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A free trade area (FTA) is a trade bloc whose member countries have signed a free trade agreement (FTA), which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration. Countries choose this kind of economic integration if their economical structures are complementary. If their economical structures are competitive, they are more likely to form a customs union.
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Unlike in a customs union, members of a free trade area do not have a common external tariff, which means they have different quotas and customs, as well as other policies with respect to non-members. To avoid tariff evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions.
Cumulation is the relationship between different FTAs regarding the rules of origin — sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree — if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade bloc or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries) — then the new FTA will consist of the old FTA plus the new country (or countries).
Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.
The aim of a free trade area is to reduce barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.
Every customs union, trade common market, economic union, customs and monetary union and economic and monetary union has also a free trade area.
To determine eligibility for a free trade agreement (FTA), importers must obtain product information from all the suppliers within the supply chain. An automated solution should be in place for an importer to solicit his/her suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the product's Harmonized System number. Each free trade agreement will qualify an importer's products in different ways, however the basis of the qualification surrounds the idea that the finished product must have a minimum percentage of local/regional content.
Under the North American Free Trade Agreement (NAFTA), qualifying rules include De Minimis, Regional Value Content, and Tariff Shift.
A finished good must qualify under one of these rules to be eligible for free trade under NAFTA. This is just one example of a qualification for a free trade agreement. If a certificate of origin is present from a supplier demonstrating that the good originated in a country under the associated free trade agreement, no further calculations are needed.
When qualifying products for an FTA, the use of an automated system allows importers to stay up-to-date on international compliance regulations, as well as solicit suppliers via the web instead of manually. A functional solution should also perform the required calculations for the associated FTA during the Bill of Material (BOM) analysis, ensuring correct eligibility.