Free trade refers to the unrestricted exchange of goods and services between countries. It’s a way for nations to trade without tariffs, quotas, or other restrictions.
Free trade agreements can impact your business whether you’re an importer, exporter or involved in cross-border transactions.
In this article, we explore what free trade is, the various agreements that shape it, and how your business can navigate it effectively.
We also look at how Privalgo helps businesses manage currency risk and streamline international payments in the context of free trade.
Table of contents
- What is free trade?
- How to benefit from free trade agreements
- Pros and cons of free trade for businesses
- Summarising free trade for businesses
- 10 FAQs about free trade and its impact on businesses
What is free trade?
Essentially, free trade involves governments coming together to make trade between their countries easier. It promotes open markets and the free flow of goods, leading to increased competition, innovation, and lower costs for businesses and consumers.
In essence, free trade agreements (FTAs) are designed to remove trade barriers between two or more countries. They enable businesses to operate across borders with less regulation to worry about, making international trade more accessible and profitable.
Read: What is a tariff in global trade?
Examples of free trade agreements
Free trade agreements or preferential trade agreements (PTAs) exist to promote trade by giving certain countries better access to each other’s markets. Here are a few examples:
NAFTA – 1994/USMCA – 2020
Introduction
The North American Free Trade Agreement (NAFTA) was one of the most influential FTAs in modern history, signed between the United States, Canada, and Mexico.
It created a three-way trade bloc in North America, removing most tariffs and promoting free movement of goods and services.
Impact
NAFTA led to a dramatic increase in trade between the three countries, particularly benefiting industries like manufacturing and agriculture. It also contributed to the rise of integrated supply chains across North America.
Replacement
In 2020, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). The updated agreement focused on improving certain provisions, particularly around labour, environmental standards, and digital trade.
Statistics
USMCA nations accounted for 16% of Global GDP in 2023, and 11% of global GDP growth between 2012 and 2022.
In 2022, US goods and services trade with USMCA totalled an estimated $1.8 trillion. Exports were $789.7 billion, and imports were $974.3 billion.
European Union (EU) single market
Introduction
The EU’s single market is one of the most complete examples of free trade. It allows for the free movement of goods, services, capital, and people across all EU member states.
Impact
The single market has significantly boosted trade within Europe, creating a collective economy and promoting competition. It’s also encouraged economic growth by removing borders and simplifying trade regulations between EU countries.
Statistics
In 2021, the EU single market’s GDP was €14.522 billion with 17 million EU citizens living or working outside of their own EU country. Trade within the EU single market also generates 56 million jobs.
CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) – 2018
Introduction
The CPTPP, signed by 11 countries in the Asia-Pacific region, has replaced the Trans-Pacific Partnership (TPP).
After the US withdrew from the TPP in 2017, the remaining nations (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) moved forward with the CPTPP. The UK plans to join the 11 countries by the end of 2024.
The CPTPP cuts out tariffs and opens markets across a wide range of sectors.
Impact
The CPTPP has strengthened economic ties between these nations, leading to increased trade in goods, services, and investment. It also sets high standards for labour, protecting the environment, and intellectual property.
Statistics
The CPTPP free trade area had joint GDP of £9 trillion in 2022 and was home to half a billion people. The UK government predicts UK trade with CPTPP members could increase by the equivalent of £4.9 billion (3.9%) in the long run.
UK free trade agreements – 2019 to present
Post-Brexit, the UK has been negotiating multiple FTAs, such as with Australia, Japan, Singapore, New Zealand, EU, Canda, South Korea, Vietnam, Switzerland. Many of these were signed between 2019 and 2021, but some negotiations are ongoing.
They allow UK businesses to export and import more freely while managing the new regulations.
By understanding the key terms of these preferential trade agreements, businesses can capitalise on the benefits of free trade, making accessing foreign markets easier and reducing costs associated with tariffs and other trade barriers.
Brexit: the UK’s withdrawal from the EU single market
The UK joined the EU and the European Economic Community (EEC) in 1973, meaning it was a part of the EU single market from its inception in 1993.
However, the UK withdrew from the EU single market in 2020 after a 2016 public referendum concluded with a vote to leave.
Despite its exit from the EU single market, the UK continues to trade actively with the EU, and the trading relationship remains essential to the UK’s economy.
In 2023, the UK’s exports of goods and services to the EU amounted to £356 billion, accounting for 42% of the UK’s total exports.
Meanwhile, UK imports from the EU totalled £466 billion, representing 52% of all imports into the country. This data shows that the EU remains one of the UK’s most significant trading partners even after Brexit.
Post-Brexit, the UK is no longer part of the EU single market and customs union. While there are no tariffs on goods traded between the UK and the EU under the current Trade and Cooperation Agreement (TCA), other non-tariff barriers have increased, affecting trade flows.
For instance, UK goods exports to the EU were 11% below their 2019 levels in 2023 due to these additional trade barriers and other global factors.
While the UK and EU still share a fruitful trade relationship, the shift in trading conditions post-Brexit means UK businesses need to manage new regulations and logistical challenges when trading with the EU.
How to benefit from free trade agreements
Free trade presents immense opportunities. However, it also requires businesses to adapt and stay compliant.
For instance, navigating foreign trade policies and international regulations can be tricky, but essential for engaging in free trade.
Here’s how your business can successfully navigate and benefit from it:
Understand trade agreements
To get the most out of free trade, make sure you have a clear understanding of foreign trade policies in the countries you’re trading with.
UK businesses can find all the FTAs involving the UK on the Gov website.
These policies dictate the rules for imports and exports, and failing to comply could result in fines, delays, or even bans.
