Adventages of Free Trade Agreements

ADVANTEGES OF FREE TRADE

1. On regional basic

1. EXPAND MARKET SIZE

 Free trade helps goods/ services to be easier to come across borders by reducing international barriers such as tariff, quota and regulations. Each country can have access to markets of other member countries, which creates a generally larger market for all members.

For example, population of Canada is about 36 million and total consumers of NAFTA (North American Free Trade Agreement) is 478 million. When being one of three members of NAFTA, Canadian firms can be free access to total markets. The number of buyers is twelve as much. Canada gets much bigger market size when it parts in NAFTA. Mexico and the United States also have the same benefits as Canada do.

1. INCREASE COMMERCIAL BENEFIT

Thanks to free trade, the member-country firms do not have to pay significant tariffs, international barriers is gradually removed. Therefore, exporting and importing are substantially increased, which create bigger commercial benefits for countries.

An example for increasing commercial benefits is about turnover between Viet Nam and China after China signed ACFTA (Asean China Free Trade Area) with Asean in 2002 and took effect in 2010.

[pic 1]Figure 1

Figure 1 shows about increasing in turnover between Vietnam and China during 5 years. Import-turnover increases quite rapidly while export-turnover is quite stable. This lead total turnover increases about three times from 2004 to 2008.

Another example is that joining NAFTA has brought success for Mexico, especially in exporting. According to the Ministry of Economy of Mexico, in 1993, Mexico's industrial export reached nearly $ 40 billion. 20 years later, has increased 8 times. In 1995, Mexico exported $ 600 million in medical equipment to the United States and Canada. In 2013, the turnover of this group has increased to $ 6.3 billion- 10 times over 18 years. In 1995, the Mexican aircraft industry cannot export; but by 2013, its export-turnover to the US and Canada reached $ 4.7 billion.

1. COMPARATIVE ADVANTAGES

When countries take part in free trade, member countries have trends to eliminate tariffs or non-tariffs barriers. It means the cost decreases and the price of products decreases, too. Therefore, some products of member-countries in free trade have lower price than domestic products. Countries will import these products without conducting production. From that, sources will be allocated efficiently and countries will get benefits from exporting-importing and using lower-price products.

For instance, according to CEFT (Common Effective Preferential Tariff) of AFTA, Malaysia had preferential tariffs for 172 kinds of imported products of Vietnam, which included electronic components. Figure 2 shows us that Vietnam imported electronic components from Malaysia much more than other products instead of producing because Vietnam produces electronic components with high cost while Malaysia exports them to Vietnam with lower price.