What Is the Difference between a Free Trade Agreement and Regional Economic Integration

The Europe 2020 strategy presented by the European Commission sets out a vision of the EU`s social market economy for the twenty-first century. It shows how the EU can emerge stronger from this crisis and how it can be transformed into a smart, sustainable and inclusive economy that offers high levels of employment, productivity and social cohesion. It calls for stronger economic governance in order to achieve rapid and sustainable results.28 In general, trade creationA situation in which a free trade area creates trade that would not otherwise have existed. means that a free trade area creates trade that would not have existed otherwise. As a result, delivery is made by a more efficient producer of the product. In any case, the creation of businesses will increase the national well-being of a country. With regard to the term free trade area, the General Agreement on Tariffs and Trade (GATT 1994) originally meant that it covered only trade in goods. [4] An agreement with a similar objective, namely to promote the liberalization of trade in services, is referred to in Article V of the General Agreement on Trade in Services (GATS) as the “Economic Integration Agreement”. [5] In practice, however, the term is now often used to refer to agreements that concern not only goods, but also services and even investment. With hundreds of free trade zones currently in place and under negotiation (around 800 under ITC`s Rules of Origin Facilitator, including non-reciprocal trade agreements), it is important for businesses and policymakers to keep an eye on their status. There are a number of custodians of free trade agreements that are available at the national, regional or international level. Among the most important are the Latin American Integration Association (LAIA) database on Latin American free trade agreements[18], the database of information agreements of Asian countries managed by the Asian Centre for Regional Integration (ARIC)[19] and the portal on European Union free trade negotiations and agreements.

[20] The simplest way to do this is to imagine that a country that joins a free trade agreement could have import markets where trade formation would take place and other markets where trade diversions would take place. Trade-generating markets would certainly generate national welfare gains, while trade-diversion markets could result in national welfare losses. It is common for economists to make the following statement: “If the positive effects of trade creation are greater than the negative effects of trade diversion, then the free trade agreement will improve national well-being.” A more concise statement, albeit a little less precise, is: “If a free trade agreement results in more trade creation than trade diversion, then the free trade agreement improves prosperity.” For a variety of reasons, it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not otherwise possible. A clear example of this is the discussion of trade wars between major countries in Chapter 7 “Implications of Trade Policy with Perfectly Competitive Markets”, Section 7.9 “Retaliation and Trade Wars”. It shows that if countries work together and set zero tariffs relative to each other, both countries are likely to benefit from them compared to the case both countries try to gain short-term benefits by setting optimal tariffs. This is just one of the advantages of cooperation. Countries that liberalize cross-border movements of labour and capital, coordinate fiscal policy and resource allocation for agriculture and other sectors, and coordinate their monetary policy. One might ask, if free trade is the most economically effective policy, how is it that a move towards free trade by a group of countries can reduce economic efficiency? The answer is quite simple if we put the history of FTA education in the context of the theory of the second best. Recall that the theory of the second best suggests that if there are distortions or imperfections in a market, the addition of another distortion (such as a trade policy) could actually increase prosperity or economic efficiency.

In the case of a free trade agreement, the policy change is to remove barriers to trade rather than adding a new trade policy. However, the second best theory works the same way in the opposite direction. Challenges for businesses include being outside a new trading bloc or changing the “rules” of their industry due to new trade agreements. .

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