTA) between two or more countries liberalises the conditions for trade beyond the liberalisation commitments the countries have agreed individually at the World Trade Organisation (WTO) and which they are bound to extend to all WTO members. Under WTO rules FTAs must liberalise ‘substantially all’ trade in goods and services. What this means in terms of exact amounts of liberalisation is both undefined and untested, and is expected to remain so, given that almost all WTO members have FTAs and have a common interest in avoiding their legality being challenged. However it would typically mean at least 70-80% of tariff lines are reduced or removed entirely, along with substantial market access in services.

Key statistics

According to the WTO website, “In the period 1948-1994, the GATT received 124 notifications of [Trade Agreements]…., and since the creation of the WTO in 1995, over 400 additional arrangements covering trade in goods or services have been notified.” Most major economies are therefore party to a number of trade agreements, for example the US has agreements in force with 20 countries, while EFTA has 27 FTAs covering 38 countries and territories outside the EU. These numbers indicate the view of governments in the 1990s and beyond that trade liberalisation through Free Trade Agreements helps economic growth.

Content of a Free Trade Agreement – Market Access

Free Trade Agreements originally consisted of schedules of tariff reduction or elimination: some immediately, some over a defined period. To ensure consistency between agreements tariffs are always listed according to the Harmonised System of Tariff Nomenclature (or HS codes), and for example in the EU-Chile Association Agreement run to slightly less than 900 pages (of a total of 1437).

Not all tariffs are reduced or eliminated. In the case of the recently introduced EU-Canada Trade Agreement (CETA), just less than 99% of tariff lines will ultimately be eliminated. The remainder are all in the agricultural sector, which is often protected in trade agreements. In agriculture, products are either entirely protected or may be subject to Tariff Rate Quotas, which limit the volume of imports that benefit from reduced tariffs.

These tariff reductions are subject to products meeting conditions on Rules of Origin, which determine how much of the product must come from the country concerned. These rules, which are often extremely complex, add nearly 100 pages to the EU-Chile Agreement, and even more to some other agreements.

Commitments to liberalise trade in services typically relate to removing limitations on market access, or to areas where national treatment (that is, granting companies based in an FTA partner country the same rights to conduct business as those enjoyed by indigenous one) has not previously been granted. For example the EU-South Korea FTA opened up access to the legal services market of Korea for EU firms, which was not in place prior to the agreement.

Similarly, commitments on government procurement determine the access parties have to each other’s public procurement opportunities. Some countries linked by FTAs will also be party to the WTO Government Procurement Agreement, and will seek to go beyond the commitments made to all members there, for example by allowing access to procurements by public sector bodies not listed in the GPA schedules.

Content of a Free Trade Agreement – non-tariff barriers and other provisions

In recent years Free Trade Agreements have become increasingly complex, for example CETA contains 30 chapters. Many of these chapters aim to tackle non-tariff barriers, for example in determining equivalence in regulations covering trade in agriculture (Sanitary and Phytosanitary measures, or SPS for short) or goods (Technical Barriers to Trade or TBT), or how goods are treated at customs.

Other chapters relate more generally to the rules which trading partners are expected to follow in order to receive preference. These may include maintenance of high environment and labour conditions, respect for Intellectual Property, and restrictions on the state aid a government can provide for a private sector company. There will also be a process laid out for dispute settlement between the parties, and possibly a mechanism by which investors can take a government to a tribunal for unfair treatment (the Investor-State Dispute Settlement, or ISDS).

There is considerable discussion among trade experts as to whether Free Trade Agreements are now too large and take too long to agree. Some argue that they should therefore return to focusing mostly on market access issues, while others want to see further expansion of related areas such as labour provisions. Similarly there are those who believe that FTAs receive too much attention, and that governments should focus on expanding commitments made by all WTO members, and others who want to see more focus on removing individual barriers through Mutual Recognition Agreements.

Do Free Trade Agreements deliver?

In considering the effects of “Free Trade” Agreements, it is worth noting that the name is a bit of a misnomer, because they are in fact “preferential” and therefore discriminate against third parties. Further, they by no means free all trade between the economies involved in them – there are lots of exceptions, even on tariffs, especially for agriculture. So there has been much debate among trade economists about whether / how far they stimulate global trade overall.

Most economists and most governments believe that Free Trade Agreements deliver overall economic gain for the countries concerned (for example see this from the Australian Government) – provided they actually generate additional trade and do not simply divert existing trade at the expense of third countries. This economic gain may however disguise some concentrated losers, particularly in previously protected sectors, and for this reason even agreements solely reducing tariffs can be controversial. Given that it is also difficult to isolate economic data to specifically prove impacts, the debate is likely to continue.

Meanwhile, discussions in Free Trade Agreements have increasingly turned to tackling non-tariff barriers as well as market access. In part this is to tackle those barriers, but President Obama also claimed that the Trans-Pacific Partnership (TPP) was essential to ensure the US and its partners – and not China – set future global economic rules. However, as has been seen during the debate over the TPP in the US, and the proposed Transatlantic Trade and Investment Partnership (TTIP) in the EU, non-tariff barriers can cause controversy, particularly for the part of the public who feel their regulations are superior to the other parties (i.e. EU for TTIP, US for TPP).  This controversy was specifically exacerbated by the inclusion of clauses on ISDS, so it is possible that without these the inclusion of non-tariff barriers would be less controversial. Nonetheless this recent controversy has left the future development of Free Trade Agreements uncertain.

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We welcome suggestions for further reading on the subject

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