Free trade agreements (FTAs) are the backbone of the global economy. By offering importers relief from tariffs and quotas, they encourage the smooth flow of goods and allow firms to diversify their supply chains, as well as reduce their costs.
There are many bilateral FTAs between countries that firms can take advantage of. The US, for example, has deals with 20 nations, ranging from Australia to Singapore. However, the most important accords are the multilateral deals between groups of countries.
These include trade access within economic blocs such as the European Union, African Union and Mercosur, as well as a range of newer regional partnerships that aim to promote global trade and avoid blockers that can lead to protectionism.
Why firms should take advantage of FTAs
Identifying beneficial FTAs should be an essential part of any firm's trading strategy. Focusing on these areas enables businesses to save money, as well as open up new opportunities for partnerships and customers.
Some of the key advantages of using FTAs include:
- Direct cost savings through reduced or eliminated duties
- Better access to markets
- More investment opportunities
- Higher protection for trademarks and intellectual property
The 4 largest FTAs to be aware of
The world's largest free trade areas all offer great opportunities for business to set up multinational supply chains, diversify their operations and reduce the cost of international trade. Here are four that all firms need to know about.
Regional Comprehensive Economic Partnership (RCEP)
By total GDP, the Regional Comprehensive Economic Partnership (RCEP) is the world's largest free trade area. According to the World Bank, its signatories had a total GDP of $25.84 trillion in 2019, while the 15 nations included cover 30 % of both global GDP and population. The SwissRe Institute also projects that it will account for 35 % of global GDP by 2030.
The largest member of RCEP is China, with other key partners including Australia, Japan, Malaysia, New Zealand and Singapore. The deal also includes a range of low and middle-income countries with strong manufacturing economies, such as Vietnam.
US-Canada-Mexico Agreement (USMCA)
Signed in 2018 to replace the earlier, outdated North America Free Trade Agreement (NAFTA), the trilateral agreement between the US, Canada and Mexico accounts for 17 % of global GDP and offers a modernized trade agreement. Compared to NAFTA, it provides a greater focus on digital trade, fighting corruption and regulatory standards, as well as improved rules of origin for key sectors such as the automotive industry.
According to the US Trade Representative, goods and services trade between the US and the two other members totaled an estimated $1.8 trillion in 2022.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
Signed in 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) acts as a replacement for the previously-proposed Trans Pacific Partnership, which collapsed after the US pulled out. In its place, the CPTPP includes 11 original signatories; Japan, Malaysia, Vietnam, Australia, Singapore, Brunei, New Zealand, Canada, Mexico, Peru and Chile.
These nations accounted for 10 % GDP in 2023, as well as 6.5 % of global GDP growth in the past decade. The group is set to expand to 12 by the end of the year with the accession of the UK, while other nations that have formally applied to join include China, Taiwan, Ecuador and Ukraine.
European Economic Area
Consisting of the 27 members of the EU, along with Iceland, Liechtenstein and Norway, which have full access to the single market, the European Economic Area (EEA) covers nations with a total GDP of $16.3 trillion as of 2020.
The EU itself also has more than 40 individual agreements with countries and regions. These include Association Agreements with eight Mediterranean countries, a customs union with Turkey, and Stabilization and Association Agreements with six Western Balkan countries that are all focused on eliminating tariffs.
