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What are Free Trade Agreements?

Mary McMahon
By
Updated Feb 25, 2024
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Free trade agreements are pacts between nations which express the desire to commit to engaging in free trade. The pact usually includes a detailed list of points which each party must satisfy, ensuring that trade between the partners is truly free and open. Multiple countries can also band together to create a free trade area of two or more countries in which free trade is actively promoted and encouraged. Pacts are an important way to make a free trade system work effectively, showing that all member nations are bargaining in good faith.

In free trade, two countries can trade with each other without any limits. Tariffs, quotas, taxes, and other burdens to trade are lifted, while government subsidies, tax reductions, and other perks which are designed to benefit domestic producers are also halted. This removes disincentives to trade, encouraging nations to exchange goods, services, and labor as needed, promoting the free flow of capital, ideas, and goods across international boundaries. Proponents of free trade believe that it helps to lower costs while promoting innovation in the member nations, especially if a free trade area includes a large number of countries.

When a country decides that it wants to engage in free trade with a partner, it meets with that partner to establish a free trade agreement, in which both parties agree to remove barriers to trade. Several pacts of countries committed to free trade like the Central American Free Trade Agreement (CAFTA) have created free trade areas in which numerous nations trade freely with each other, using the framework of their agreement as a starting point.

Free trade agreements must be periodically renewed to address emerging issues, and they often include legal recourse for nations which think that parties to the agreement are reneging on the terms. For example, one nation could force another to alter its drug patent laws to promote free trade under the terms of the agreement. The parties to free trade agreements usually hold an annual meeting, trading off so that every member nation has a chance to host the meeting.

Some free trade advocates argue that free trade agreements are actually a barrier to free trade, and that purely free and open trade should not have to be regulated or mandated in any way. However, many would agree that establishing successful free trade agreements is often the first step, showing member nations that free trade is possible and promoting a free trade environment.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By fBoyle — On Dec 14, 2014

@anon31514-- A regional integration agreement is when neighboring countries to establish common rules and even institutions. The goal is to increase cooperation in political and economic areas. It can also involve cooperation in security matters or environmental issues.

Since this is also an economic arrangement, it also involves easier trade between countries in this regional integration. A free trade agreement on the other hand, is only an agreement for trade and nothing else. It is not permanent and can be discontinued. Moreover, countries in free trade agreements don't have to be neighbors.

By bluedolphin — On Dec 14, 2014

@ddljohn-- I don't think free trade has disadvantage. On the contrary, free trade benefits all economies involved by encouraging more production. After all, an economy needs to produce goods to trade them. It's also great for consumers who have access to a greater variety of goods at lower prices. Since tariffs and quotas are eliminated, traded goods under free trade agreements cost less. So it's really a win-win situation for everyone.

Take the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico for example. All three economies have benefited greatly from the agreement. It's in fact the largest trading bloc in the world as of 2014 in terms of GDP. The other idea behind regional free trade agreements like this one is that it strengthens and unifies countries in the same region. So it encourages alliance in social and political matters and helps these countries become stronger in the global economy against other strong economic adversaries.

By ddljohn — On Dec 14, 2014

Don't free trade agreements also have disadvantages though? Don't they create unfair competition for domestic businesses and cause them to lose money? And if domestic businesses produce less, that would hurt the national economy right?

And what about free trade agreements that only include several countries? Isn't it a bit like out-casting other nations? Won't nations take advantage of these to punish countries they dislike?

By anon31514 — On May 06, 2009

What is the difference between a regional trade agreement and a regional integration agreement?

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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