Free Trade Agreement is a very important concept in the world economy as it comprises of a specific type of trade agreement among two or more countries. It is of two types
Bilateral (involving two countries) and Multilateral (involving more than two countries).
It is a pact between two or more nations to reduce barriers to imports and exports
among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or
no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
Hence understood, it is totally contrary to protectionism.
Key Principles of FTA:
- It does not necessarily mean for the government to remove the trade barriers or totally avoid protectionism but it keeps a regulatory check on the trade practices. Also, many FTAs help in totally free trade across countries.
- It allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically; this ensures the faster growth of the economies simultaneously meeting the needs of its consumers.
- It might have policies in place that exempt specific products from tariff-free status in order to
protect home producers from foreign competition in their industries.
- With the help of FTA, many countries have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.
- It expands the diversity and lowers the prices of goods available in a nation, simultaneously better exploiting its homegrown resources, knowledge, and specialized skills.
- The economy becomes Laissez faire in nature, i.e. with least government intervention.
Some examples of FTA: