What is a Free Trade Area

Free trade areas are regions in which a group of countries have signed a free trade agreement,
and invoke little or no price control in the form of tariffs or quotas between each other. Free
trade areas allow the agreeing nations to focus on their competitive advantage and to freely
trade for the goods they lack the experience at making, thus increasing the efficiency and
profitability of each country. Free trade areas allow the agreeing nations to focus on
their comparative advantages and to produce the goods they are comparatively more efficient
at making, thus increasing the efficiency and profitability of each country. One of the most
well-known and largest free trade areas was created by the signing of the North American Free
Trade Agreement (NAFTA) on January 1, 1994. This agreement between Canada, the United
States and Mexico encourages trade between these North American countries.
To develop a free trade area, participating nations must develop rules for how the new free
trade area will operate.

Free trade areas benefit consumers, who will have increased access to less expensive and/or
higher quality foreign goods and who will see prices decrease as governments reduce or
eliminate tariffs. Producers may struggle with increased competition, but they may also acquire
a greatly expanded market of potential customers. Workers in some countries and industries
are likely to lose jobs as production shifts to become more efficient overall. Free trade areas
can also encourage economic development in countries as a whole, benefiting everyone who
resides there through increased living standards.

Encouragement of trade is one of the most important objectives of any economic grouping, be
it in the form of a free trade area, a customs union or economic union. The increase of trade is
a basic objective of establishing any customs union. As the customs union, according to the
economic theory, increases trade among its members through eliminating or diminishing trade
barriers. The increase of trade is the main influencing mechanism through which the other
objectives, such as the customs union, increased specialization, reducing prices, increasing
production efficiency and expanding market, can be achieved.

Example for free trade area

1. North American Free Trade Area

North American Free Trade Agreement (NAFTA), controversial trade pact signed in 1992 that
gradually eliminated most tariffs and other trade barriers on products and services passing
between the United States, Canada, and Mexico. The pact effectively created a free-trade bloc
among the three largest countries of North America

The North American Free Trade Agreement (NAFTA) was inspired by the success of
the European Economic Community (1957–93) in eliminating tariffs in order to stimulate trade
among its members. Proponents argued that establishing a free-trade area in North America
would bring prosperity through increased trade and production, resulting in the creation of
millions of well-paying jobs in all participating countries.
A Canadian-U.S. free-trade agreement was concluded in 1988, and NAFTA basically extended
that agreement’s provisions to Mexico. NAFTA was negotiated by the administrations of U.S.
Pres. George H.W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican Pres. Carlos
Salinas de Gortari. Preliminary agreement on the pact was reached in August 1992, and it was
signed by the three leaders on December 17. NAFTA was ratified by the three countries’
national legislatures in 1993 and went into effect on January 1, 1994.
NAFTA’s main provisions called for the gradual reduction of tariffs, customs duties, and other
trade barriers between the three members, with some tariffs being removed immediately and
others over periods of as long as 15 years. The agreement ensured eventual duty-free access
for a vast range of manufactured goods and commodities traded between the signatories.
“National goods” status was provided to products imported from other NAFTA countries,
banning any state, local, or provincial government from imposing taxes or tariffs on such
goods.

NAFTA also contained provisions aimed at securing intellectual-propertyrights. Participating

countries would adhere to rules protecting intellectual property and would adopt strict
measures against industrial theft.
Other provisions instituted formal rules for resolving disputes between investors and
participating countries. Among other things, such rules permitted corporations or individual
investors to sue for compensation any signatory country that violated the rules of the treaty.
Additional side agreements were adopted to address concerns over the potential labour-market
and environmental impacts of the treaty. Critics worried that generally low wages in Mexico
would attract U.S. and Canadian companies, resulting in a production shift to Mexico and a
rapid decline in manufacturing jobs in the United States and Canada. Environmentalists,
meanwhile, were concerned about the potentially disastrous effects of rapid industrialization
in Mexico, given that country’s lack of experience in implementing and enforcing
environmental regulations. Potential environmental problems were addressed in the North
American Agreement on Environmental Cooperation (NAAEC), which created
the Commission for Environmental Cooperation (CEC) in 1994.
Further provisions of NAFTA were designed to give U.S. and Canadian companies greater
access to Mexican markets in banking, insurance, advertising, telecommunications, and
trucking.

Criticism
Many critics of NAFTA viewed the agreement as a radical experiment engineered by
influential multinational corporations seeking to increase their profits at the expense of the
ordinary citizens of the countries involved. Opposition groups argued that overarching rules
imposed by NAFTA could undermine local governments by preventing them from issuing laws
or regulations designed to protect the public interest. Critics also argued that the treaty would
bring about a major degradation in environmental and health standards, promote
the privatization and deregulation of key public services, and displace family farmers in
signatory countries.

