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Free trade agreements are pacts between nations which express the desire to commit to engaging in free trade. The pact usually includes a detailed list of points which each party must satisfy, ensuring that trade between the partners is truly free and open. Multiple countries can also band together to create a free trade area of two or more countries in which free trade is actively promoted and encouraged. Pacts are an important way to make a free trade system work effectively, showing that all member nations are bargaining in good faith.
In free trade, two countries can trade with each other without any limits. Tariffs, quotas, taxes, and other burdens to trade are lifted, while government subsidies, tax reductions, and other perks which are designed to benefit domestic producers are also halted. This removes disincentives to trade, encouraging nations to exchange goods, services, and labor as needed, promoting the free flow of capital, ideas, and goods across international boundaries. Proponents of free trade believe that it helps to lower costs while promoting innovation in the member nations, especially if a free trade area includes a large number of countries.
When a country decides that it wants to engage in free trade with a partner, it meets with that partner to establish a free trade agreement, in which both parties agree to remove barriers to trade. Several pacts of countries committed to free trade like the Central American Free Trade Agreement (CAFTA) have created free trade areas in which numerous nations trade freely with each other, using the framework of their agreement as a starting point.
Free trade agreements must be periodically renewed to address emerging issues, and they often include legal recourse for nations which think that parties to the agreement are reneging on the terms. For example, one nation could force another to alter its drug patent laws to promote free trade under the terms of the agreement. The parties to free trade agreements usually hold an annual meeting, trading off so that every member nation has a chance to host the meeting.
Some free trade advocates argue that free trade agreements are actually a barrier to free trade, and that purely free and open trade should not have to be regulated or mandated in any way. However, many would agree that establishing successful free trade agreements is often the first step, showing member nations that free trade is possible and promoting a free trade environment.
What is the difference between a regional trade agreement and a regional integration agreement?
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