International trade agreements and their member countries

Trade agreements are essential components of a country's economy and foreign policy. Apart from individual embargoes, trade in goods or services between all countries is also possible without corresponding trade agreements, but is often associated with time-consuming and costly regulations.

The basis of a trade agreement is to mutually simplify trade for selected or even all groups of goods and, for example, to waive customs duties and import restrictions. In some cases, simplified payment procedures also apply between the participating countries. From a legal perspective, such an agreement also has a status under international law.

Free trade zones and their challenges

A free trade area (FTA) is an economic area in which countries agree to waive customs duties and other trade barriers for imports and exports among themselves. This promotes trade and strengthens economic relations, as costs are reduced for companies and therefore also for consumers. This is initially good for companies and residents, but has its pitfalls. Because where one country saves on customs duties, the state of the other does not earn them either. The state therefore lacks the money to expand infrastructure or promote the economy. Developing countries in particular face major challenges as a result.

The expected economic growth and the resulting increase in tax revenue must therefore be at least as high as the loss of customs revenue. If both countries import the same amount of goods from each other, this usually works well. However, the more different the two countries are, the more problems there are. This applies not only to the degree of economic development, but also to available resources. Oil-exporting countries, for example, have a commodity that is in high demand all over the world. A partner country could therefore import vast quantities of oil duty-free in such a UAS. Conversely, if there is a lack of raw materials or products for which the partner has any demand at all, this FTA would be unfair and would probably not even come into being.

Large free trade areas and customs unions with very different member countries have precisely these problems. If the USA were to establish an unrestricted FTA with the small countries of the Caribbean, its economic weight would not only create unequal trade barriers, but would also have a disproportionate influence on the coordination of the FTA.

Competitive disadvantages for local industry are another point of contention. Opening up the markets would be fatal if, for example, the European Union were to stop imposing tariffs on imports of Chinese goods. The significantly lower production costs would mean bankruptcy for many domestic companies and would also result in job losses.

A common solution is therefore to initially restrict duty-free status to individual product groups and only slowly expand it over decades.

All trade agreements currently on worlddata.info

Differences between free trade areas and customs unions

It is often not entirely clear what the differences are, or whether there are any at all. From an organizational and political point of view, however, the difference is significant for the participating countries:

A customs union is an agreement between countries that involves the elimination of customs duties within the participating countries and the introduction of a common external tariff towards other countries. Uniform rules therefore apply within the union and each country levies the same level of customs duties externally.

A free trade area, on the other hand, enables the free movement of goods between member countries without tariffs, but allows each member country to maintain its own tariffs against non-member countries.

Data without guarantee © WorldData.info, all rights reserved
This page was first published in November 2020 and has been continuously updated since then. Last modified: May 2024