What Is Free Trade Agreement?

A free trade agreement provides special conditions for those who are members of the pact between countries. Essentially these conditions apply to import/export quotas and treatment at the customs stations. According to most studies, this involves using a system that verifies where the goods come from (country of origin). In many cases, the agreement has requirements for what local materials are used and how much local labor is involved in producing those goods.

One way to get a better understanding of what a free trade agreement is would be to compare trade between states within a country and trade between two nations separated by an ocean. Within a country there are few if any barriers to trade. States don’t generally impose a tariff or fee for moving items into or out of the state. Nor do these states usually set quotas for import or export.

However, these restrictions, limits and extra fees have been quite common between nations. The goal of a free trade agreement is to eliminate these barriers to the easy movement of goods, or at least to reduce the impact of these barriers. One of the theories behind the overall concept of free trade is that certain countries or certain regions within a country will tend to focus on a particular product or portion of a system, giving it what is commonly called a comparative advantage. Taking this theory a step further, proponents of free trade argue that allowing the natural selection of comparative advantage, all countries or regions will develop an area of specialization. This, in turn, will lead toward increased income and more comfortable lifestyles for all populations. No country or populated region will have a dominate advantage.

Critics of the free-trade theory argue that the practice of opening national borders with such agreements might increase the overall wealth of the countries involved. The agreements might also benefit a certain number of regional or urban populations, depending on the goods produced and how they are traded. But free trade agreements do not address the problem of unequal distribution of wealth, according to opponents. History has shown that there are sections of the population in free-trade countries that suffer significantly after free trade agreements are put in place.

This is where the concept of fair trade must be introduced, according to critics of the free-trade philosophy. Encyclopedia definitions of fair trade point out that fair trade is meant to produce sustainable productivity and income improvement for people from the smallest, close-to-the-earth producer to the largest shipping and manufacturing organizations. Those who tend toward the free-trade philosophy argue that focusing on being fair only impedes the free flow of goods, which, they say, is the way it is supposed to be.

The bottom line is the important item for those who wish to expand the market for their products, and free trade agreements have allowed the bottom line to improve considerably for some corporations. The United States has more than a dozen free trade agreements with other countries, much to the advantage of U.S.-based companies.

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