Encyclonomic WEB*pedia: FREE TRADE AREAS

FREE TRADE AREAS:
A group of nations that have agreed to eliminate (or at least minimize) trade barriers -- especially tariffs, import quotas, and assorted regulatory non-tariff barriers -- within the group to encourage mutual trade. Free trade areas are usually contiguous or adjacent nations, often located on the same continent. Three noted free trade areas are comprised of nations located in North America, Europe, and Asia.
Free trade areas are groups of nations that have entered into a formal agreement, usually an international treaty, to reduced or eliminate any existing barriers to trade with the goal of allowing the free exchange of goods and services. The goal is to allow unrestricted trade among nations in the same way that trade within nations is generally unrestricted by tariffs, import quotas, or other barriers.
While trade barriers within members of a free trade area are reduced or eliminated, barriers to trade often remain for other nations. In fact, the creation of one free trade area is often a competitive response to the creation or existence of other free trade areas. That is, adjacent nations on one continent join force to enhance their mutual efficiency and prosperity through unrestricted trade as a means of competing in global markets with a group of nations located on another continent.
Notable free trade areas that have been established in recent decades are located in (1) North America (United States, Canada, and Mexico) formed through the North American Free Trade Agreement (NAFTA) and (2) Europe, specifically the European Union (containing most European nations) formed through the Maastricht Treaty. Other free trade areas have emerged or are emerging in Asia, Africa, and South America.
The creation of a free trade area can be a first step in a more formation economic and political integration of two or more nations. The European free trade area, for example, is part of the politically and economically integrated European Union.
Putting the "Free" in Trade
As the name implies, free trade areas attempt to establish areas that allow or encourage "free trade." A word or two about this notion of free trade seems in order.
Free trade is merely the unrestricted exchange of goods and services, unrestricted, that is, by government rules, regulations, taxes, or quotas. While the term can apply to any sort of exchange, it is most commonly used in the context of international trade.
International trade historically has been restricted by government taxes, import quotas, and regulatory barriers. Domestic government leaders and policy makers were generally inclined to erect trade barriers to protect their domestic economies (especially domestic producers) from the competition of foreign imports.
Ironically, barriers to international trade were maintained with full understanding of the benefits created by unrestricted free trade WITHIN a country. Extending the notion of free trade within a country to free trade among countries seemed like a logical move. But it was a move confronted by unwavering calls for protection against foreign imports.
Gains from Trade
The benefits of unrestricted free trade among nations were recognized almost from the beginnings of formal economic study (early 1800s). The key to these benefits is comparative advantage and the law of comparative advantage. The law of comparative advantage indicates that nations can benefit through international trade, trade with other nations.
Comparative advantage means that any given nation can produce at least one good at a relative lower opportunity cost than production in at least one other nation. Both nations can then benefit by trading this good.
The benefits, or gains from trade, result from the combination of consumer surplus and producer surplus. With any exchange -- domestic or international -- buyers acquire consumer surplus because the maximum demand price they are willing and able to pay is greater than the price paid and sellers acquire producer surplus because the minimum supply price they are willing and able to receive is less than the price received. The exchange is win-win for both sides.
Trade restrictions -- tariffs, import quotas, regulatory barriers -- prevent these gains from trade. Free trade, in contrast, enable these gains. Free trade areas are thus established to capture these gains for the member countries.
Notable Free Trade Areas
Two notable, and influential, free trade areas are in North America and Europe.
North America: This free trade area containing United States, Canada, and Mexico was officially established by the North American Free Trade Agreement (NAFTA) formally enacted in 1994. NAFTA eliminated many tariffs and other trade barriers among these three countries and substantially reduced others. The North American free trade area is an extension of a long-standing agreement between the United States and Canada with the inclusion of Mexico. Since, and even prior to, the official establishment of this trade area, NAFTA has been quite controversial, with concerns over job loses, environmental quality degradation, and excessive control by private corporations.

Europe: The nations of Western Europe have taken steps toward economic and political unification since the end of World War II. Starting with limited economic cooperation among a half dozen European countries, Europe established a "common market" in the 1950s that reduced trade barriers and promoted trade among member countries. Political and monetary cooperation ensued over the next few decades, resulting in the Treaty of Maastricht in 1992 that formally created the European Union. The European free trade area, while not yet a unified, sovereign nation, is more than merely a system of reduced tariffs and trade barriers.
Others of Interest
While the European Union and North America tend to have the most noted, and most influential free trade areas, a number of other free trade areas have emerged in recent years.
Southeast Asia: The Association of Southeast Asian Nations (ASEAN) is comprised of 10 nations in the region, including Vietnam, Indonesia, Malaysia, Phillipines, Cambodia, Laos, Myanmar, Singapore, Thailand, and Brunei Darussalam. Among other activities, ASEAN has enacted a free trade agreement among member countries.

Central Europe: The Central European Free Trade Agreement was created in 1992 among seven nations of central Europe, including Poland, Czech Republic, Slovakia, Hungary, Slovenia, Romania, and Bulgaria.

South Asia: The South Asia Free Trade Agreement was enacted in 2004 by seven in south Asian nations including India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, and the Maldives.

Europe: European Free Trade Association is a free trade area established in 1960 among Iceland, Norway, Switzerland, and Liechtenstein as an alternative to the European Union.

A Host of Others: Several other free trade areas have been established over the years for other nations, often nations that are not necessarily contiguous, bordering countries. They operate in Africa, Central America, and South America. Many are not "areas" so much as bilateral trade agreements among trading partners that might be separated by vast oceans.
Up and Coming Areas
A number of free trade areas are "in the works." Groups of countries are and have been negotiating the details of a free trade area, but have not yet finalized the agreements.
Americas: Prompted in part by NAFTA, the United States joined in with other counties in North, South, and Central America (including nearby island nations) in 1994 to begin establishing the Free Trade of the Americas. However, as of the mid 2000s, this free trade area was not officially established remained a "work in progress."

Asia: Another prospective free trade area on the drawing board is that among several asian nations, which might include the likes of China, Japan, Korea, Vietnam, Australia, and New Zealand.
Check Out These Related Terms...
     | North American Free Trade Agreement | General Agreement on Tariffs and Trade | World Trade Organization | free trade | foreign trade policies | tariffs | import quotas | export subsidies | protectionism |
Or For A Little Background...
     | international trade | comparative advantage | law of comparative advantage | exports | imports | net exports | foreign trade | terms of trade | gains from trade | open economy | closed economy | trade barriers |
And For Further Study...
     | balance of trade | balance of trade surplus | balance of trade deficit | balance of payments | foreign exchange market | international market |
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     FREE TRADE AREAS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: December 17, 2025].