Jul 4, 2011

IR - One Definition A Day: Free Trade Area

IR - One Definition A Day, Free Trade Area (p. 184, Ref. 1)

A form of economic uniton between states. In a free trade area the constituent members agree to abolish tariffs and other restrictions on stipulated goods between themselves. However, vis-à-vis the rest of the system they continue to maintain the structure of their existing tariffs. A free trade area is therefore a less integrated system than a customs untion because there is no common external tariff. 

Although a free trade area is less integrated it may prove to be just as complicated to implement because rules and procedures have to be agreed to prevent goods entering the area from outside via those member states with the lowest range of tariffs. Without the claer rules about origin, the states with the lowest tariffs will benefit most from a free trade area, because trade and production will be deflected in their favour. Logic would suggest that a free trade area works best where the members have a similar pattern of external tariffs, or where they agree to substantial hamrmonisation of tariffs to reduce differentials. For this reason a free trade area is often seen as the preliminary stage in the formulation of a full customs union.

During the 1950s considerable discussion took place among Western European state members of the Organization for European Economic Cooperation (OEEC) about the desirability of forming a free trade area. Agreement was not possible, however, and instead the membership became divided between those states wishing to proceed much further with integration in order to form a customs union and the remainder, led by the UK, wanting to stay with the free trade area idea. 

The formation of the European Community (EC) constituent insitution, the European Economic Community (EEC) under the Treaty of Rome in 1957, seemed to settle the issue. In retaliation the British formed the European Free Trade Association (EFTA) under the Stockholm Treaty in 1959. EFTA was a bargaining chip designed to force the EC to expand its membership and to lower the common external tariff. The EC refused to negotiate with EFTA en bloc and in 1961 the British defected to begin access negotiations with the Community.

Free trade areas, as forms of economic integration, were covered by General Agreement of Tariffs and Trade (GATT). Although it might seem that some aspects of the free trade area idea contradict the GATT principle of non-discrimination, exceptions were made in the Agreement for these types of groupings. Currently the Asia-Pacific region is following the lead set by Europe in mid-century. Various forms of economic cooperation are under exploration and more specifically the establishment of NAFTA exemplifies this trend.

(Source: Penguin Dictionary of IR)

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