Research Paper on "Free Trade Agreements"

Research Paper 4 pages (1345 words) Sources: 4

[EXCERPT] . . . .

Free trade agreements are trade blocks created between different countries to encourage trade between these countries by eliminating or reducing tariffs, taxes, import quotas and also giving preference to the countries in these trade blocs. Some trade agreements also encourage free movement of people between the countries. This situation is termed as an open border. Countries which choose to form free trade agreements as their economic integration are said to be complementary Manger, 2005()

The free trade agreement forms a free trade area between these countries. Members of a free trade area have different quotas, tariffs and customs but do not have a common tariff unlike in a customs union. This is the major difference between a customs union and a free trade area. A customs union is basically a free trade area which has a common external tariff though with different quotas. This is established for competitive economies in order to avoid deficiency of competition Kowalczyk & Riezman, 2009()

In order to avoid evasion of tax through re-exportation, the members of a free trade area use the system of certifying the origin which is commonly called the rules of origin. This is where there is a requirement for the minimum amount of local material that can be used to transform the goods to add value to them. Re-exportation is the situation whereby a country wins trade by charging lower tariffs to countries which are not members of the free trade are then re-exports the goods to another free trade area member tariff-free Kowalczyk & Riezman, 2009()

Examples of free trade agreements are the Asia-Pacific Trade Agreement (AFTA), North American Free Trade Agreement (NAFTA), G-3 Free Trade Agreement (G3), ASEAN Free Trade Agreement (AFTA), Central European Free Trade Agreement (CEFTA), and the South Asia Free Trade Agreement (SAFTA) Kowalczyk & Riezman, 2009()

Aim of a free trade agreement

Free trade agreements usually eliminate any significant barriers to trade between the member states. It this enables the easy exchange of services and goods as a result of reduced or eliminated trade tariffs and import quotas. As a result, there are no delays at the border as the goods pass from one country to another thus the goods are able to flow faster and easier. Additionally since the free trade area agreement usually does not have any differences in taxes and regulations, there is better flow of trade Jason & Dayton, 2008()

Free trade areas as a form of economic integration help to grow the area's economy as a result of encouraging division of labor, specialization and giving the member states a comparative advantage. In an unrestricted marketplace, each source of production tends to specialize in the activity which gives it a comparative advantage. Therefore, the net revenues for these member countries will increase thus boosting the economies of the countries Jason & Dayton, 2008()

Case of the ASEAN

The Association of Southeast Asian Nations (ASEAN) Free trade area was established in the year 1993 as a culmination of the end of the Cambodian conflict and it helped to open up the Southeast Asia (SEA) region to the development of new trade partnerships and stronger negotiations. This had increased the volume of trade and the cooperation of the SEA countries toward improving their economies and the standards of living. During the first years of the ASEAN, the economic development of the SEA countries was extremely low. However, the SEA region has grown to become a solid player in the global trade market and this has furthered the economic development of the region Tay, 2001()

The ASEAN has also contributed to economic development by ensuring the political stability of the region is maintained. This has also helped to collaborate with other organizations internationally such as the World Bank and the IMF in the provision of funding for various industries and other projects in the SEA countries Keling, Som, Saludin, Shuib, & Ajis, 2011()

Economies of the ASEAN member nations are majorly primary producers and the manufacturing industries had not fully developed and thus contributed very… READ MORE

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