Free Trade

A free trade agreement (FTA) is an accord concluded by two or more states, with the aim of lowering import and export barriers. According to the policy, goods and services are traded across the international border, although there are little state wages, quotas, grants or imposed embargo.

The FTA notion is quite contrary to the policy of protectionism or economic isolationism. 

Working principles of Free Trade Agreement

Formal and reciprocal convention of concerned parties is necessary to implement the FTA policy. At the same time, realization of this strategy can be a result of limitation absence. 

Authorities have no need to undertake concrete measures for stimulation of the policy. Such hands-off attitude is termed as “laissez-faire commerce”. 

It’s not obligatory for authorities to give up the import and export monitoring or terminate with the reflationary policy. According to the current international policy, there exist several FTAs, which entail completely free trade. 

For instance, free trade is implicated between two countries. But there are certain restrictions, considering import of particular medicine, or animals without preventive immunization, or processed products, that fall short of accepted standards. 

Moreover, the protecting policy of domestic manufacturers can be applied to secure the market from import-competing interests. In other words, certain products don’t have a tariff-free entry. 

Economic paradigm of free trade. International level of free trade has no differentiation from the trade with bordering countries or cities. Nevertheless, the production and selling processes are organized so that best utilization of resources should be anticipated. Other enterprises bring in goods that are scarce or in deficit on a state scale. Local manufacture and external commerce combine, i.e. the economy evidences a faster ramp-up and caters consumer needs. 

This position became mainstream in 1817 in the book “On the Principles of Political Economy and Taxation”, written by the famous economist David Ricardo. He claimed that the policy broadens the variety of choice and reduces product prices. It’s essential to recall that domestically made goods and expertise are involved.

Public attitudes on free trade. There is no concordance of opinion concerning free trade influence. US professors, having specialization in economics, are 7 times more likely to endorse this type of policy than the rest of society. 

According to the general public, free trade isn’t in great demand. Concern points are deceptive trade practices from countries with low labor costs, which mean a loss of well paid jobs. 

Financial market view. No wonder that financial markets witness a flip side. Free trade creates a base for domestic manufacturers to discover other parts of the world. In addition to that, it’s an essential part of financial architecture. For instance, currently American investors have entry to the majority of markets and, of course, to the variety of its derivatives. 

Although, the probability of completely free trade is doubtful. There exist tons of supranational regulatory entities such as International Labor Organization, The World Health Organization, International Organization of Securities Commission (IOSCO), World Trade Organization, etc.

Actual examples of Free Trade Agreements

Nowadays, the European Union can be considered a great illustration of the free market. A unitary whole without borders is formed by affiliated countries for trading purposes. The admission of euro as a common currency simplifies carrying out transactions. This system is governed by a bureaucratic body with a headquarter located in Brussels. The agency deals with the matters connected with trade between affiliate members. 

U.S. free trade agreements. Currently, several accords are operating on the market, including multilateral arrangements (the North American Free Trade Agreement (NAFTA) and Central American Free Trade Agreement (CAFTA)). Free-standing accords, which exist in different states, also cover countries from Australia to Peru. 

In total, these agreements indicate that half of goods imported to the USA are free of duty. The average import tax on manufactured products amounts to 2%. 

The presence of agreements doesn't mean the availability of a free trade in its laissez-faire format. Trade barriers were imposed on hundreds of imported goods in the U.S, such as beef, sugar, automobiles, etc.