Effects
NAFTA produced mixed results. It turned out to be neither the magic bullet that its proponents
had envisioned nor the devastating blow that its critics had predicted. Mexico did experience a
dramatic increase in its exports, from about $60 billion in 1994 to nearly $400 billion by 2013.
The surge in exports was accompanied by an explosion in imports as well, resulting in an influx
of better-quality and lower-priced goods for Mexican consumers.
Economic growth during the post-NAFTA period was not impressive in any of the countries
involved. The United States and Canada suffered greatly from several economic recessions,
including the Great Recession of 2007–09, overshadowing any beneficial effects that NAFTA
could have brought about. Mexico’s gross domestic product (GDP) grew at a lower rate
compared with that of other Latin American countries such as Brazil and Chile, and its growth
in income per person also was not significant, though there was an expansion of the middle
class in the post-NAFTA years.
Little happened in the labour market that dramatically changed the outcomes in any country
involved in the treaty. Because of immigration restrictions, the wage gap between Mexico on
the one hand and the United States and Canada on the other did not shrink. The lack
of infrastructure in Mexico caused many U.S. and Canadian firms to choose not to invest
directly in that country. As a result, there were no significant job losses in the U.S. and Canada
and no environmental disaster caused by industrialization in Mexico.

Expansion Of The Agreement

Although NAFTA failed to deliver all that its proponents had promised, it continued to remain
in effect. Indeed, in 2004 the Central America Free Trade Agreement (CAFTA) expanded
NAFTA to include five Central American countries (El Salvador, Guatemala, Honduras, Costa
Rica, and Nicaragua). In the same year, the Dominican Republic joined the group by signing a
free trade agreement with the United States, followed by Colombia in 2006, Peru in 2007, and
Panama in 2011. According to many experts, the Trans-Pacific Partnership (TPP) that was
signed on October 5, 2015, constituted an expansion of NAFTA on a much-larger scale.
North American Free Trade Agreement Benefits

In 1994, the United States, Mexico and Canada entered into the North American Free Trade
Agreement (NAFTA) to encourage trade among the three nations. NAFTA is the largest trading
block of its kind, encompassing over 444 million people and $17 trillion of goods and services.
The American Chamber of Commerce calls the agreement a massive success, pointing out that
from 1993 to 2007, trade of goods between the three countries rose from $293 billion to $909
billion. NAFTA has been successful in promoting growth in a number of areas.

Manufacturing

NAFTA has allowed the three countries to take advantage of niches and specialize in those
areas. In practical terms, Canada may produce nickel at a mine in Ontario and export the raw
metal to California, where engineers need the element for new battery technologies. The high-
tech components are built in California and sent to Mexico for assembly into a finished product.
From raw materials to finished product, NAFTA opens doors and allows the three nations to
remain competitive on the world market.
Jobs

NAFTA has created a vibrant employment marketplace that allows each country to use the
strength of the agreement to bolster existing talent and set the stage for future job growth. As
Mexico's economy grows due to an increase in manufacturing and assembly positions, the
country requires skilled laborers, high-tech equipment and training that the U.S. and Canada
can supply. This sharing of knowledge increases employment opportunities across the
continent.
Less Expensive Goods
A number of NAFTA benefits drive the cost of consumer goods down in all three countries.
The creation of a single trade area allows companies to achieve much better economies of scale.
A Canadian manufacturer of appliances now has access to a much larger marketplace, which
drives the cost down. Cross-border manufacturing also reduces the cost of a product, directly
impacting its price. Similarly, with crops and livestock now easily transported across borders
without tariffs, consumers benefit from less expensive foods.
Agriculture

Agriculture has seen tremendous gains for all parties under NAFTA. American exports of
agricultural products to Canada and Mexico have increased dramatically since NAFTA came
into force, and now account for over 30 percent of all exports. The U.S. Department of
Agriculture has determined that Mexico and Canada, along with China, are the largest
consumers of American agricultural products, far outpacing other nations. NAFTA has resulted
in overall growth in exports from all three countries, with each benefiting from increased
exports of their core agricultural products.

Disadvantage of NAFTA

1. U.S. Jobs Were Lost

Since labor is cheaper in Mexico, many manufacturing industries withdrew part of their
production from the high-cost United States. Between 1994 and 2010, the U.S. trade
deficits with Mexico totaled $97.2 billion. In the same period, 682,900 U.S. jobs went to
Mexico. But 116,400 of those jobs were displaced after 2007. The 2008 financial crisis could
have caused them instead of NAFTA.

