Regional trading agreements refer to a treaty that is signed by two or more countries to encourage the free movement of goods and services across the borders of its members. The agreement comes with internal rules that member countries follow among themselves. When dealing with non-member countries, there are external rules in place that the members adhere to.
Quotas, tariffs, and other forms of trade barriers restrict the transport of manufactured goods and services. Regional trading agreements help reduce or remove the barriers to trade.
Types of Regional Trading Agreements
Regional trading agreements vary depending on the level of commitment and the arrangement among the member countries.
1. Preferential Trade Areas
The preferential trading agreement requires the lowest level of commitment to reducing trade barriers, though member countries do not eliminate the barriers among themselves. Also, preferential trade areas do not share common external trade barriers.
2. Free Trade Area
In a free trade agreement, all trade barriers among members are eliminated, which means that they can freely move goods and services among themselves. When it comes to dealing with non-members, the trade policies of each member still take effect.
3. Customs Union
Member countries of a customs union remove trade barriers among themselves and adopt common external trade barriers.
4. Common Market
A common market is a type of trading agreement wherein members remove internal trade barriers, adopt common policies when it comes to dealing with non-members, and allow members to move resources among themselves freely.
5. Economic Union
An economic union is a trading agreement wherein members eliminate trade barriers among themselves, adopt common external barriers, allow free import and export of resources, adopt a set of economic policies, and use one currency.
6. Full Integration
The full integration of member countries is the final level of trading agreements.
Benefits of Regional Trading Agreements
Regional trading agreements offer the following benefits:
1. Boosts Economic Growth
Member countries benefit from trade agreements, particularly in the form of generation of more job opportunities, lower unemployment rates, and market expansions. Also, since trade agreements usually come with investment guarantees, investors who want to invest in developing countries are protected against political risk.
2. Volume of Trade
Businesses in member countries enjoy greater incentives to trade in new markets, thanks to attractive trading conditions due to the policies included in the agreements.
3. Quality and Variety of Goods
Trade agreements open a lot of doors for businesses. As they gain access to new markets, the competition becomes more intense. The increased competition compels businesses to produce higher-quality products. It also leads to more variety for consumers. When there is a wide variety of high-quality products, businesses can improve customer satisfaction.
Thank you for reading CFI’s guide to Regional Trading Agreements. To keep advancing your career, the additional CFI resources below will be useful: