Free trade agreement facts for kids

A free trade agreement (often called an FTA) is like a special promise between countries. It's an agreement under international law that helps them trade goods and services more easily with each other. Imagine two countries deciding to be best trade buddies!

There are two main kinds of these agreements:

• Bilateral agreements are between just two countries. They agree to make it simpler to buy and sell things between them. This often helps businesses grow.
• Multilateral agreements involve three or more countries. These can be trickier to set up because more countries need to agree on the rules.

The main goal of an FTA is to lower or get rid of tariffs (which are like taxes on imported goods) and other trade barriers. This makes it cheaper and easier for countries to trade, encouraging more international trade. These agreements often cover things like how much tax to pay, how to make trade faster, and rules for investment or intellectual property (like patents and copyrights).

The General Agreement on Tariffs and Trade (GATT) first focused on trade in goods. But today, FTAs often cover much more, including services and even investment.

Understanding Different Trade Zones

It's important to know that FTAs are different from something called a "customs union." Both types of agreements aim to make trade easier among their members.

The big difference is how they treat countries *outside* their group.

• In a customs union, all member countries agree to have the exact same rules and taxes for goods coming from countries outside their group.
• But with an FTA, each country can still have its own rules and taxes for trade with countries that are not part of the agreement.

Because of this, FTAs often have special "rules of origin." These rules help figure out where a product truly comes from. This prevents countries outside the FTA from using the country with the lowest taxes as a backdoor to get special treatment.

A Look Back: The History of Trade Agreements

People have been talking about "free trade agreements" for a long time, even back in the late 1800s in places like Australia. After World War II, countries wanted to work together more. They created the General Agreement on Tariffs and Trade (GATT) in 1947. GATT aimed to lower taxes on goods around the world. It also allowed countries to form smaller trade groups.

The end of the 20th century saw a big increase in these regional trade groups. For example, the European Union (EU) became more formal in 1993. Also, the North American Free Trade Agreement (NAFTA) started in 1994, helping trade between Canada, Mexico, and the United States.

Why Rules Matter: Free Trade and the WTO

The World Trade Organization (WTO) has general rules for all its members about how they should treat each other's trade. This is called the "most favored nation" (MFN) principle. It means you should treat all WTO members equally.

However, free trade agreements are a special exception to this rule. The WTO allows countries to form FTAs, letting them give special trade benefits only to each other. But there are some important conditions:

• When countries form an FTA, they cannot make trade rules *harsher* for countries that are *not* part of the agreement. They can only make trade *easier* for the countries *within* the FTA.
• The FTA must aim to remove almost all trade taxes and barriers between the member countries.

Countries must tell the WTO when they create new free trade agreements. The WTO then reviews these agreements to make sure they follow the rules. Even though disputes within an FTA are usually handled by the countries involved, the WTO can sometimes get involved if there are bigger issues.

How Trade Agreements Affect Countries

Free trade agreements can have interesting effects on how countries trade.

Trade Creation and Trade Diversion

Imagine a country that used to buy a product from a very efficient factory in a non-member country. If that country then joins an FTA, it might start buying the product from a less efficient factory *within* the FTA, because the taxes are lower. This is called trade diversion. It means trade shifts away from the best supplier to a supplier within the FTA.

On the other hand, trade creation happens when an FTA makes it possible for new trade to happen that didn't exist before. For example, if an FTA removes taxes, a country might start buying a product from a neighbor that it couldn't afford before. This usually helps everyone because goods become cheaper.

Economists study both these effects. While trade creation always helps a country's economy, trade diversion can sometimes be less helpful, as consumers might miss out on cheaper goods from outside the FTA. However, sometimes even trade diversion can be okay if it's not a huge amount of trade.

Modern Trade Deals: Deeper Connections

Older trade agreements mostly focused on simple things like taxes on goods. But today's free trade agreements are becoming "deeper." This means they cover many more topics. They might include rules about services, e-commerce (online shopping), and even how data is stored and shared between countries. These deeper agreements help countries work together more closely and make trade smoother in many different areas.

Making Sure Products Qualify

Since countries in an FTA can have different taxes for non-member countries, they need a way to make sure only products truly from the FTA get the special low-tax treatment. This is where rules of origin come in.

These rules are like a passport for products. They determine if a product was made enough within the FTA to be considered "originating" from one of the member countries. For example, a product might need to have a certain percentage of its value added within the FTA, or undergo a "substantial transformation" (meaning it changed a lot during manufacturing) in a member country.

These rules encourage countries within an FTA to use materials and parts from other FTA members. This helps boost trade and cooperation among the countries in the agreement.

Finding Information About Trade Deals

There are hundreds of free trade agreements around the world! It can be tricky for businesses and governments to keep track of them all. Luckily, there are online databases that help.

The World Trade Organization (WTO) has a system called the Regional Trade Agreements Information System. It lists agreements that countries have told the WTO about. You can search for agreements by country or by what they cover (goods or services).

Another helpful tool is the Market Access Map, created by the International Trade Centre (ITC). This database includes information on taxes and other barriers in many trade agreements, even those not officially reported to the WTO. It helps businesses understand how to access different markets.

See also

In Spanish: Tratado de libre comercio para niños

• Free trade
• List of bilateral free-trade agreements
• List of multilateral free-trade agreements
• Trade agreement