FREE TRADE AREA/ZONE
INTRODUCTION
Free trade
Free trade
is a type of trade policy that allows traders to act and transactwithout interference from government. According to the law of comparativeadvantage the policy permits trading partners mutual gains from trade of goods andservices. Under a free trade policy, prices are a reflection of true supply anddemand, and are the sole determinant of resource allocation. Free trade differs fromother forms of trade policy where the allocation of goods and services amongsttrading countries are determined by artificial prices that do not reflect the true natureof supply and demand. These artificial prices are the result of protectionist tradepolicies, whereby governments intervene in the market through price adjustmentsand supply restrictions. Such government interventions generally increase the cost of goods and services to both consumers and producers.Cumulation is the relationship between different FTAs regarding the rules of origin ²sometimes different FTAs supplement each other, in other cases there is nocrosscumulation between the FTAs. A free trade area is a result of a free tradeagreement (a form of trade pact) between two or more countries. Free trade areasand agreements (FTAs) are cascadable to some degree ² if some countries signagreement to form free trade area and choose to negotiate together (either as atrade bloc or as a forum of individual members of their FTA) another free tradeagreement with some external country (or countries) ² then the new FTA willconsist of the old FTA plus the new country (or countries).The aim of a free trade area is to so reduce barriers to easy exchange that trade cangrow as a result of specialisation, division of labor, and most importantly via (thetheory and practice of) comparative advantage. The theory of comparativeadvantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather thanabsolute) advantage.The theory argues that the net result will be an increase in income and ultimatelywealth and well-being for everyone in the free trade area. However the theory refersonly to aggregate wealth and says nothing about the distribution of wealth. In factthere may be significant losers, in particular among the recently protected industrieswith a comparative disadvantage. The proponent of free trade can, however, retortthat the gains of the gainers exceed the losses of the losers.Our study revolves around the implications of a free trade economy and its feasibilityin the current economic scenario.
FEATURES OF FREE TRADE
1) Trade of goods without taxes by means of special quotas or removal of restrictions.2) Removal of restrictions on trade limitations.3) Free access to markets4) Free flow of capital and 5) Free flow of labor.
1)
Trade of goods without taxes by means of special quotas or removal of restrictions.The trade of goods in a free trade area is achieved by the means of certain rules inconsensus on certain agreements. These rules are agreed upon by the respectivegovernments and adhered to by the same. The free trade allows the trade of goodsin the respective regions. Nations in these regions mostly share a common currency.This allows the nations to transact in terms of freedom from rules of nationaldifference in denominations.
2
)
Removal of restrictions on trade limitations.Countries usually have a fixed state control on the inflow and outflow of trade andrestrict it in terms of the amount of total capital flow. Thus the government forms theregulatory body to regulate and stabilize the economy and sees to it that theregulations are strictly followed. In a free trade, governments have a form of mutualunderstanding over the unrestricted flow of capital and goods. Thus the governmentsact as an initiator of free customs and other duties which limits the trade. Thesecountries either have the same economic pattern (As in members of EuropeanUnion) or have a dependency of markets (As Nepal and India).
3
)
Free access to marketsCountries of these zones have free access to one another¶s markets which allowsthem to trade freely in terms of exports and imports. The regulations of customimports are relaxed which them to invest in each other¶s markets freely without anybinding. Also these countries share the knowledge and information regarding eachother¶s market conditions which help in demand forecasting before investment. Alsothese helps to avoid future losses suffered due to insufficient knowledge of themarket.
4
)
Free flow of capitalCountries of the free trade zones usually trade through a common currency. Thisallows them to trade freely in terms of capital in spite of the different economic statesof the country. Even though usually these countries share a common economicstatus( Example : Members of the European Union.), certain free trade zones (like Nepaland India )have a memorandum of understanding which allows them to share acommon currency and to transact freely in terms of money flow .
5)
Free flow of labor.These countries have a liberal visa and immigrations for citizens belonging to other countries. These countries allow the free flow of labor in each other which helps in
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