A free trade area is a group of countries that abolish trade barriers and impose low tariffs between themselves but can individually impose external tariffs on non-member countries. Key characteristics include abolishing restrictions on trade between members, uniform commercial policies for non-members, and free movement of capital and labor. While free trade areas increase market size and efficiency, they can also result in trade diversion where members trade more with each other instead of non-member countries from which goods may be imported more cheaply.

1. Dr.K.Prabhakar

2. Free trade area
A group of countries agreeing to abolish all
trade restrictions and barriers or charge low
rates of tariffs. They may impose barriers on
othre countries.

3.  They abolish all trade barriers and low tariffs
 They have uniform commercial policy towards
non-member countries.

4.  All members will abolish restrictions and
barriers
 Uniform policy with respect to other
memebers
 Free movement of human resources and
capital.

5.  All members will have no barriers and least
tariffs
 Uniform policy with respct to non members
 Free movement of capital and human
resoruces
 Uniform monetary and fiscal policy.

6.  Increases size of markets
 The resources are pooled.
 Rapid technological innovations and
economies of scale.
 Reduced prices for cusumers.

7.  Trade diversion
 A can of beer from a potential country is
1.20$
 Non partner is 1$.
 Now If there is tariff for partner it will cost
1.20 for the country
 If it is 40% tariff for non partner it will be
1.40$. With out the trade agreement
countries will be benefited by free trade so
that they can get it for 1$.

8.  Tariff refers to tax imposed on imports.
 Specific tariffs- fixed charge per unit 1000rs for
a TV
 Ad Valorem- Propotion to the value of imported
good 100% on imported cars.
 Advantages
 Revenue, jobs protected.
 Disadvantages
 Highers prices
 They reduce the efficiency of world economy as
the highly efficiently produced goods will not be
available to customers.

9.  To protect the domestic producer
government pays by costs.
 In India fertilizer subsidy, power
subsidy,pesticides, fixing prices for
agricultural inputs etc
 Due to this foreign produced cannot enter the
market.
 However, advanced countries also provide
subsidies
 USA =.05%, Japan=2%, Sweden=2%,
Ireland=7and they in the form of cash grant.

10.  It provides easy access to foreign markets
 Boeing has the advantage of first mover.
 However, WTO discourages subsidies as they
encourage inefficiency.

11.  India started reducing the subsidies for
fertilizers and other farm subsidies
 The reservation of SSI is removed for most of
the SSI units.

12.  Import quota is direct restriction on quantity
of goods which are imported into a country.
 These are done by issuing import licences for
different goods.
 They are removed from 31 March 2001.

13.  It is by exporting country not to export
beyond a quantity to a particular country.
 US request to Japan on import of cars during
1981.
 Local content requirement is another form of
restriction.

14.  LCR requires atleast a particular percentage
(50% of compenents or 50% of value should
be manufactured in a country).

15.  National security. ( Chinese communication
hardware)
 Protecting domesting industries. ( loss of
dolls business, locks etc in India)
 Protecting jobs
 Retaliation: Due to political reasons we
retaliate other coutries. US not to trade with
Cuba.

16.  Market
 Agriculture
 Textiles ( Multi Fiber Agreement- 1 January
2005)
 Trade Related Intellectual property rights.
 Trade related investment Measures.
 Trade in services

17.  Government should lessen its control over
market forces

18.  Trade distorting support policies should be
stopped (Amber Policy or Green Box)
 Expenditure on research, disease control,
expansion of infrastructure, environmental
protection, fod security and direct payment
for environmental programme.

19.  1 January 2005.
 Protection of Patents for 20 years.
 Copy rights and computer programmes is
protected for 50 years
 Trade marks for 7 years

20.  Abolition of restriction on Foreign capital
 Offering equal rights to foreign investor
 No limitation for a foreign company
 No limitation on import of machinary
 Not to force use of local material
 Export is not mandatory
 Restriction on repartiation, divident and
royalty