Free Trade Agreement (FTA)

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 23, 2022

FTA Definition

A free trade agreement, or FTA, is an agreement made between two or more nations to reduce the barriers of trade between them.

Under an FTA, goods and services can be imported and exported between countries with little to no prohibitions, quotas, or tariffs. Often an FTA is a formal agreement, but a free-trade policy can also occur from a lack of trade restrictions, such as in the case of "laissez-faire"(pronounced: lay-say fair) trade, which is French for "let go."

Benefits and History of FTAs

In principle, free trade facilitates faster economic growth by allowing businesses to focus on making products that best utilize their resources while importing goods that are domestically scarce.

According to economist David Ricardo's book On the Principles of Political Economy and Taxation (1817), free trade increases the diversity of goods while lowering their price, and allows nations to make better use of their domestic resources and specializations.

FTAs vs Tariffs

While an FTA is usually the most beneficial, a government may place a tariff on certain products to protect domestic manufacturers.

It may also block the import of certain goods that have not been approved by a nation's regulators, such as drugs, unvaccinated animals, or foods that don't meet the government's national standards.

The international agency responsible for ensuring that trade flows smoothly between countries is the World Trade Organization.

FTA (Free Trade Agreement) FAQs

What does FTA stand for?

FTA is an acronym for Free Trade Agreement.

What is a Free Trade Agreement?

A free trade agreement, or FTA, is an agreement made between two or more nations to reduce the barriers of trade between them. Under an FTA, goods and services can be imported and exported between countries with little to no prohibitions, quotas, or tariffs.

What are the benefits of a Free Trade Agreement?

In principle, free trade facilitates faster economic growth by allowing businesses to focus on making products that best utilize their resources while importing goods that are domestically scarce.

Is a FTA a formal agreement?

Often an FTA is a formal agreement, but a free-trade policy can also occur from a lack of trade restrictions, such as in the case of “laissez-faire” (pronounced: lay-say fair) trade, which is French for “let go.”

What are alternatives to FTA agreements?

While an FTA is usually the most beneficial strategy, a government can also place a tariff on certain products to protect domestic manufacturers. It may also block the import of certain goods that have not been approved by a nation’s regulators, such as drugs, unvaccinated animals, or foods that don’t meet the government’s national standards.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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