Free trade helps business to expand.
Signatories to a free trade agreement usually agree not to impose customs, tariffs, or similar import duties on goods and/or services. Tariffs increase the cost of imported goods and make them less competitive and it is deemed to be in the interests of competition and fair trade to eliminate these where possible. Countries therefore often enter into free trade agreements whereby they agree to reduce and/or eliminate barriers to trade.
Bilateral Free Trade Agreements
A bilateral free trade agreement is a straightforward treaty between two countries in which both agree to reduce barriers to trade. The United States has a number of bilateral agreements with different countries. For example, in 2004 the U.S. and Australia agreed to eliminate tariffs on imported goods originating from the other country.
Multilateral Free Trade Agreements
Several countries can enter into a multilateral agreement, which will generally be complex in structure. The General Agreement on Tariffs and Trade, (GATT) now administered by the World Trade Organization, is a treaty in which subscribers commit to individual levels of tariffs for trade with other countries.
Regional Free Trade Agreements
A regional free trade agreement is an agreement among countries within a specific geographical region. According to the World Trade Organization, there were 283 regional trade agreements in force as of July 2010. The North American Free Trade Agreement relates to both goods and services and the signatories are the United States, Mexico and Canada. Its objectives are to eliminate barriers to trade and facilitate the cross-border movement of goods are services among the signatories.
Preferential Trade Agreements
Preferential trade agreements are between developed and developing countries. In the agreement, the developed country will not impose tariffs on certain goods, without requiring reciprocal commitments.
Customs Unions
In a customs union, the member states not only agree to free trade among themselves, but also agree on common external tariffs for all states that are not members of the customs union. The European Union is an example of a customs union. Here, the member states of the EU agree not to impose duties on any goods originating from any other member state.
