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THE INFLUENCING FACTORS OF FREE

TRADE AGREEMENT

Subject: International Political Economy

Lecturer: Mr. Zamroni Salim, Ph.D

Arranged by:

1. Agreva Tania (016201600069)

Class: French 4

International Relations/20162

President University
Jalan Ki Hajar Dewantara RT. 2 / RW. 4, Jababeka Education Park, Mekarmukti, Cikarang
Utara, Bekasi, Jawa Barat 17550
Telepon: (021) 89109762 Fax: 021 8910 9762
Email: http://www.president.ac.idWeb: http://president.ac.id

FREE TRADE AGREEMENT


I. Introduction
Trade agreements are when two or more nations agree on the terms of trade between
them. For this reason, when most people say trade agreements, they mean international trade
agreements. Trade agreements determine the tariffs (taxes and duties) that countries impose
on imports and exports. Imports are goods and services produced in a foreign country and
bought by U.S. residents. It includes all goods that are shipped into the U.S., even if produced
by an American company. If the consumer is a U.S. resident, and the provider is a foreign
resident, then it is an import. Exports are any good or service that passes through customs
from the United States to be sold overseas. It includes merchandise shipped from a U.S.
based company to its foreign affiliate or branch.There are many different types of trade
agreements. Unilateral trade agreements are when one country either imposes trade
restrictions, or loosens them, and no other country reciprocates. The United States and other
developed countries often do this as a type of foreign aid to help emerging markets strengthen
certain industries.
Bilateral agreements are between two countries. Both countries agree to loosen or
remove trade restrictions to expand business opportunities. They typically involve lowering
tariffs and conferring preferred trade status with each other. The sticking point usually centers
around key protected or subsidized domestic industries, such as automotive, oil or food
production. The United States has 16 bilateral agreements. It's negotiating the world's largest
agreement with the European Union -- the TTIP. The most difficult to negotiate are multi-
lateral trade agreements. These are among three countries or more. However, once
negotiated, they are very powerful. That's because they cover a larger geographic area,
conferring a better competitive advantage on the signatories. Also, all countries in a multi-
lateral agreement give each other most favored nation status. That means they treat each other
equally. The most well-known, and controversial, multi-lateral trade agreement is the North
American Free Trade Agreement. It would have been replaced by the Trans-Pacific
Partnership, but the United States pulled out of it. Most of the other U.S. regional trade
agreements are also multi-lateral. Once agreements move beyond the regional level, they
usually need help. That's where the World Trade Organization steps in. It is an international
body helps negotiate global trade agreements. Once in place, the WTO enforces the
agreement and responds to complaints. The WTO currently enforces the General Agreement
on Tariffs and Trade. The world almost received greater free trade from the next round,
known as the Doha Round Trade Agreement. If successful, Doha would have reduced tariffs
across the board for all WTO members. Unfortunately, the two most powerful economies
refused to budge on a key sticking point. Both the U.S. and the EU resisted lowering farm
subsidies. These subsidies made their food export prices lower than those in many emerging
market countries. These low food prices would have put many local farmers out of business,
sending them to look for jobs in over-crowded urban areas. That doomed the Doha round,
and possibly all future world multi-lateral trade agreements.

The failure of Doha allowed China to gain a global trade foothold. It has signed
bilateral trade agreements with dozens of countries in Africa, Asia, and Latin America. In
return for loans and technical or business support, Chinese companies receive rights to
develop the country's oil and other commodities.

II. Theoretical Framework


2.1 What is free trade?

The term free trade apparently originated at the end of the sixteenth century in
parliamentary debates over foreign trade monopolies. In England, royal grants giving
select merchants the exclusive privilege to engage in trade with a particular region of the
world dates back to the thirteenth century the term free trade initially carried a different
meaning than what we now attach to it. A free trade was commercial activity in which
entry was unrestricted, where the liberty of the merchant to participate in trade was
unhindered by exclusionary guild regulations or government grants of monopoly rights
and privileges.1

2.2 What economic factors should influence the likelihood of an FTA?

In his seminal survey of the theory of customs union, Lipsey (1960) stated: If one
wishes to predict the welfare effects of a customs union it is necessary to predict the
relative strengths of the forces causing the trade creation and trade diversion. For the
impatient reader, we find that trade-creating and trade-diverting economic characteristics
matter considerably in explaining the probability of an FTA. Pairs of countries with FTAs
tend to have the particular economic characteristics that the theory suggests should
enhance the two countries net trade creation and welfare (through possibly reducing
nonmembers net welfare). 2

1
https://nccur.lib.nccu.edu.tw/bitstream/140.119/33942/7/93303807.pdf
2
http://www3.nd.edu/~jbergstr/Working_Papers/Economic_Determinants_of_FTAs.pdf
III. Research question

3.1 What are the influencing factors of Free Trade Agreement (FTA)?

IV. Discussion
Free trade is an activity of buying and selling of products between countries without
any hassle or bureaucratic rules governing the free trade within a State. Thus, a country,
company or even individual can sell products that are created abroad. Vice versa, the State
lainpun can sell its products in the country so that the consumer can get the goods - goods of
international quality with ease and at a relatively affordable price. In the absence of
regulatory barriers in conducting free trade is certainly spur a country to develop the country
in selling produce superior products that characterizes the country. According to the experts
to conduct free trade would be mutually beneficial for the country.
There are strong evidences that pairs of countries governments tend to form FTAs:
(i) the closer two countries are geographically (more trade creation); (ii) the more remote a
pair of natural trading partners is from the rest of the world (ROW) (less trade diversion); (iii)
the larger and more similar in economic size are two trading partners (more trade creation);
(iv) the greater the difference of capital-labor ratios between two trading partners (more trade
creation); and (v) the smaller the difference of the members capital-labor ratios with respect
to the ROWs capital-labor ratio (less trade diversion).
The character of the Asia Pacific has changed dramatically in relation to the use of the
FTA as an instrument of trade policy. China and Japan for example are negotiating separate
free trade agreements with the Association of Southeast Asian Nations (ASEAN). Chile, New
Zealand, Mexico and Singapore have pursued vigorous FTA programs since1999. There are
also a growing number of agreements between countries with differentcultures, ethnicities
and histories such as the European Free Trade Association (EFTA) and Korea (2006);
Thailand and New Zealand (2005); Japan and Mexico (2005); Thailand and Australia (2005);
Korea and Chile (2004); United States and Singapore (2004); Singapore and Australia
(2003), New Zealand and Singapore (2001) and United States and South Korea (2007). As of
the middle of 2007, there is the possibility of a Chile-Singapore-New Zealand pact, an
Australia-China pact, an Australia-Japan pact and a possible Japan-US FTA. These new
agreements confirm the growing relevance of the FTA as an instrument of trade policy and its
continued application in the near future. While ASEAN has had their own FTA since the
early 1990s, it was only since the late 1990s that Southeast Asian countries began seriously
wooing non-ASEAN countries as possible partners in free trade agreements.3

V. Conclusion
The influencing factors of FTA are (i) the distance between the countries; (ii) the
accessibility of the countries for the goods flow (iii) the similarity of economic size; (iv) the
difference of capital-labor ratios between two countries; and (v) the difference of the
members capital-labor ratios with worlds capital-labor ratio.

3
http://dirp3.pids.gov.ph/ris/pjd/pidspjd09-2fta.pdf

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