In the era of globalisation, free trade agreements are increasingly multiplying and expanding. By reducing barriers to the movement of goods and capital, free trade areas are profoundly transforming procurement strategies and trade flows. For businesses, these spaces appear as significant strategic levers to optimise global supply chains.
Free trade area: Definition and functioning
A free trade area (FTA) designates an economic space where countries have concluded an agreement to eliminate tariff (customs duties) and non-tariff barriers (formalities[1]) to trade in goods and services between them. This can cover different sectors: Manufacturing industry, agriculture…
This translates notably into:
- A decrease in customs duties on imports and exports;
- A reduction or elimination of import quotas;
- A simplification of customs procedures…
The free movement of goods and services constitutes the foundation of these trade agreements. However, countries determine their own trade policies towards countries outside the area. The objective is to facilitate trade and strengthen economic integration between member countries.
Today, "new generation" agreements emphasise the reduction of non-tariff barriers. Beyond reducing customs duties on goods, these agreements also include access to public markets, intellectual property protection, and legislative harmonisation. Lastly, some treaties integrate mechanisms to settle disputes in case of conflicts between parties.
Other types of agreements between countries
Beyond free trade areas, there are many other possible types of agreements between countries to promote their economic integration. There are, for example, customs unions, common markets, or economic unions.
Customs union
Beyond the free movement of goods, a customs union involves applying a common external customs tariff. Integration is therefore stronger than in a free trade area.
Common market
The common market goes even further in economic integration. In addition to previous criteria, there is the mobility of production factors. Here, products circulate freely, as do investments and workers.
Economic union
An economic union represents the ultimate form of integration. Member countries go as far as coordinating their various economic and fiscal policies. Moreover, a common monetary policy is established. This can lead to a single, shared currency.
Thus, free trade areas can represent a first step towards more complete economic integration. This can subsequently lead to a customs union, a common market, or even an economic and monetary union.
Main free trade areas in the world
The number of free trade areas is growing rapidly. Among those existing, some stand out for their importance and economic impact.
Regional comprehensive economic partnership
To date, the Regional Comprehensive Economic Partnership (RCEP) is the world’s largest free trade agreement.
Signed in 2020, it involves 15 Asian countries:
- The ten countries of the Association of Southeast Asian Nations (Indonesia, Malaysia, Singapore, Thailand, the Philippines, Brunei, Vietnam, Laos, Myanmar, and Cambodia);
- China;
- Japan;
- South Korea;
- Australia;
- New Zealand.
This economic zone contributes to more than a third of global GDP[2].
North American free trade agreement
Created in 1994, the North American Free Trade Agreement (NAFTA) constitutes the most extensive free trade area in the world, uniting Mexico, the United States of America, and Canada. This commercial treaty represents 26% of global GDP1.
European union
The European Union (EU), created in 1993, is much more than a free trade area. It is a common market with a customs union. However, it has established multiple free trade agreements with other foreign countries and regions worldwide. The European Union represents nearly 18% of global GDP1.
Southern common market
Founded in 1991, the Southern Common Market (Mercosur or Mercosul) accounts for 3% of global GDP1.
This free trade area includes several South American countries:
- Argentina;
- Brazil;
- Paraguay;
- Uruguay;
- Bolivia.
Venezuela was suspended in 2016, while Chile, Colombia, Ecuador, Guyana, Peru, and Suriname are listed as associate members.
African continental free trade area
The African Continental Free Trade Area (AfCFTA) emerged in 2018. It encompasses 54 African countries with the ambition of creating the world’s largest free trade area in terms of participating countries.
European free trade association
Established in 1960, the European Free Trade Association creates a free trade area between several European states not members of the European Economic Community (EEC):
- Norway;
- Switzerland;
- Iceland;
- Liechtenstein.
Comprehensive and progressive agreement for trans-Pacific partnership
Previously known as the Trans-Pacific Partnership (TPP), it was renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018, following the United States’ withdrawal.
It includes 12 countries:
- Canada;
- Australia;
- Brunei;
- Chile;
- Japan;
- Malaysia;
- Mexico;
- New Zealand;
- Peru;
- Singapore;
- Vietnam.
Recently, the United Kingdom became the first European country to join this treaty.
Advantages of free trade areas
Free trade areas considerably streamline supply chains within member countries. This offers numerous advantages to businesses, serving improved competitiveness.
Reducing costs
Free trade agreements reduce or even eliminate customs duties and other trade barriers. This undoubtedly helps reduce import and export costs of goods.
Simplifying procedures
These agreements often include provisions to simplify and rationalise customs procedures. This takes the form of electronic documents or pre-clearance of goods. Such elements allow businesses to save time and reduce administrative burdens.
Harmonising regulations
Lastly, these commercial agreements tend to promote regulatory cooperation among member countries. This notably consists of harmonising regulations and standards, whether sanitary, social, technical, or environmental.
By considering these commercial agreements in their sourcing strategies, businesses can obtain a competitive advantage. This allows them to benefit from preferential tariffs and optimise and secure the entire logistics chain.
Douglas Gill, Export Sales Manager at the Manutan Group, adds: "Businesses have every interest in establishing partnerships with key suppliers locally established in these strategic zones. This presence facilitates alignment between local specificities and group standards. Beyond reinforcing their competitiveness, this enables them to better manage risks related to supply chain disruptions and geopolitical tensions."
As you understand, free trade areas encourage global trade by lowering barriers to trade goods and capital. As such, they constitute a strategic opportunity to optimise business procurement while building a resilient supply chain.
