November 16, 2004		2004-R-0783
FREE TRADE AGREEMENTS
By: John Rappa, Principal Analyst

You asked what free trade agreements (FTAs) are and if they have achieved their goals.

PURPOSE

Nations negotiate FTAs to increase trade between them. FTA’s accomplish this goal by lowering tariffs, import quotas, customs practices, and unnecessarily stringent licensing requirements and product standards. These trade barriers inflate the price of imports or make it hard to export goods to another country. Other barriers prevent foreign businesses from bidding on government contracts, owning shares in domestic businesses, or operating a business in a nation.

Historically, nations erect trade barriers to nurture fledging domestic industries or give inefficient ones time to adopt new, cost-cutting technologies. These policies also preserved jobs, but stifled competition. Since 1945, nations turned to free trade as the ticket to economic prosperity and negotiated FTAs as a way to gain unfettered access to foreign markets.

But that access increases competition, which benefits some businesses but harms others. It benefits those businesses that can make or deliver services at competitive prices in domestic and foreign markets. It also benefits consumers by giving them a wider range of lower-priced products and services to choose from. But the competition could also force uncompetitive businesses to close their doors and lay workers off.

TYPES

Most FTAs specify the rules for holding trade talks, conducting trade, and resolving trade disputes. They also create international commissions to manage the talks and resolve disputes. But they vary depending on the number of nations involved in the talks.

Multilateral FTAs involve many nations from different regions. For example, almost 150 nations belong to the World Trade Organization (WTO), the multilateral FTA that succeeded the provisional, post-World War Two General Agreement on Tariffs and Trade (GATT). Multilateral talks are slow and complicated, given the number of nations involved. For this reason, some of the participating nations simultaneously negotiate separate bilateral or regional FTAs.

For example, the U. S. and Canada negotiated a bilateral FTA, but this 1998 agreement was superseded by the 1994 regional North American Free Trade Agreement (NAFTA). NAFTA may be superseded in 2005 the hemisphere-wide Free Trade Area for the Americas (FTAA). In the meantime, the U. S. and several Central American nations recently finished negotiating the Central American FTA.

ACHIEVING GOALS

FTAs’ primary goal is to increase trade flows and improve nations’ economic welfare. “Empirical evidence since the end of the Second World War supports this claim: countries that have adopted relatively more open trading regimes generally experienced higher levels of economic growth and development, other things being equal” (The U. S. -Central America Free Trade Agreement (CAFTA): Challenges for Sub-Regional Integration, Congressional Research Service, 2003, emphasis added).

FTAs’ success is less clear when researchers do not treat the other things as equal. The World Trade Association stated that “GATT’s success in reducing tariff barriers to such a low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governments to devise other forms of protection for sectors facing foreign competition” (Understanding the WTO, WTO, 2003).

JR: ts