FTAs create new opportunities for businesses seeking to expand overseas by eliminating tariff barriers and non-tariff restrictions that have hindered business expansion.
Rules regarding government tariff collection and domestic regulations that cross into costly “disguised protectionism”. They also increase transparency for investments between countries.
Economic Benefits
Trade agreements reduce tariffs and other trade-related barriers, enabling countries to exchange goods and services more cheaply with each other. For businesses, this means greater access to foreign markets as well as investing in global value chains without incurring higher import prices.
As free trade can sometimes harm domestic producers who no longer can compete against cheaper imports, these producers sometimes seek protectionist measures such as quotas or export restrictions on raw materials to depress prices of their inputs and drive down input prices further.
To ensure the maximum benefits from any trade agreement, each country must agree to lower trade barriers in return – this practice is known as reciprocity – so as to guarantee each party receives similar advantages under this trade regime as they would under a free trade regime.
Social Benefits
An international trade agreement may include provisions related to intellectual property rights, investment protection and rule of law as well as non-trade issues such as environmental and labor standards that have considerable social benefits.
Free trade can make a nation less reliant on foreign markets in times of natural disaster or other crisis, provide infant industries with economic protection, reward companies that employ good labor practices or reduce pollution while penalizing others, and punish companies which don’t.
Drafters of the GATT believed that trade barriers must be removed through multilateral negotiations so as to maximize benefits from expanded production based on comparative advantage. They codified this principle in Article I’s most-favored-nation (MFN) clause and mandated that trading partners treat domestic products from each other with similar low tariff rates as their own products.
Environmental Benefits
Since the early 1990s, environmentalists have expressed misgivings about trade agreements due to certain dispute settlement decisions which seemed to prioritize trade over measures intended to safeguard the environment. But recently added provisions into PTAs have helped assuage this concern.
One such provision allows countries to suspend tariff-free treatment in cases of severe environmental damage. This helps limit any risk that trade could encourage lower standards simply to gain a competitive edge.
One such provision requires countries to treat imported goods and services the same way they treat domestically, thus helping eliminate discriminatory measures such as selective excise taxes, special “health” requirements, export quotas or restrictions placed upon processed foods.
There are also provisions that aim to eliminate trade barriers associated with environmental goods, like remanufactured products that reduce waste and energy consumption. More research must be conducted into whether such provisions can promote green trade flows effectively.
Intellectual Property Benefits
Trade agreements provide companies with access to foreign markets by lowering or eliminating tariffs and other barriers to international trade, making importing and exporting cheaper for companies as well as lower prices for consumers on imported products and services.
However, an agreement containing provisions regarding intellectual property may not benefit all nations and industries in equal ways. Firms investing heavily in R&D and producing large volumes of IP like pharmaceuticals, chemicals, electronics, software, machinery creative works or media may prefer an aggressive IP regime over one with weaker provisions.
Smaller economies often face the difficult choice between joining a PTA crafted by larger, more innovative trading powers with which they share IPR provisions or forgoing access to their markets altogether. Power and innovation disparities exist among trading partners which impact trade agreement IPR rules; since American withdrawal from TPP, power disparities and innovation capacities have decreased to allow more equitable negotiation settings.