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Benefits of Free Trade Agreement in International Trade

Navigating Free Trade Agreements: Maximizing Benefits for International Trade

The main aim of Free Trade Agreements is to ensure a safe and secure trade liberalisation. It was anticipated that the FTAs will divert trade instead of encouraging the exporters and importers to carry on more trade. However, records indicate that there is a minimal diversion and the Free Trade Agreements and Regional Trade Agreements are effectively promoting and expanding trade liberalisation. 

One significant benefit of FTAs is that they can be negotiated and concluded smoothly and quickly as compared to multilateral agreements. There are demerits too. If not laid out with an appropriate framework of policies and terms, Free Trade Agreements can reduce instead of increasing and enhancing economic welfare. Also, there are no efficient vehicles to liberalise trade in the industries or sectors where the parties not included in the agreement have a significant influence. We will talk about the advantages and disadvantages of the Free Trade Agreement in detail later here.

What is Free Trade Agreement?

To give you a brief, it is a form of agreement or pact between nations to minimise the complexities and barriers to imports and exports. Under the free trade policy, it is easy to sell and purchase goods and services in the international market. There are minimal or no government tariffs, subsidies, quotas, or restrictions to impede the transactions and exchanges. 

How Does a Free Trade Agreement Work?

In recent times, free trade policy generally comes into practice through mutual agreement between the concerned nations, on a formal platform. Moreover, the free trade policy is all about removing trade restrictions and making cross-border transactions more convenient and hassle-free for exporters and importers.  

It is not mandatory for the government specifically adopt measures to promote free trade. This is termed laissez faire trade or trade liberalisation which hands in a significant amount of freedom to the exporters, importers, and manufacturer exporters to process trade across borders.

Not always do the governments with free trade agreements or policies hand in all the authority of import and exports or neglect every protectionist policy. For instance, a nation may grant permission to practice free trade with another state but not allow the import of animals that are not vaccinated, drugs that are not recognised and approved by the regulating authorities, or food that are not up to the mark.

The state can even have certain principles and policies under which some products are exempted from being tariff-free so that the local producers are protected from the highly competitive manufacturers in their market.

What are the Benefits of Free Trade Agreement?

There are numerous advantages of Free Trade Agreements, let us have a look at them.

Economic Welfare

Free Trade Agreements enhance economic activities and welfare in the nations. It also opens up various job opportunities giving everyone, the big and small enterprises to gain benefit from trade and investments.

There are various additional advantages of Free Trade Agreements such as in-built agendas that promote reforms on a domestic level and trade liberalisation.

Prevent Interruptions

FTAs are not just reducing and eliminating tariffs, they also help tackle the barriers faced within the nation that tend to interrupt the flow of goods and services. They help attract investors, and effectively regulate problems such as intellectual property, government procurement, and e-commerce.

Increased Accessibility of Resources

Through Free Trade Agreements, buyers and sellers get easy access to a wider range of goods and services that are competitively priced. Consumers and manufacturers get their hands on advanced technology as well as innovative and creative practices.

More Ways to Improve Trade

They attract more advantages through foreign investments. These agreements also encourage regional integration and give shared ways to process trade and investment among the trading partners.

The less developed countries can have an economic boom with the numerous investment opportunities and improved trade Free Trade Agreements attract.

FTAs support links between businesses and people that help improve the bilateral relationships with the partners.

Improved Quality of Global Trade

In the absence of Free Trade Agreements, the nations usually protected their local businesses and industries. This led to the creation of a non-competitive and stagnant global market with bare progress. When the protection is removed through FTAs, the market experiences a rise in competitively priced high quality goods and services which enhances global trade.

New Methods for Development

Global businesses comparatively have more skills and expertise than local businesses to develop domestic resources efficiently. Especially in activities such as oil drilling, mining, and manufacturing. Free Trade Agreements enable global firms to access these business opportunities.

When these multinational companies collaborate with domestic organisations for developing the resources, they teach and train them with the best techniques. Thus, local businesses learn new methods and are enabled to tackle the competitive global market.

What are the Disadvantages of Free Trade Agreements

One of the major disadvantages of Free Trade Agreements is job outsourcing. They are held responsible for the workforce leaving their nations. However, there are some more demerits of Free Trade Agreements, let us discuss them.

Increase Job Outsourcing

Why do FTAs increase job outsourcing? This happens because the companies can afford the reduced tariffs on imports and thus try to widen their branches to other nations. With minimal or eliminated taxes, imports from a country with inexpensive living cost less. It makes it difficult for businesses to compete in the industry effectively, thus, they prefer reducing their workforce through layoffs. This then leads to job outsourcing.

Loss of Intellectuals

There is a high probability of intellectual property being stolen. Many developing countries have no specified or strict laws to protect inventions, new processes, and patents. Or they may have laws that are not effectively practised. This results in their accomplishments getting into the hands of thieves. Thus, they are forced to compete with low-priced domestic products.

Rise in Unemployment

Numerous emerging market sectors and traditional economies rely on farms and agriculture for employment opportunities. The small family farms are not strong enough to compete with the subsidised agriculture business carried out in developed countries. Thus, they tend to lose or sell their farms and go to the cities in search of jobs and livelihood. This leads to increased unemployment, crimes, and more people below the poverty line.

Poor Working Conditions

It is possible that multinational companies are outsourcing jobs to emerging market countries without providing the necessary labour protection. This results in children and women being subjected to working in the factories under pathetic working conditions and getting paid far less than what they deserve. 

Reduction of Tax Revenue

There are several small countries that need help to replace the revenue that they lose from import tariffs and fees. This results in the reduction of tax revenue.

Harmful Effects on the Environment

Emerging market countries generally focus on something other than environmental protection measures. Free Trade Agreements result in the depletion of minerals, timber, and other available natural resources. Deforestation and strip mining harm the forests and fields, making them wastelands.

List of Free Trade Agreements Signed by India

India entered into 13 regional Trade agreements (RTAs) or Free Trade Agreements (FTAs) with various countries and regions. Here is the list:

  • India-ASEAN FTA
  • India-Singapore CECA
  • India-Malaysia CECA
  • India-Thailand FTA – Early Harvest Scheme (EHS)
  • India-Japan CEPA
  • India-South Korea CEPA
  • Agreement on SAFTA
  • India-Sri Lanka FTA
  • India-Nepal Treaty of Trade
  • India-Bhutan Agreement on Trade, Commerce and Transit
  • India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
  • India-UAE CEPA
  • India-Australia Economic Cooperation and Trade Agreement (Ind-Aus ECTA)

Additionally, India has also signed 6 Preferential Trade Agreements (PTAs) including Asia Pacific Trade Agreement (APTA).

All the Regional Trade Agreements signed by India have exit clauses mentioned in Article 32 of APTA: “Any Participating State may withdraw from this Agreement, such withdrawal to take effect six months following the day on which written notice of the same is served to the Participating States through the Executive Secretary of ESCAP. The rights and obligations of a Participating State which has withdrawn from this Agreement shall cease to apply as of that date”.

Conclusion

Free Trade incorporates policies that enable imports and exports without tariffs or any other trade barriers, making them inexpensive. Under a Free Trade Agreement, two or more countries land on a mutual agreement to reduce or cancel out their tariffs or tariff barriers, thus facilitating more exchanges and transactions with the FTA partners. This helps the countries gain numerous benefits, from getting inexpensive goods and services to accessing each other’s resources, be they physical or intellectual.

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