What Is a Free Trade Agreement (FTA)?
A free trade agreement, or FTA, is an agreement made between two or more nations to reduce the barriers of trade between them.
Under an FTA, goods and services can be imported and exported between countries with little to no prohibitions, quotas, or tariffs.
Often an FTA is a formal agreement, but a free-trade policy can also occur from a lack of trade restrictions, such as in the case of “laissez-faire”(pronounced: lay-say fair) trade, which is French for “let go.”
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Benefits and History of FTAs
According to economist David Ricardo’s book On the Principles of Political Economy and Taxation (1817), free trade increases the diversity of goods while lowering their price, and allows nations to make better use of their domestic resources and specializations.
FTAs vs Tariffs
While an FTA is usually the most beneficial, a government may place a tariff on certain products to protect domestic manufacturers.
It may also block the import of certain goods that have not been approved by a nation’s regulators, such as drugs, unvaccinated animals, or foods that don’t meet the government’s national standards.
The international agency responsible for ensuring that trade flows smoothly between countries is the World Trade Organization.