Free Trade Area

AAA

DEFINITION of 'Free Trade Area'

A group of countries that have few or no price controls in the form of tariffs or quotas between each other. 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.

INVESTOPEDIA EXPLAINS 'Free Trade Area'

To develop a free trade area, participating nations must develop rules for how the new free trade area will operate. What customs procedures will each country have to follow? What tariffs, if any, will be allowed and what will their costs be? How will participating countries resolve trade disputes? How will goods be transported for trade? How will intellectual property rights be established and managed? The goal is to create a trade policy that all countries in the free trade area agree upon.

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.

The United States participated in 14 free trade areas with 20 countries as of the beginning of 2014. In addition to NAFTA, there is the Dominican Republic-Central American Free Trade Area (DR-CAFTA), which includes the Dominican Republic, Costa Rica, El Salvador, Nicaragua, Honduras and Guatemala. The United States also has free trade agreements with Australia, Bahrain, Chile, Colombia, Panama, Peru, Singapore, Israel, Jordan, Korea, Oman and Morocco.

RELATED TERMS
  1. North American Free Trade Agreement ...

    A regulation implemented on Jan. 1, 1994, that decreased and ...
  2. Tariff

    A tax imposed on imported goods and services. Tariffs are used ...
  3. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  4. Environmental Tariff

    A tax placed on products being imported to or exported from countries ...
  5. Quota

    A government-imposed trade restriction that limits the number, ...
  6. Protectionism

    Government actions and policies that restrict or restrain international ...
Related Articles
  1. Active Trading

    Competitive Advantage Counts

    What's the best indicator of a company's future success? Its ability to succeed when others fail.
  2. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  3. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  4. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  5. There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
    Economics

    Most Powerful And Influential Public Companies In 3 Metrics

    There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
  6. What's a Multinational Corporation?
    Investing

    What's a Multinational Corporation?

    A multinational corporation is just that – a corporation that operates in multiple nations, with a home office that coordinates global management. Being a multinational corporation is a complicated ...
  7. What does Free Carrier Mean?
    Investing

    What does Free Carrier Mean?

    Free carrier is a trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. Costs for transportation and risk of loss transfer ...
  8. A look at China's plan to control population growth and how it could change going forward.
    Economics

    China's One-Child Policy Explained

    A look at China's plan to control population growth and how it could change going forward.
  9. Economics

    What is the difference between loan syndication and a consortium?

    Learn about consortiums and loan syndications, two types of multiple banking arrangements designed to finance transactions that single lenders do not handle.
  10. With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
    Economics

    A Look At China's Growing Influence On The World

    With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center