Getting to know Free Trade Agreements

What are Free Trade Agreements, and why do they exist?

This is the first of a series of posts introducing the new United Kingdom – Australia Free Trade Agreement (which is yet to come into force) and how it may be relevant to you.

What is a Free Trade Agreement?

A Free Trade Agreement (FTA) is a set of policies agreed to between two or more countries removing some barriers faced by companies when trading goods and services: barriers which otherwise exist by default.

By default, all World Trade Organisation Member states (nearly all countries) trade with one another on ‘Most Favoured Nation’ terms. In practice, this means companies face tariffs (taxes on imports and exports) of up to 20% on specified products, and around 5% for the majority of internationally traded goods.

FTAs not only reduce these tariffs but can also provide benefits in other ways, such as:

  • Raising/removing import quotas
  • Prioritising relevant transport
  • Reducing red-tape, and
  • Easing the movement of individuals and the hiring of workers.

FTAs in the context of international treaties / conventions

The United Kingdom and Australia are both parties to The Vienna Convention on the Law of Treaties 1969 (the ‘VCLT’). The VCLT governs the observance, application and interpretation of ‘treaties’. A treaty is defined by the VCLT as ‘an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments’.

Where potential conflicts with other agreements may arise following the introduction of this FTA, the VCLT will govern these – informing a clear interpretational ‘pull’ to ensure coherence and minimising divergence from pre-existing obligations to third parties.[1]

Economic Theory behind FTAs

In his 1817 book ‘On the Principles of Political Economy and Taxation’, economist David Ricardo laid out the foundational arguments for laissez-faire (free) trade, including that,

‘Under a system of perfectly free commerce… each country reward(s) ingenuity… and distributes labour most effectively and most economically… (to the) general benefit… of the universal society of nations.’[2]

Following this line of thought, countries that find similar interests but have different strengths stand to benefit from agreements which liberalise trade. For example, a country that produces more tech devices than its population needs but does not have enough natural materials for clothing could well benefit from entering a targeted free trade agreement with a country that produces excess cotton and wool but needs more mobile phones.

Which countries use FTAs?

The EU has around 42 free trade agreements with over 70 different countries, more than any other country or political union. Besides the UK, the next most FTAs are active with Iceland, Switzerland, Norway and Chile: countries which participate in more than 30 FTAs each. By comparison, the US has only 14 FTAs.

After Brexit, the UK has signed many agreements with countries around the world on similar terms as existed while it remained in the EU, making the UK second only to the EU in its use of FTAs.

UK-Australia FTA

Among post-Brexit agreements, the UK’s FTA with Australia (which is yet to be formally ratified, and as such is not yet in force) stands out as initiating particularly strong efforts to encourage business opportunities, some of which may directly advantage you.

 

This blog series will introduce the ‘how’, ‘when’ and ‘why’ of changes that the UK-Australia FTA proposes.

Courtney Gleeson
Lawyer
Sheltons Group Legal (London and Sydney)
C.Gleeson@SheltonsGroup.com

Matthew Thorn
Law Graduate
Sheltons Group Legal (London and Sydney)

 

[1] Professor Albert Sanchez-Graells. 2022. Written Evidence submitted to the House of Commons International Trade Committee, following up on the Oral Evidence provided during the session of 9 March 2022 on “UK trade negotiations: Agreement with Australia” (HC 1002). London: The House of Commons.

[2] Ricardo, David., 2002. The principles of political economy and taxation. Cambridge: Janus Publishing Company Lim, p.83.