FREE TRADE AREA/ZONE

INTRODUCTION
Free trade
Free trade is a type of trade policy that allows traders to act and transact
without interference from government. According to the law of comparative advantage the
policy permits trading partners mutual gains from trade of goods and services. Under a free
trade policy, prices are a reflection of true supply and demand, and are the sole determinant
of resource allocation. Free trade differs from other forms of trade policy where the allocation
of goods and services amongst trading countries are determined by artificial prices that do not
reflect the true nature of supply and demand. These artificial prices are the result of
protectionist trade policies, whereby governments intervene in the market through price
adjustments and supply restrictions. Such government interventions generally increase the
cost of goods and services to both consumers and producers.
Cumulation is the relationship between different FTAs regarding the rules of origin —
sometimes different FTAs supplement each other, in other cases there is no crosscumulation
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).
The aim of a free trade area is to so reduce barriers to easy exchange that trade can
grow as a result of specialisation, division of labor, and most importantly via (the theory and
practice of) 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.
The proponent of free trade can, however, retort that the gains of the gainers exceed the
losses of the losers.
Our study revolves around the implications of a free trade economy and its feasibility in the
current economic scenario.

FEATURES OF FREE TRADE

1) Trade of goods without taxes by means of special quotas or removal of
restrictions.
2) Removal of restrictions on trade limitations.
3) Free access to markets
4) Free flow of capital and
5) Free flow of labor.

1) Trade of goods without taxes by means of special quotas or removal of restrictions.

The trade of goods in a free trade area is achieved by the means of certain rules in
consensus on certain agreements. These rules are agreed upon by the respective
governments and adhered to by the same. The free trade allows the trade of goods in the
respective regions. Nations in these regions mostly share a common currency. This allows the
nations to transact in terms of freedom from rules of national difference in denominations.

2)Removal of restrictions on trade limitations.

Countries usually have a fixed state control on the inflow and outflow of trade and
restrict it in terms of the amount of total capital flow. Thus the government forms the
regulatory body to regulate and stabilize the economy and sees to it that the regulations are
strictly followed. In a free trade, governments have a form of mutual understanding over the
unrestricted flow of capital and goods. Thus the governments act as an initiator of free
customs and other duties which limits the trade. These countries either have the same
economic pattern (As in members of European Union) or have a dependency of markets (As
Nepal and India).

3) Free access to markets

Countries of these zones have free access to one another’s markets which allows them to
trade freely in terms of exports and imports. The regulations of custom imports are relaxed
which them to invest in each other’s markets freely without any binding. Also these countries
share the knowledge and information regarding each other’s market conditions which help in
demand forecasting before investment. Also these helps to avoid future losses suffered due to
insufficient knowledge of the market.

4) Free flow of capital

Countries of the free trade zones usually trade through a common currency. This
allows them to trade freely in terms of capital in spite of the different economic states of the
country. Even though usually these countries share a common economic status
( Example : Members of the European Union.), certain free trade zones (like Nepal and
India )have a memorandum of understanding which allows them to share a common currency
and to transact freely in terms of money flow .

5) Free flow of labor.

These countries have a liberal visa and immigrations for citizens belonging to other
countries. These countries allow the free flow of labor in each other which helps in
developing the countries labor force and helps the citizens of these nations to move in the
direction of incoming capital. However this free flow of capital and labor leads to many
illegal activities. Therefore the governments have to make laws to avoid such situations.
History of free trade
The value of free trade was first observed and documented by
Adam Smith in his magnum opus, The Wealth of Nations, in 1776. Later, David Ricardo
made a case for free trade by presenting specialized an economic proof featuring a single
factor of production with constant productivity of labor in two goods, but with relative
productivity between the goods different across two countries. Ricardo's model demonstrated
the benefits of trading via specialization—states could acquire more than their labor alone
would permit them to produce. This basic model ultimately led to the formation of one of the
fundamental laws of economics: The Law of Comparative
Advantage. The Law of Comparative Advantage states that each member in a group of
trading partners should specialize in and produce the goods in which they possess
lowest opportunity costs relative to other trading partners. This specialization permits
trading partners to then exchange their goods produced as a function of specialization. Under
a policy of free trade, trade via specialization maximizes labor, wealth and quantity of goods
produce, exceeding what an equal number of autarkic states could produce. Economists that
advocated free trade believed trade was the reason why certain civilizations prospered
economically. Adam Smith, for example, pointed to increased trading as being the reason for
the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also
of Bengal (East India) and China. The great prosperity of the Netherlands after throwing off
Spanish Imperial rule, and declaring Free Trade and Freedom of thought, made the Free
Trade/Mercantilist dispute the most important question in economics for centuries. Free trade
policies have battled with mercantilist, protectionist, isolationist, communist, and other
policies over the centuries.
Many classical liberals, especially in 19th and early 20th century Britain (e.g. John
Stuart Mill) and in the United States for much of the 20th century (e.g. Cordell Hull),
believed that free trade promoted peace. The British economist John Maynard Keyne (1883-
1946) was brought up on this belief, which underpinned his criticism of the Treaty of
Versailles in 1919 for the damage it did to the interdependent European economy.
After a brief flirtation with protectionism in the early 1930s, he came again to favour free
trade so long as it was combined with internationally coordinated domestic economic policies
to promote high levels of employment, and international economic institutions that meant that
the interests of countries were not pitted against each other. In these circumstances, 'the
wisdom of Adam Smith' again applied, he said.
However, some boundaries do exist. There are limitations on the extent of freedom.
These are essential in maintaining the integrity and sovereignty of the economy.

