FREE TRADE, INTERNATIONAL BUSINESS AND GLOBALISATION

Free Trade, International Business And Globalisation

Free Trade, International Business and Globalisation

A free trade area (FTA) is a free trade zone between nations that sets a common internal tariff, typically zero or very low, but unlike the customs union does not set a common external tariff—that is, for a country that is a member of a FTA, it can maintain whatever tariff schedule it chooses for countries that lie outside the FTA. Like a customs union, the countries in an FTA set tariffs for substantially all goods and services that are traded as well as other trade rules such as over investments. Modern examples of FTAs are the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States; the Central European Free Trade Agreement (CEFTA) between Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Romania, Bulgaria, and Croatia; and the Andean Community between Bolivia, Colombia, Ecuador, Peru, and Venezuela. There are hundreds of bilateral FTAs. (Barton, 2006, 23)

The creation of free trade zones is not without controversy. Advocates support their creation for several reasons. First, they worry that countries may engage in stalling tactics, sometimes called foot dragging, during the multilateral WTO negotiations. Foot dragging slows the speed and limits the scope of negotiations within the WTO. For example, agricultural subsidies have been discussed for many years with few substantive changes in the rules. In a smaller forum such as in a preferential trade arrangement, the parties may move swiftly on such topics. In addition, in a smaller setting, parties may address some new trade topics neglected by the WTO. For example, the NAFTA placed investment rules centrally and was ahead of the WTO in handling this area of international commerce. In this way, the free trade zones often experiment with particular trade issues before the WTO subsumes them. (Barton, 2006, 23)

Critics, however, have several complaints about free trade zones. First, since these free trade zones give advantage to members relative to nonmembers, they seem to be contrary to the most favoured nation clause of the WTO's rules. Expressed otherwise, free trade zones discriminate against nonmembers. Second, one of the effects is that free trade zones may result in trade diversion. Trade diversion is when a trading partner switches its source of supply from a supplier located outside the free trade zone to a member of the free trade zone that would have been a higher cost supplier than the outside supplier if not for the tariff advantage conferred by the free trade zone. For example, the World Bank conducted a study in the mid-1990s that showed that after the formation of Mercosur many Argentine companies switched their source of supply from cheaper suppliers outside Mercosur to more expensive Brazilian suppliers, only because of the tariff advantages bestowed to Brazilian producers through the free trade zone. If this is so, free trade zones distort production and do not result in maximum benefits for consumers. (Gilpin,1987, 5)

Rules of origin are particularly elaborate for products that ...