Skip to main content

Free Trade Agreements and Trading Blocs

Free Trade Agreements and Trading Blocs

Sovereign nations join together, usually on a regional scale, to create free trade agreements. Free trade agreements are created to lower trade barriers and to stimulate trade between member countries. Member countries belonging to the free-trade area trade freely with each other while maintaining trade barriers and tariffs for non-member countries. Free trade agreements are generally seen as having a positive impact on economic growth, especially for smaller countries in the agreement. Trading blocs are groups of countries that have reached a common agreement to lower trade barriers throughout the group (e.g., NAFTA, ASEAN, and the European Union).

HISTORY

According to the Congressional Budget Office, since the end of World War II there has been significant support, especially from the United States, to eliminate artificial trade barriers and to support a greater liberalization of international trade. The General Agreement on Tariffs and Trade (GATT) was created shortly after World War II, between twenty-three countries, to facilitate and coordinate trade between the nations. In addition to creating a more liberal trade environment, it also had provisions and charters creating rules for employment, commodity agreements, restrictive business practices, international investments, and services. The process of creating a free trade agreement followed a pattern of discussion, negotiation, and eventual ratification. The complete process is called rounds There were eight rounds in the GATT treaty. Despite numerous difficulties and differences between the involved countries, much was accomplished by GATT; although portions were never fully ratified by all of the countries.

In 1995, during the Uruguay round of GATT negotiations, the World Trade Organization (WTO) was created. The WTO became the official successor to the GATT. The WTO is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible. At the center of the WTO is its multilateral trading system that functions by seeking consensus between all member nations (over 150). The notion of consensus facilitates cooperation and, potentially, an agreement that is most beneficial to all involved countries.

MOST FAVORED NATION

An important component of free trade agreements is the most favored nation status. The most favored nation status within a free trade agreement creates a situation where all countries are treated equally. Benefits, reduction of tariffs, and other trading privileges applied to one country will be applied to all countries with the most favored nation status.

TRADING BLOCS

Trading blocs are relationships between countries, generally in the same region, to facilitate free trade agreements. Trading blocs include: North American Free Trade Agreement (NAFTA), Central American Free Trade Agreement (CAFTA), Association of Southeast Asian Nations (ASEAN), European Union (EU), Mercado Comun del Sur (Mercosur), and Southern African Development Community (SADC). Southeast Asia has enjoyed unparalleled and astonishing economic growth in the past three decades since the establishment of ASEAN. In 1967, ASEAN's overall trade was worth $10 billion. In 2006, total trade reached a staggering $1.4 trillion.

NAFTA. NAFTA, along with its two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC), is the largest trade agreement on Earth today. The combined effects on trade, labor, and environmental bylaws has created a colossal force in trade that determines when and how all Canadian, American, and Mexican goods and services will be dispersed amongst its most powerful consumerseach other.

NAFTA does have its controversies and opponents, but overall it is widely considered to be the most impressive free trade agreement to date. Opponents suggest that energy taxes, especially those that caused billions in losses in 2006, are caused directly by NAFTA regulations that do not guard private citizen interest between nations well enough. Additionally, some say that government-issued subsidies given to those protected by NAFTA are an unfair monetary advantage against those who are not listed under NAFTA, especially those in the agricultural industries. A 2008 poll of U.S. voters suggests that roughly 53 percent of Democrats do not approve of NAFTA, while in Canada, NAFTA has an approval rating of more than 62 percent.

DR-CAFTA. DR-CAFTA, previously known as CAFTA, is the free trade agreement between Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua, the United States and, most recently, the Dominican Republic, which put the agreement into effect in March of 2007. Very similar in its common goals to NAFTA, DR-CAFTA is seen by many as just another step in creating a completely globalized free trade agreement. DR-CAFTA represents the future of free trade and the evolution from smaller free trade areas to larger areas, with the end goal being to include nearly every nation.

DR-CAFTA is probably most important to the creation of new highways that will traverse the terrain from Panama to Mexico and even Texas. In order for these roads to become a reality between these separate nations, a trade agreement such as DR-CAFTA will need to lower or totally eliminate tariffs to bring materials and labor in and out of construction areas. Opponents of DR-CAFTA suggest that this trade agreement, like NAFTA, is just another way to globalize and monetize the interests of massive corporations, not the interests of small business or citizens of a given nation. Supporters of DR-CAFTA see it as a natural progression for the area as well as a thoughtful way to compete against global mass-producers such as China.

Mercosur. Established in 1991 and updated in 1994, Mercosurthe free trade agreement between Uraguay, Paraguay, Brazil, and Argentinahas welcomed other nations, including Peru, Bolivia, Chile, Columbia, Ecuador, and in 2006, Venezuela. The latter nations have only partial membership in the trade agreement. Mercosur has lowered tariffs for all member nations, but most notably in 2005 for Columbia, which is now able to bring products and services to more than 200 million people who would not have had access previous to Mercosur.

Like all trade agreements, Mercosur has its issues. Some feel that it has been set up in such a way that it solidifies the status quo of both underdeveloped and wealthy nations, making it difficult for the poor to rise up and truly take advantage of any of the agreement's offerings. Others say that the extreme class separations in the geographic area effected by Mercosur can only stand to gain wealth, even if it is through a trickle-down system.

