Question

What is the purpose of free trade agreements?

Answer 1

Ans) A free trade agreement (FTA) is a contract or treaty between two or more countries to initiate and improve trade between them and to remove all obstructions in trade. Its objective is to reduce and slowly remove taxes over a period of time. Some examples of free trade agreement are NAFTA- North American Free Trade Agreement in 1994, EFTA- European Free Trade Association, etc.

Purpose of Free Trade Agreement:-

- To reduce obstructions in export costs. This will enable the country to establish companies and compete with opponent traders much easily. The reduction in trade barriers will create a highly transparent and quite stable trade investment economy. Thus, exporting products for the country becomes easier and cheaper.

- An FTA ensures fair treatment of the investing country in the other country. The contract ensures that the investing country be treated as favourably as the investors of the home country. There will be no discrimination between the two.

- It also creates an amity and a sense of understanding and belongingness among the countries in an agreement. They share knowledge, ideas, cultures and traditions and reduces the possibility of indifference, rivalry and war.

- To increase competition in the country's economy in order to create perfect competition. If there were no FTAs then the domestic country would turn into a monopoly. FTA improves the business of investor as well as ensures that there is no monopolistic competition in the home country.

- To increase managerial efficiency of home country as there is increased competition with the advent of foreign country businesses through FTAs. Thus all human and material resources are utilised in a judicious and optimum manner.