A free trade agreement is a form of economic integration, and exists when geographic regions group together to create what is known as a free trade area. Some well known examples are the European Union (EU) and the North American Free Trade Agreement (NAFTA). A free trade area is free from all barriers to trade. Members of a free trade agreement maintain common trade barriers for nonmembers, so membership in a free trade agreement has its benefits.
A major benefit of membership in a free trade agreement is trade creation. Trade creation occurs when one country benefits from the ability to trade a product or service freely with other members of a free trade area. For example, if before Spain entered the EU, the United States and Spain both provided wheat to EU countries, they would both be subject to the same tariffs. However, once Spain became an EU member, wheat from Spain would become much cheaper than wheat from the United States. The flow of trade would be altered as a result, creating trade opportunities for Spain.
Reduced Import Prices
Reduced import prices are another benefit of free trade agreements, which are experienced two ways. First, when countries enforce tariffs on imports, the price consumers pay for the imported goods increases. Members of a free trade agreement, however, are not subject to the same import tariffs as nonmembers, resulting in lower prices for consumers.
Second, if just one country imposes a tariff on imports, the price of the imported goods will increase in that particular country, resulting in lower demand for the product. However, if an entire free trade area imposes the tariff, the resulting drop in demand will be definitely be felt by the exporting country, forcing a decrease in the price of the imported products.
Membership in a free trade agreement increases the size of a particular market, which may result in a reduced ability to monopolize certain industries. An increase in market size means there are more companies competing for business, which means there will be an increase in the supply of available goods and services. An increase in supply while demand remains steady may result in lower prices for consumers, as companies vie for their business.
- Photo Credit import export textiles. image by Bruno Bernier from Fotolia.com
What Are the Benefits of a Free Trade Zone?
Free trade zones eliminate many of the barriers to trade that increase prices for consumers and businesses.
Benefits of Free Trade
The benefits of free trade have been known since Adam Smith discovered them in his 1776 book, "The Wealth of Nations." Economists...
What Are the Benefits of Trade Bloc Agreements?
Trade bloc agreements allow the nations involved to lower trade barriers. This benefits governments and businesses.
What Are Examples of Trade Agreements?
Examples of trade agreements, which can be bilateral, multilateral or special, include AUSFTA, EU, ASEAN, APTA and NAFTA.
Definition of Optimum Tariff
An optimum -- or optimal -- tariff is a tax designed for maximizing the welfare of a country. Optimum tariffs are found...
What Are the Benefits of Free Trade in Developing Countries?
In 1776, Scottish economist Adam Smith called for an economy where people could engage in trade with citizens of other countries free...
What Are the Benefits of Free Trade for Canada?
The North America Free Trade Agreement is a three-way agreement between Canada, the United States and Mexico. The treaty is one of...
What Are the Benefits of Free International Trade?
With the advancement of air travel and internet technology, globalization and international trade have been expanding at an unprecedented pace. With this...