When it comes to international trade, countries around the world have entered into various preferential trade agreements (PTAs) to facilitate and enhance their trade relationships. These PTAs allow countries to trade with one another with certain benefits or reduced barriers, making it easier and more profitable for them to conduct business. In this article, we`ll list and outline the four main types of preferential trade agreements.
1. Free Trade Agreement (FTA)
Free Trade Agreements (FTAs) are agreements between two or more countries that establish a free trade area and eliminate tariffs and non-tariff barriers on all goods traded among them. These agreements can be bilateral or multilateral, and they provide a level playing field for businesses to compete on. FTAs promote economic integration between countries, making it easier and cheaper for businesses to export their goods and services.
2. Customs Union
A Customs Union is an agreement between two or more countries where they agree to eliminate tariffs and other trade barriers between each other and establish a common external tariff (CET) on goods imported from outside the union. This means that all countries in the customs union apply the same tariff rates to goods imported from outside the union. The aim of customs union is to facilitate the movement of goods among participating countries while protecting their industries from cheap imports.
3. Common Market
A Common Market goes beyond a customs union by allowing freedom of movement of goods, services, capital, and people across the borders of participating countries. This type of agreement enhances economic integration by creating an open and competitive market among the participating countries. It allows businesses to operate across the borders and take advantage of the larger market created by the agreement.
4. Economic Union
An Economic Union is the most advanced form of regional integration. It goes beyond a common market by creating a supranational entity with a common monetary and fiscal policy. It can include a single currency, a central bank, and a common economic and fiscal policy. The most well-known example of an economic union is the European Union, which introduced the Euro as a common currency.
In conclusion, Preferential Trade Agreements come in different forms and shapes depending on the level of economic integration desired by the participating countries. Free Trade Agreements, Customs Union, Common Market, and Economic Union are some of the most common types of preferential trade agreements that countries enter into. These agreements improve trade relationships, increase economic efficiency, and create a more stable economic environment.