Are Free Trade Agreements In Danger?

Free Trade Agreements are the legal infrastructure underpinning international trade. Incoterms, letters of credit are all example of how countries attempt to collaborate with trade partners in order to curb barriers to trade and spur economic activity and investments between each other.

After a wave of global trade liberalization since the 1980s, in recent years free trade has come under fire, first with protectionist policies from the United States, and now with the current crisis spurring debates about re-onshoring, i.e. bring production of necessary or strategic manufacturing back home.

Therefore, a question must be asked: are free-trade agreements really in danger?

Free trade agreements

What is a Free Trade Agreement?

First of all, what is a free trade agreement (also called FTA)?

Actually, there are two types of FTA: the first one aims at just reducing tariffs and quotas to incentive trade between the two signatory countries.

Such FTAs was common during the 1950s and 1960s, when countries began to open their economies and reduce barriers to trade for the first time since the collapse of the global order of the XIX century in 1914.

The second type of FTA is more pervasive and requires the harmonization of subsides and regulations at the domestic level between the countries entering into the agreement. A the end of the day, tariffs are important, but businesses want certainty: certainty of being able to sell their products without restrictions or unfair domestic competition, certainty regarding the legal and tax environment, etc.

FTAs of this kind were more common since the late 1980s, and have been the main driver behind the huge wave of globalization from then onward.

As you can imagine, this type of agreement requires harmonization of domestic laws between the countries entering into the agreement. What many people are saying now is that these agreements deprive countries of their sovereignty, and, therefore, are way more difficult to implement.

Are FTA Under Threat?

As a proxy for assessing the health of FTAs around the world, we shall look at what the world’s largest economies and most beneficiary of FTAs are doing.

The European Union, which is the world’s largest exporter, has 41 trade agreements in place covering 72 countries. More recently, is has signed FTAs with Canada, Japan, and Mercosur, and is negotiating an extensive trade deal with the ASEAN.

The United States, the world’s largest economy, has way less FTAs in force: just 14 trade deals with 20 countries.

China, the second largest economy in the world, has signed 16 FTAs and is discussing another 8.

India has 42 FTAs in force, whereas Japan has signed 18 FTAs and is negotiating 4 more.

Globartis Research Center