What are Free Trade Agreements?

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What are Free Trade Agreements?

  • FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between  them, but (in contrast to a common market) capital or labor may not move freely.
  • FTAs normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.).
  • FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.

Types of FTA

  • Preferential Trade Agreement (PTA):In a PTA, two or more partners agree to reduce tariffs on agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade.
  • The key difference between an FTA and a PTA is that while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated.
  • Bilateral Investment Treaty (BIT): A Bilateral Investment Treaty (BIT) provides investors with various guarantees when investing in the country of the treaty partner.
  • Economic Partnership Agreement (EPA) or Comprehensive Economic Partnership (CEP): The EPA/CEP agreements are comprehensive in scope, covering such fields as trade in goods, trade in services, investment, and economic cooperation
  • Foreign Investment and Protection Agreement (FIPA): The main provisions of the Foreign Investment and Protection Agreement cover the handling of foreign investments by the host country, the transfer of capital and investment income, compensation for expropriation and procedures for settling disputes.
  • Custom Union: In a Customs union, partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against rest of the world. An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and Swaziland. European Union is also an outstanding example.
  • Common Market: Integration provided by a Common market is one step deeper than that by a Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. European Common Market is an example.
  • Partnership Cooperation Agreement (PCA): The aim of the Partnership and Cooperation Agreement (PCA) is to encourage political, commercial, economic, and cultural cooperation. With attention for human rights and democratic processes, the PCA moves beyond many other trade agreements.


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