Free trade agreement

A free-trade agreement (FTA) or treaty is an agreement according to international law to form a free-trade area between the cooperating states. There are two types of trade agreements: bilateral and multilateral. Bilateral trade agreements occur when two countries agree to loosen trade restrictions between the two of them, generally to expand business opportunities. Multilateral trade agreements are agreements among three or more countries, and are the most difficult to negotiate and agree.^[1]

FTAs, a form of trade pacts, determine the tariffs and duties that countries impose on imports and exports with the goal of reducing or eliminating trade barriers, thus encouraging international trade.^[2] Such agreements usually "center on a chapter providing for preferential tariff treatment", but they also often "include clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues".^[3]

Important distinctions exist between customs unions and free-trade areas. Both types of trading bloc have internal arrangements which parties conclude in order to liberalize and facilitate trade among themselves. The crucial difference between customs unions and free-trade areas is their approach to third parties. While a customs union requires all parties to establish and maintain identical external tariffs with regard to trade with non-parties, parties to a free-trade area are not subject to such a requirement. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as they deem necessary.^[4] In a free-trade area without harmonized external tariffs, to eliminate the risk of trade deflection, parties will adopt a system of preferential rules of origin.^[5]

The General Agreement on Tariffs and Trade (GATT 1994) originally defined free-trade agreements to include only trade in goods.^[6] An agreement with a similar purpose, i.e., to enhance liberalization of trade in services, is named under Article V of the General Agreement on Trade in Service (GATS) as an "economic integration agreement".^[7] However, in practice, the term is now widely used in politic science, diplomacy and economics to refer to agreements covering not only goods but also services and even investment. Environmental provisions have also become increasingly common in international investment agreements, like FTAs.^[8]: 104