How Are Free Trade Agreements Made?

By Mitchell Ho

Introduction

According to the International Trade Administration, a Free Trade Agreement (FTA) is “an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among other topics.”

In simpler terms, an FTA is a deal between countries that aims to reduce or eliminate trade barriers like tariffs and quotas. The idea is to make it easier for goods, services, and investments to flow between them.

A Hypothetical

Take this example. The UK wants to sell twenty cars to South Africa for £100,000 each. However, South Africa slaps a 20% tariff on imported cars to protect its local car industry. This means the British car company has to increase the price to cover the tariff, pushing the final cost to £120,000. And that’s before even considering shipping costs or profits. So, South African customers end up paying a lot more for those British cars.

Considerations

This is where an FTA comes in handy. But setting one up isn’t just about cutting tariffs. There are a lot of important questions that need answering first. For instance, do South African consumers even want these British cars? Would the South African government be willing to give up the tariff revenue, and if they do, how will they make up for it? Will the benefits of cheaper imports outweigh the possible harm to local industries?These are the kinds of questions that need to be carefully thought through when negotiating an FTA.

Negotiations

The governments involved first need to create a negotiating framework. This means figuring out what they want to achieve economically and politically. What are each country’s goals? The UK might want to boost its exports, while South Africa might focus more on protecting jobs or getting access to new technologies. Then, they need to decide who will represent them in the negotiations. These could be trade ministers, economists, and legal experts. When negotiations begin, many issues will be on the table. For example, should South Africa completely remove tariffs on British cars, or just lower them a bit? Deciding how much and how quickly tariffs should be cut is a big part of the talks. There’s also the question of rules of origin — how do they determine which goods are eligible for tariff reductions? This ensures that only products genuinely made in the participating countries benefit from the deal. Another key point is how disputes will be resolved. Will there be an independent arbitration panel, or will the countries try to sort things out through a joint committee? Then there’s the issue of regulatory compliance. How will British companies make sure they’re following South African laws, and vice versa? This might involve harmonising safety standards or agreeing to recognise each other’s regulations. Intellectual property is also a big deal — how will the agreement protect patents, trademarks, and copyrights?

Agreement and Ratification

Once everything has been hammered out, the parties will draft an agreement that lays out all the terms. This draft then goes through a detailed review process, including a legal check to make sure it aligns with international trade laws and the domestic laws of the countries involved. They might also need to translate the final version into the official languages of the countries, depending on what’s required.

After the draft is finalised, the agreement is signed by the representatives of the countries involved, showing they intend to stick to the deal. But for the FTA to take effect, it needs to be ratified. This usually means getting it approved by each country’s legislative or parliamentary bodies and incorporating the FTA’s provisions into their national laws.

Once that’s done, the FTA is implemented according to the timeline the countries have agreed on. This might mean gradually lowering tariffs over several years. After implementation, the agreement needs to be monitored to make sure everyone is following the rules and to tackle any problems that arise. They might also review the agreement from time to time to make adjustments for any economic changes or unexpected challenges.

Effects

With the FTA in place, the UK can now sell its cars in South Africa for £100,000 without the extra 20% tariff. This means South African customers can buy British cars at a more reasonable price, all thanks to the improved trade relationship between the two countries.