Free Trade Agreement (FTA) is a contract or agreement between two or more nations that they can import and export products or services from the countries in the agreement without charging any taxes, subsidies, tariffs, or quotas with no government intervention. This concept of free trade is also known as trade liberalization. Free business on the international level is not at all different from trade between cities or trade between two people.
In every profession, there are some terms and conditions which are to be fulfilled to trade peacefully. Free trade allows companies and business to produce goods or products in which they have a competitive advantage in or to put it simply they create products which use their resources efficiently and effectively. They import goods and products that are infrequent domestically. When companies provide domestically and sell internationally, it lets the economy of the country to grow faster, and it caters to the needs of the consumers or customers better.
Types of Free Trade Agreements
There are three types of Free Trade Agreements;
1. Unilateral Agreement:
Unilateral trade agreements are agreements where one country imposes the term and conditions or the trade restrictions and no other country involved in the agreement counters. This is a rare type of agreement which doesn’t happen very often. Countries do such an agreement for the sake of foreign aid and strengthen their emerging markets.
2. Bilateral Agreements:
Bilateral trade agreements are agreements between two countries in which they both with a consensus decide the trade restrictions and can loosen them accordingly. The countries indulge in such agreements to expand each other’s business and growth opportunities.
3. Multilateral agreements:
Agreement between three or more countries. It is the most difficult to negotiate because of the number of countries involved. It’s hard to bring everyone to one point because of the different needs and demands of each country, but once negotiated multilateral agreements are the most powerful agreements because they cover more geographical areas and gives every country involved in the agreement opportunities to different markets.
How does free trade agreements work?
The main purpose of free trade is to reduce tariffs on goods and services that are manufactured in one country and sold in another. FTA also covers non-tariff barriers such as product standards, quotas, intellectual property, and labor mobility, depending on the terms of negotiation. Free trade agreements can be carried out between two countries or between three or more countries. Free trade agreements can also regulate investments between partners, so the rules are the same for investors in all member states. The agreement provides investor protection as the Foreign Investment Promotion and Protection Agreement (FIPA).
Should you use Free trade agreements?
Before entering a free trade agreement, there are few things one has to assess before signing the agreement, or else the agreement might become a liability. Free trade, as discussed before, is to gain access to international markets.
- The first thing to assess the strengths and weaknesses of the company. Once you’ve done that, then assess the opportunities and threats that could be there if you are stepping into a market you have no prior information about.
- Assess the demand for your product and service. Is the demand enough? Will you be able to cater to it all?
- Identify your target market, what demographics, age group what are their needs and demands.
- Identify potential partners who could help you in sharing the risk and taking advantage of the opportunities offered by the market.
- Visit the market and see how the local markets work and how the business is conducted. Assess the business environment.
- Once you have done all this, make your strategy for entering the market. Plan your selling process. Will it be directly or through intermediaries?
Dos and Don’ts when using free trade agreements
Dos:
- Use expert help to assess your overall free trade agreement position.
- Assess whether the agreement’s provisions apply to your products or services.
- Build relationships with your customers and partners.
- Ensure that you comply fully with its rules.
Don’t:
- It depends solely on an agreement to keep you competitive.
- Neglect your market research just because there’s an agreement in place.
- Make a free trade agreement the sole reason for entering a market.
Free trade agreements require a lot of time for planning and deciding. It is not a decision to be made hastily.