What is a Free Trade Agreement and its benefits

Occasionally we hear about the term Free Trade Agreements or FTA for short being used in the media describing a new country establishing a Free Trade Agreement with another country for economic benefits that would be directed at both countries. As such, in this article, we would explore the concept of an FTA and how it applies in the world of trade. To read other useful articles with regards to the logistics industry, feel free to click here. 

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What exactly is a Free Trade Agreement (FTA)?

A Free Trade Agreement or commonly known as an FTA, is an economic cooperation between two or more countries. The  signing of an FTA would mean that the countries involved would reduce the current trade barriers which are put in place to protect the country’s local industries. The FTA as a result would simplify the way the involved countries do their trade. Some of the removed barriers or ‘restrictions’ are import quota as well as tariffs.

How Does the FTA Work?

An FTA can exist as a Bilateral Free Trade Agreement or as a Multilateral Free Trade Agreement. Bilateral agreements refer to 2 countries that are involved in the agreement. Multilateral agreements on the other hand, refer to more than two countries that have joined the agreement. The main purpose of an FTA is to allow the countries involved to help industries access new markets by widening their reach. As a result, more people would  be able to buy their product and services. From the perspective of the customer, prices for the products are also lower when the the other countries products are sold. For example, Country A and B have signed an FTA. This means that the Country A’s products can enter Country B at a lower cost due to lower tariffs as well as import quota. As such, the overall price of A’s products on the Shelves of the country are far more affordable and vice versa

What are the downsides of an FTA?

One of the concerns of an FTA is that more powerful economies have control over smaller ones. For example, the smaller economies tend to give more concessions which may not benefit them in the long run, but the larger economy instead.

How is Indonesia currently involved in FTAs?

Indonesia is part of the Association of Southeast Asian Nations or ASEAN. ASEAN consists of a couple of countries in Southeast Asia. Through ASEAN, Indonesia is involved in a few bilateral FTAs. For example, ASEAN has signed FTAs with China, India, Japan as well as Korea. It is interesting to note that some of these agreements consists of Free Trade Areas. A Free Trade Area is  a region that consists of the trade bloc whose member countries have signed an FTA. As such, there are specific regions in these areas such as China, India and Japan for free trade with ASEAN.

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