Ensure you’re familiar with the agreements relevant to your industry and region. It might be that certain products you import/export have tariffs in some countries but not others.
You can find out which products and services face tariffs from each country the UK has an FTA with on the Gov website – like this one about trade with Australia.
Understanding all the UK FTAs can help you identify new nations to trade with, helping you keep costs down, access new markets and raise profits.
Read: Maximising sustainable growth: a guide for freight forwarders
Build relationships with foreign partners
Networking: Attend trade shows, conferences, and other events to connect with potential business partners in foreign markets.
Cultural understanding: Develop a deep understanding of foreign cultures and business practices to foster effective communication and collaboration.
Trust and reliability: Establish a reputation for trust and reliability with foreign partners to build long-lasting relationships.
Read: Importing from China to the UK
Adapt to market changes
Flexibility: Be prepared to adapt to changing market conditions, such as fluctuations in demand, currency exchange rates, and regulatory environments.
Diversification: Consider diversifying your product line or markets to reduce your exposure to risks.
Continuous improvement: Invest in research and development to stay competitive and meet the evolving needs of customers.
Read: What are black swan events?
Pros and cons of free trade for businesses
As we mentioned above, free trade can benefit businesses by expanding markets and reducing costs, but that’s not to say it’s free from any challenges. Let’s break them down.
Pros
- Market access: Free trade opens up new markets for businesses, providing opportunities for growth and diversification.
- Cost reduction: By eliminating tariffs, businesses can lower their costs, making their products more competitive on the global stage.
- Increased efficiency: Free trade promotes competition, which encourages businesses to innovate and improve efficiency.
- Consumer benefits: Access to a greater variety of goods and services at lower prices due to reduced trade barriers.
Cons
- Increased competition: While competition drives innovation, it can also squeeze profit margins for businesses, especially in saturated markets.
- Compliance with complex regulations: Keeping up with the complex, ever-changing regulations of multiple countries can be time-consuming and costly for businesses, particularly small and medium-sized enterprises.
- Intellectual property concerns: FTAs can raise concerns about the protection of intellectual property rights, as businesses may worry about their innovations being copied or stolen.
- Environmental damages: Free trade can sometimes lead to increased environmental pollution, as businesses may seek to lower costs by relocating to countries with weaker environmental regulations.
Summarising free trade for businesses
Free trade offers businesses both opportunities and challenges. By learning the details of trade agreements, building relationships with foreign partners, and adapting to market changes, businesses can reap the rewards of free trade.
FTAs provide clear information about which products and services are affected by tariffs. This means your business can be sure that your imports or exports will be free of specific costs.
However, engaging in free trade with other countries likely means engaging in the foreign exchange (FX) markets. Trading in different currencies makes your business vulnerable to FX risk, which can significantly impact your budgeting power and profit margins.
At Privalgo, we specialise in helping businesses importing or exporting from overseas limit the risk of currency volatility through personalised hedging strategies.
Our team of dedicated currency experts will get to know your business inside and out. They’ll suggest a combination of FX products to help you set your budget with confidence and maximise value when you exchange currencies.
Contact us today to see how we can help your business manage FX risk and grow globally.
10 FAQs about free trade and its impact on businesses
Below are 10 frequently asked questions (FAQs) about free trade and its impact on businesses. Some include information already discussed in this article.
What does free trade mean?
Free trade refers to the unrestricted exchange of goods and services between countries, without tariffs, quotas, or other trade barriers. It allows businesses to operate across borders with fewer regulatory constraints, making international trade more accessible.
What is a real example of free trade?
A well-known example is the USMCA (United States-Mexico-Canada Agreement), which facilitates free trade between the three countries by removing most tariffs and promoting the free movement of goods and services across North America.
Is free trade good for the UK?
Yes, free trade is beneficial for the UK as it opens up new markets, encourages investment, and lowers costs for UK businesses. Free trade agreements enable businesses to access foreign markets more easily and reduce costs associated with tariffs.
Does the UK have a free trade agreement?
Yes, the UK has several free trade agreements in place, including deals with countries such as Japan, Australia, New Zealand, and Canada. These agreements facilitate smoother trade relationships and create opportunities for UK businesses to import and export goods and services.
What is the EU free trade agreement?
The EU free trade agreement refers to the European Union single market, which allows the free movement of goods, services, capital, and people across all EU member states. It’s one of the most comprehensive examples of free trade in the world.
Will the USMCA be renewed?
The USMCA agreement, which replaced NAFTA in 2020, is designed to be regularly reviewed and updated. The next renewal in 2026 has come under some recent pressure with disputes emerging over ports between the US and Mexico.
How do free trade agreements benefit businesses?
Free trade agreements (FTAs) benefit businesses by providing market access, eliminating tariffs, and creating opportunities for expansion. They reduce the cost of importing and exporting, making businesses more competitive on a global scale.
What are the risks of free trade for businesses?
Risks to free trade for businesses include increased competition, compliance with complex international regulations, and currency fluctuations. Businesses must stay agile and adapt to changes in demand and trade policies.
How can my business navigate free trade agreements?
Businesses can navigate free trade agreements by understanding relevant trade policies, building strong relationships with international partners, and staying compliant with customs regulations. Working with a currency specialist like Privalgo can also help mitigate risks in currency exchange.
What is foreign trade policy?
Foreign trade policy refers to the set of laws, regulations, and agreements established by a country to manage its international trade activities. It governs how goods and services are imported and exported, the tariffs imposed, and the trade agreements negotiated with other countries to encourage or restrict trade. These policies are designed to protect domestic industries while fostering economic growth through global trade.