Almost 80 percent of the losses were in manufacturing. The hardest-hit states were California,
New York, Michigan, and Texas. They had high concentrations of the industries that moved
plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical
appliances.

2. U.S. Wages Were Suppressed

Not all companies in these industries moved to Mexico. But some used the threat of moving as
leverage against union organizing drives. When workers had to choose between joining the
union or losing the factory, workers chose the plant. Without union support, the workers had
little bargaining power. That suppressed wage growth. Between 1993 and 1995, 50 percent of
U.S. manufacturing companies in industries that were moving to Mexico used the threat of
closing the factory. By 1999, that rate grew to 65 percent.

3. Mexico's Farmers Were Put Out of Business

Thanks to NAFTA, Mexico lost 1.3 million farm jobs. The 2002 Farm Bill subsidized U.S.
agribusiness by as much as 40 percent of net farm income. When NAFTA
removed trade tariffs, companies exported corn and other grains to Mexico below cost. Rural
Mexican farmers could not compete. At the same time, Mexico reduced its subsidies to farmers
from 33.2 percent of total farm income in 1990 to 13.2 percent in 2001. Most of those
subsidies went to Mexico's large farms. These changes meant many small Mexican farmers
were put out of business by highly subsidized American farmers.

4. Maquiladora Workers Were Exploited

NAFTA expanded the maquiladora program by removing tariffs. Maquiladora is where United
States-owned companies employ Mexican workers near the border. They cheaply assemble
products for export back into the United States. The program grew to employ 30 percent of
Mexico's labor force. The workers had "no labor rights or health protections," according
to Continental Social Alliance. In addition, the "workdays stretch out 12 hours or more, and if
you are a woman, you could be forced to take a pregnancy test when applying for a job."

5. Mexico's Environment Deteriorated

In response to NAFTA’s competitive pressure, Mexico agribusiness used more fertilizers and
other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into marginal
land, resulting in deforestation at a rate of 630,000 hectares per year.

6. NAFTA Called for Free U.S. Access for Mexican Trucks

Another agreement within NAFTA was never implemented. NAFTA would have allowed
trucks from Mexico to travel within the United States beyond the current 20-mile commercial
zone limit. A demonstration project by the Department of Transportation was set up to review
the practicality of this. In 2008, the House of Representatives terminated this project. It
prohibited the DOT from implementing it without Congressional approval.

Congress worried that Mexican trucks would have presented a road hazard. They are not
subject to the same safety standards as U.S. trucks. U.S. truckers' organizations and companies
opposed it because they would have lost business. Currently, Mexican trucks must stop at the
20-mile limit and have their goods transferred to U.S. trucks.

There was also a question of reciprocity. The NAFTA agreement would have allowed
unlimited access for U.S. vehicles throughout Mexico. A similar arrangement works well
between the other NAFTA partner, Canada. But U.S. trucks are larger and carry heavier loads.
They violate size and weight restrictions imposed by the Mexican government.

2. South Asian Free Trade Area (SAFTA)

The South Asian Free Trade Area (SAFTA) is an agreement reached on January 6, 2004, at
the 12th SAARC summit in Islamabad, Pakistan. It created a free trade area of 1.6 billion
people in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri
Lanka (as of 2011, the combined population is 1.8 billion people). The seven foreign ministers
of the region signed a framework agreement on SAFTA to reduce customs duties of all
traded goods to zero by the year 2016. The SAFTA agreement came into force on January 1,
2006, and is operational following the ratification of the agreement by the seven governments.
SAFTA requires the developing countries in South Asia (India, Pakistan and Sri Lanka) to
bring their duties down to 20 percent in the first phase of the two-year period ending in 2007.
In the final five-year phase ending 2012, the 20 percent duty will be reduced to zero in a series
of annual cuts. The least developed nations in South Asia (Nepal, Bhutan, Bangladesh,
Afghanistan and Maldives) have an additional three years to reduce tariffs to zero. India and
Pakistan ratified the treaty in 2009, whereas Afghanistan as the 8th memberstate of
the SAARC ratified the SAFTA protocol on 4 May

The Agreement on SAARC Preferential Trading Arrangement (SAPTA) was signed on April
11, 1993, and entered into force on December 7, 1995, with the desire of the Member States of
SAARC (India, Pakistan, Sri Lanka, Nepal, Bangladesh, Bhutan, Afghanistan and
the Maldives) to promote and sustain mutual trade and economic cooperation within the
SAARC region through the exchange of concessions.
The establishment of an Inter-Governmental Group (IGG) to formulate an agreement to
establish a SAPTA by 1997 was approved in the Sixth Summit of SAARC held in Colombo in
December 1991.
The basic principles underlying SAFTA are as under;

1. overall reciprocity and mutuality of advantages so as to benefit equitably all

Contracting States, taking into account their respective level of economic and industrial
development, the pattern of their external trade, and trade and tariff policies and
systems;
2. negotiation of tariff reform step by step, improved and extended in successive stages
through periodic reviews;
3. recognition of the special needs of the Least Developed Contracting States and
agreement on concrete preferential measures in their favour;
4. inclusion of all products, manufactures and commodities in their raw, semi-processed
and processed forms.