Free trade areas, the logical progression of free trade agreements, will most likely be implemented until all separate agreements make up one larger, almost completely universal agreement.

CRITICISM OF FREE TRADE

The expansion of free trade and the creation of trading blocs cause concern for some people. As reported by the Congressional Budget Office, the pursuit of free trade could divert the world from multilateral negotiations and lead to the development of rival trading blocs Other concerns include: the exploitation of developing countries by industrialized countries; environmental concerns as the production of goods overseas is not consistently regulated from country to country; and labor concerns over fair wages and the loss of jobs from industrialized countries to the developing countries, as well as political concerns that may influence the negotiations between trading partners.

BENEFITS OF FREE TRADE

Multilateral and free trade agreements create benefits by increasing imports and exports of goods. Countries are not the same in their production capabilities. Access to raw materials, necessary levels of technological development, and education of the workforce all have an impact on developing a product or service. Free trade agreements create the opportunity for countries to focus on what they do best, while being able to acquire goods and services at, potentially, the lowest price possible. Free trade makes it possible for countries rich in certain natural resources (such as oil) to trade them with the world for a fair price while also importing traded goods from other nations that are scarce in their own, such as produce. By opening doors for other countries to compete fairly, without burdensome tariffs or trade policies, there is a belief that increased free trade is a deterrent to monopolistic activities.

FUTURE OF FREE TRADE AGREEMENTS

The most recent round of negotiations for multilateral trade in the World Trade Organization continues to drag on due to the increasing number of participants with their own opinions on what each country, including their own, should be entitled to. The attractiveness of free trade agreements will remain high as the benefits evolve with a changing, globalizing marketplacewith the advent of the Internet and other technologies and English-speaking workforces abroad, it's not just tangible goods that are traded between countries anymore. Countries interested in increasing trade will circumvent the delays in the WTO by making their own agreements. The expansion of current trade agreements is also taking placeas with the expansion of NAFTA into the Free Trade Agreement for the Americas (FTAA). The U.S. market is extremely desirable and lucrative for smaller countries' exports, while also providing access to a wider variety of goods and services from the United States and other potential trading partners.

BIBLIOGRAPHY

Canadians' Views On Trade Agreements Ipsos-Reid Polling 2008. Available from: http://www.ipsos-na.com/news/pressrelease.cfm?id=2224.

Economic and Budget Issue Brief: The Pros and Cons of Pursuing Free-Trade Agreements Congressional Budget Office 2003. Avaliable from: http://www.cbo.gov.

Duina, Francesco. The Social Construction of Free Trade: The European Union, NAFTA, and Mercosur Princeton, New Jersey: Princeton University Press, 2007.

Hufbauer, Sjamsu R. Toward a US-Indonesia Free Trade Agreement: Issues and Opportunities (Policy Analyses in International Economics) Washington, D.C.: Peter G. Peterson Institute, 2007.

Magnusson, Paul. States's Rights vs. Free Trade Business Week 7 March 2005, 102103.

Mahmood, Amir. WTO and Market Access in Non-Agricultural Products: Issues and Options for Developing Countries Journal of American Academy of Business, Cambridge 6, no. 1 (2005): 111.

Poole, William. Why are Economists and Noneconomists So Far Apart? Review (Federal Reserve Bank of Saint Louis) 86, no. 5 (2004): 16.

Wirtz, Ronald A. A Fork in the Free-Trade Road Region (Federal Reserve Bank of Minneapolis) 18, no. 3 (2004): 69, 4853.

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Free Trade Agreements and Trading Blocs." Encyclopedia of Management. . Encyclopedia.com. 5 Nov. 2018 <https://www.encyclopedia.com>.

"Free Trade Agreements and Trading Blocs." Encyclopedia of Management. . Encyclopedia.com. (November 5, 2018). https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/free-trade-agreements-and-trading-blocs

"Free Trade Agreements and Trading Blocs." Encyclopedia of Management. . Retrieved November 05, 2018 from Encyclopedia.com: https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/free-trade-agreements-and-trading-blocs

Learn more about citation styles

Citation styles

Encyclopedia.com gives you the ability to cite reference entries and articles according to common styles from the Modern Language Association (MLA), The Chicago Manual of Style, and the American Psychological Association (APA).

Within the “Cite this article” tool, pick a style to see how all available information looks when formatted according to that style. Then, copy and paste the text into your bibliography or works cited list.

Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.com cannot guarantee each citation it generates. Therefore, it’s best to use Encyclopedia.com citations as a starting point before checking the style against your school or publication’s requirements and the most-recent information available at these sites:

Modern Language Association

http://www.mla.org/style

The Chicago Manual of Style

http://www.chicagomanualofstyle.org/tools_citationguide.html

American Psychological Association

http://apastyle.apa.org/

Notes:
  • Most online reference entries and articles do not have page numbers. Therefore, that information is unavailable for most Encyclopedia.com content. However, the date of retrieval is often important. Refer to each style’s convention regarding the best way to format page numbers and retrieval dates.
  • In addition to the MLA, Chicago, and APA styles, your school, university, publication, or institution may have its own requirements for citations. Therefore, be sure to refer to those guidelines when editing your bibliography or works cited list.