Free Trade Area Definition and Characteristics
The situation described is a Free Trade Area (FTA). This type of trade bloc is characterized by two main features:
- Elimination of tariffs and quotas on trade between member countries.
- Retention of independent trade policies and tariffs by each member country when trading with non-member countries (third countries).
The question highlights that intra-region trade is duty-free, meaning members trade freely amongst themselves. It also specifies a variation in tariff structures for imports from third countries. This independence in setting external tariffs is the defining characteristic that distinguishes an FTA from other forms of economic integration.
Distinguishing FTA from Other Trade Blocs
Let's analyze why the other options are not the correct fit:
- Customs Union: Requires members to have duty-free internal trade and a common external tariff policy towards third countries. The question states tariffs vary, ruling this out.
- Common Market: Includes the features of a Customs Union plus the free movement of factors of production (like labor and capital) among members. This is a broader integration level than described.
- Economic Union: Encompasses a Common Market but adds coordination of economic policies (like fiscal and monetary policy). This is the most advanced form of integration and does not match the scenario.
Therefore, the scenario where intra-region trade is duty-free but external tariffs differ is precisely the definition of a Free Trade Area.
Important Questions from Regional Economic Integration
- SAFTA (South Asian Free Trade Agreement) categorises member nations as Non-Least Developed Contracting States (NLDCS) and Least Developed Contracting States (LDCS). Identify the NLDSC states from the following
A. Bangladesh
B. Pakistan
C. Bhutan
D. India
E. Sri Lanka
Choose the correct answer from the options given below: - Common market achieves uniformity in monetary policy and fiscal policy among the member countries in __________.
- Identify the correct statement.
- Match List-I with List-II relating to benefits and cost of economic integration and identify the code representing correct matching.Codes :
List – I List – II a. Trade creation i. Movement of production and resources in opposite directions. b. Trade diversion ii. Become active when a member country does not augment export but simply shifts its imports from low cost source to high cost source. c. Trade deflection iii. Shifting the locus of production from high cost to low cost centre within the union. d. Polarisation forces iv. Goods produced in a third country entering a free trade area through a member country having lower tariff. Match the items of List - I with List - II and choose the correct code of combination :
List - I List - II (a) It abolishes all restrictions on trade among the members (i) Common Market (b) It not only eliminates all restrictions on trade among members but also adopts a uniform commercial policy against the non-members (ii) Economic Union (c) It allows free movement of labour and capital within the common market (iii) Free Trade Area (d) It achieves some degree of harmonization of national economic policies, through a common central bank, unified monetary and fiscal policy, etc. (iv) Customs Union
