Free Trade Area

What is a 'Free Trade Area'

A free trade area is 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.

BREAKING DOWN '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.