Purpose of the agreement

The purpose of SAFTA is to encourage and elevate common contract among the countries such
as medium and long term contracts. Contracts involving trade operated by states, supply and
import assurance in respect of specific products etc. It involves agreement on tariff concession
like national duties concession and non-tariff concession.
Objective of the agreement
The main objective of the agreement is to promote competition in the area and to provide
equitable benefits to the countries involved. It aims to benefit the people of the countries by
bringing transparency and integrity among the nations. SAFTA was also formed in order to
increase the level of trade and economic cooperation among the SAARC nations by reducing
the tariff and barriers and also to provide special preference to the Least Developed Countries
(LDCs)among the SAARC nations.

What is Safta What are its benefits

World over, regional and free trade agreements (RTAs and FTAs) are becoming the norm, even
as the WTO is in the throes of reconciling differences among member-countries to institute a
freer multilateral trade regime. Trade and investment among member-countries of the South
Asian Association of Regional Cooperation (Saarc) compares poorly with those within Asean
or the EU in the absence of an RTA. Despite the political conflicts in the region, Saarc countries
are going ahead with plans to sign an RTA, namely Safta. fe takes a Closer Look.
What is Safta
It is an abbreviation for the South Asian Free Trade Area. It is a proposed FTA between the
seven members of the Saarc group. These include Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.
What is its ultimate goal
It will replace the earlier South Asia Preferential Trade Agreement (Sapta), which was limited
in its scope. The ultimate aim of Safta will be to put in place a full-fledged South Asia
Economic Union on the lines of the EU. Safta is scheduled for launch in January 2006 and will
lead to reduction of tariffs for intra-regional trade among Saarc countries.
What falls within the ambit of Safta
The agreement incorporates trade in goods. Services and investment are not part of the
agreement.
What are the objectives guiding Safta
Among its aims are: promoting and enhancing mutual trade and economic cooperation by
eliminating barriers in trade, promoting conditions of fair competition in the free trade area,
ensuring equitable benefits to all and establishing a framework for further regional cooperation
to expand the mutual benefits of the agreement.
What other benefits can Safta bring to member-countries
It could lead to enhancement of foreign investment among Saarc nations. The visible spurt in
foreign investment within Asean cou-ntries and the increase in investments by India in Sri
Lanka and vice versa following the India-Sri Lanka FTA bear testimony to the potential of
such agreements in boosting investments.
The agreement can be structured to ensure that such investments dont harm the domestic
industries of member-nations. RTAs, like the proposed Safta, can also catalyse beneficial
industrial restructuring in member-countries through cross-border corporate marriages and
acquisitions.
Does the experience of FTAs/RTAs suggest higher economic growth in the countries
concerned
World Bank studies reveal that developing countries that have embraced open-market
strategies in the past decade have grown much faster than those that have not. The EU trade
bloc, for instance, led to the formation of the single European market and substantial
restructuring of industry on a pan-European basis. The EU also enabled member-countries to
exploit economies of scale, scope and specialisation.
According to one estimate, Safta could lead to the near trebling of the proportion of intra-
regional trade.
What is the share of intra-Saarc trade in the total external trade by Saarc countries at present
Regional trade in south Asia accounts for less than 6% of the total external trade of the region
at present. This compares poorly with 22% within the Asean free trade area, or 65% within the
EU.
Are there any special provisions for the least developed country (LDC) members
The agreement provides for a clear recognition of the special needs of LDCs by allowing them
to adopt concrete preferential measures in their favour on a non-reciprocal basis.
Are there any differences of opinion among the developing and LDC members of Saarc on the
agreement
There is a serious area of disagreement which is yet to be resolved. The LDCs, especially
Bangladesh and Nepal, are pushing for the incorporation of a tariff compensation mechanism
in the agreement.
This would make developing country members responsible for compensating LDCs for the
revenue that they forego by reducing tariffs on goods. Developing country members, which
include India, Pakistan and Sri Lanka, have argued that while some kind of compensation can
be worked out, the proposed tariff compensation mechanism cannot be a formal part of the
agreement.