What Does TLC Mean
We explain what FTAs or Free Trade Agreements are, their objectives, advantages and disadvantages. Also, examples from around the world.
What is a Free Trade Agreement (FTA)?
Free Trade Agreement (TLC, for its acronym) is called a certain type of international trade agreement , governed by the rules of the World Trade Organization (WTO), according to which two or more nations significantly lower tariffs for exports and imports of goods and services from other signatory countries.
FTAs are signed by governments to build free trade areas , stripped of tariffs, tax barriers and other protectionist mechanisms, thus allowing free trade between their territories . However, they do not necessarily lead to any kind of economic, social or political integration between the signatory nations, but rather it is a strictly commercial agreement. Although these types of treaties are common today, the first in history was the Franco-British Free Trade Agreement (known as the Cobden-Chevalier Treaty) signed in 1891 between the United Kingdom and France. It unleashed a wave of bilateral tariff agreements between the rest of the European nations of the time, paving the way for multilateral trade in the region . See also: Economic blocks
Objectives of Free Trade Agreements
In general, every Free Trade Agreement aims to:
- Eliminate any type of tariff barrier or measures that restrict trade between the signatory nations.
- Promote the conditions for fair competition between the commercial actors involved, as well as opportunities for private investment .
- Provide an adequate rights framework for the protection of intellectual property .
- Stimulate the production of the nations involved and healthy competition between them.
- Provide spaces for the peaceful resolution of conflicts .
Importance of Free Trade Agreements
Free Trade Agreements are a fundamental part of global economic initiatives , which advance towards the gradual regional or even global integration of markets and economic actors. By opposing protectionism, that is, the defense of national markets, they propose a more integrated world panorama, for better and for worse, in which borders are not an impediment to the flow of products , services and capital .
Advantages and disadvantages of Free Trade Agreements
Among the advantages of signing an FTA are:
- Facilities for export and import between the signatory countries, and higher profits for the commercial actors dedicated to it.
- Its binding nature, that is, mandatory, introduces fixed conditions to trade that provide stability , since they are predictable and accurate.
- It encourages foreign investment , facilitating the entry of capital.
- It allows nations to export to their neighbors those areas in which they are best, thus the best quality products reach further in the global market.
On the other hand, the disadvantages of this type of agreement are:
- It favors markets with greater purchasing power , making it possible to reproduce certain conditions of economic inequality among the signatory countries.
- Not all economic sectors in a country benefit equally from the treaty, and in fact small local producers are unable to compete on an equal basis with large foreign producers.
- Similarly, they can contribute to rising unemployment and economic instability in commercially weaker nations.
- It encourages business offshoring , as large corporations can relocate their factories to countries with greater availability of labor (that is, cheaper labor), which is to the benefit of the company and not the nations involved.
Examples of Free Trade Agreements
Some of the best known free trade agreements today are:
- The ANSA-China Free Trade Area (2010). It is a free trade agreement established between China and the States that make up the Association of Southeast Asian Nations (ASEAN): Vietnam, Singapore, Thailand, the Philippines, Malaysia, Laos, Indonesia, Cambodia, Burma and Brunei.
- The Free Trade Agreement between the United States, Central America and the Dominican Republic (2004). A commercial alliance that, as its name suggests, involves the United States, the Dominican Republic, El Salvador, Honduras, Nicaragua, Guatemala and Costa Rica, and that has been widely criticized from a political and economic point of view.
- The Council of Arab Economic Unity (1997). A pan-Arab free trade zone, that is, for all Arab countries, signed by 14 nations: Bahrain, Egypt, Iraq, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Syria, Tunisia and the United Arab Emirates.
- The Trans-Pacific Strategic Economic Partnership Agreement (2006). Trade agreement that involves four nations of the Pacific basin: Brunei, Chile, New Zealand and Singapore, seeks to defend the commercial interests of the region and eliminate tariffs to significantly increase trade.
- The Treaty between Mexico, the United States and Canada or T-MEC (2018). It is a free trade agreement between these nations that was signed, revised in 2019, and entered into force in 2020. This agreement replaced the old North American Free Trade Agreement (NAFTA).