The United States has Free Trade Agreements with 20 countries that include:
- Costa Rica,
- Dominican Republic,
- El Salvador,
- Peru, and
These free trade agreements allow goods to move between the US and the respective countries with reduced barriers. These reduced barriers often include allowing companies to not pay import taxes and customs duties when they export products. There are pros and cons with free trade agreements, however, free trade agreements should not prevent a company from exporting their products and finding international customers.
Table of Contents
What is a Free Trade Agreement?
A free trade agreement is a legal agreement between two or more countries that agree on rules for the trade of goods and services. Free trade agreements do not mean that the products are free, it means that reduced barriers to trade are eliminated between countries. (e.g., elimination of quotas or customs duties)
What is the History of Free Trade Agreements?
The first official free trade agreement is believed to have occurred with the Cobden-Chevalier Treaty between England and France. This agreement reduced duties on goods imported from England and France. This agreement and other free trade agreements are a part of the overall subject of international law, and greatly impacts the world and the global economy in a real way.
What is De Minimis in Free Trade Agreements?
Oftentimes, free trade agreements may require products to be made entirely from components that originate from that country. However, the concept of de minimis allows products to be created from components that do not originate from the country, if they are transformed into a finished product where the rest of the components did originate from that country.
For example, under the US – Australia Free Trade Agreement, the de minimis rule allows products that are created from 90% of parts that originate from US or Australia to qualify under the free trade agreement. Therefore, the 10% of parts that does not originate from the US or Australia is considered de minimis.
The 10% non-qualifying component will be sufficiently transformed, and tariff shifting will take place to allow the product to qualify under a free trade agreement.
Benefits of Free Trade Agreements?
The main benefit of free trade agreements allows goods and services to move with reduced barriers. The concept of International trade rests on the theory of specialization and division of labor. The theories discuss the idea that countries are often better off specializing in certain goods and services to export, and importing goods that they are not good at creating, according to “The Division of Labor and Economic Development.” by Andres Rodriguez-Clare.
In addition, free trade agreements help with the creation of jobs because theoretically, exports will increase. More exports typically require the continued creation of the products and companies will likely need to hire employees to fulfill the orders.
Cons of Free Trade Agreements?
One of the main negatives is that free trade agreements only provide trade benefits to the country or countries that are a part of the agreement. Therefore, countries that create products of higher quality or have cheaper costs will not be able to participate in the reduced trade barriers. Companies from countries that are not a part of free trade agreements may not be able to export products as efficiently as their counterparts. Barriers to trade may also prevent impoverished nations from raising the standard of living of individuals in their countries.
Do Companies Need to Participate in Free Trade Agreements?
While free trade agreements greatly benefit companies looking to export their products, companies do not have to participate in free trade agreements. The most important thing is to find a customer that is willing to purchase the product or service. Companies can still export products to a country and theoretically make a profit.