Current scenario
Currently, the World Bank believes that, at most, rates of 20% can be allowed by
developing nations; but Ha-Joon Chang (a Korean economist) believes higher levels
may be justified because the productivity gap between developing and developed
nations is much higher than the productivity gap which industrial countries faced. (A
general feature is that the underdeveloped nations of today are not in the same position that
the developed nations were in when they had a similar level of technology, because they are
weak players in a competitive system; the developed nations have always been strong
players, although formerly at an overall lower level.) If the main defense of
tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic
manufactured goods to compete for the tariff to be possibly successful. This theory,
known as import substitution industrialization, is largely considered to be ineffective for
currently developing nations and studies by the World Bank have determined that
export-oriented industrialization policies correlate with higher economic growth as
observed with the Four Asian Tigers. These assessments are based mainly on theory and
observational study of correlations, and thus suffer from a number of weaknesses such as
small sample size and numerous confounding variables.
Economics of free trade
Two simple ways to understand the potential benefits of free trade are through David
Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or
import quota. A simple economic analysis using the law of supply and demand and the
economic effects of a tax can be used to show the theoretical benefits of free trade. The chart
below analyzes the effect of the imposition of an import tariff on some imaginary good. Prior
to the tariff, the price of the good in the world market (and hence in the domestic market) is
Pworld. The tariff increases the domestic price to Ptariff. The higher price causes domestic
production to increase from QS1 to QS2 and causes domestic consumption to decline from
QC1 to QC2. This has three main effects on societal welfare. Consumers are made worse off
because the consumer surplus (green region) becomes smaller. Producers are better off
because the producer surplus (yellow region) is made larger. The government also has
additional tax revenue (blue region). However, the loss to consumers is greater than the gains
by producers and the government. The magnitude of this societal loss is shown by the two
pink triangles. Removing the tariff and having free trade would be a net gain for society.
An almost identical analysis of this tariff from the perspective of a net producing country
yields parallel results. From that country's perspective, the tariff leaves producers worse off
and consumers better off, but the net loss to producers is larger than the benefit to consumers
(there is no tax revenue in this case because the country being analyzed is not collecting the
tariff). Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly
identical results. Sometimes consumers are better off and producers worse off, and sometimes
consumers are worse off and producers are better off, but the imposition of trade restrictions
causes a net loss to society because the losses from trade restrictions are larger than the gains
from trade restrictions. Free trade creates winners and losers, but theory and empirical
evidence show that the size of the winnings from free trade are larger than the losses.

OPPOSITION
The relative costs, benefits and beneficiaries of free trade are debated by academics,
governments and interest groups. A number of arguments for and against in the ongoing
public debate can be seen in the free trade debate article.
Arguments for protectionism fall into the economic category (trade hurts the economy)cor the
moral category (the effects of trade might help the economy, but have ill effects in other
areas). The moral category is wide, including concerns of income inequality, environmental
degradation, supporting child labor and sweatshops, race to the bottom, wage slavery,
accentuating poverty in poor countries, harming national defense, and forcing cultural
change.
Free trade is often opposed by domestic industries that would have their profits and
market share reduced by lower prices for imported goods.For example, if United States tariffs
on imported sugar were reduced, U.S. sugar producers would receive lower prices and
profits, while U.S. sugar consumers would spend less for the same amount of sugar because
of those same lower prices. Economics says that consumers would necessarily gain more than
producers would lose. Since each of those few domestic sugar producers would lose a lot
while each of a great number of consumers would gain only a little, domestic producers are
more likely to mobilize against the lifting of tariffs.
More generally, producers often favor domestic subsidies and tariffs on imports in their home
countries, while objecting to subsidies and tariffs in their export markets.
This is also being opposed in developing economies like India whose domestic
manufacturing industry may have to suffer losses in revenue due to increased
competitions from the international multinational companies.
However, it opens up newer and better options for customers and more purchasing
options in the market. The recent trend of Globalization has led to the same effect

Conclusion
The free trade agreements are a view of the future and certainly a help in avoiding
future economic catastrophe. However these trade agreements have to be properly
regulated and utilized for economic growth and development of the entire community.
However this is difficult to achieve in the current aspect of the scenario