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While reviewing the assigned reading for the week, there were many interesting terms noted. The key term I chose to review from the reading this week is free trade agreements. I found the topic of regional economic integration, as well as the development of trading blocs, very interesting and feel a good understanding of these concepts are necessary to fully grasp international business. As such, the free trade agreement is noted as the first step in trading bloc development, and I thought it would be interesting to understand more on how these develop and what they entail, as well as to review some further examples.
Explanation of the Key Term
Free trade agreements are the agreements that two or more countries make to allow trade of specific products (Satterlee, 2018). This is done by addressing the barriers to trade between the countries of the agreement. In this type of agreement, barriers, such as quotas or tariffs, are removed or reduced to promote trade of certain goods between the countries. This not only increases the trade between the countries, but it also facilitates further integration. As previously noted, this is the first stage in the development of a trading bloc and can further be developed to increase the regional economic integration between countries.
Major Article Summary
Kasteng et al. (2021) examined the utilization of a free trade agreement in their study, in this case the EU-South Korea free trade agreement. This agreement was developed between the European Union and South Korea provisionally in 2011, however, was fully ratified in 2015. The authors examined the use of the free trade agreements by firms and found that at times firms did not utilize the agreement, instead choosing to pay the duty, as the savings was not great enough. An interesting factor about free trade agreements is that firms are responsible for their own administrative costs to determine the origin of products, as most free trade agreements require that the firm prove this information to utilize the agreement. When the cost of the administrative fees of proving origin are higher than the potential saving from the free trade agreement, some companies may choose to not utilize the agreement. Another factor the study discovered was that it was not all large firms that utilized the agreement. The data noted that small firms utilized the free trade agreement at about the same percentage as larger firms. Overall, this study was interesting as it provided insight into free trade agreements and showed that although an agreement between countries may be created, it may not be the best business strategy to utilize for every firm.
Cited Work Relationship to Explanation and Assigned Readings
As discussed, a free trade agreement is a pact between two or more countries to remove barriers to trade for certain goods. In the major article summary, the free trade agreement between South Korea and the European Union was examined. The article discussed this agreement, but also examined the utilization of it, as it was found that not all firms that can utilize the agreement do so. Firms will only utilize this if the potential saving from duties is greater than the administrative costs. As the readings for this week examined, the free trade agreement is the first stage in a trading bloc. As the trading bloc between countries becomes more developed and intense, it is possible that increased utilization of the agreements would be more common as cost saving are greater for firms.
Cited Work Relationship to the Other Four Articles
Further research on free trade agreements sheds further light on this topic. Benguria (2022) found in their study similar findings in the US-Columbia free trade agreement, however, also noted that the fixed cost of using the free trade agreement decreases over time and the savings increase. This leads to increased use. Fiedler et al. (2020) examined the agreement between China and New Zealand and found that the New Zealand government pushed this agreement, portraying the ease of its use for businesses, however, many New Zealand businesses did not have the breadth to utilize due to their small size and lack of resources. Franco-Bedoya and Frohm (2021) examined different free trade agreements and their utilization and found that final goods did increase in trade by about fifty percent, however, intermediate inputs did not significantly change. The authors suggest that intermediate inputs require further coordination prior to consumption, which means they are less impacted by trade costs. Finally, Pal and Pohit (2020) examined the India-Sri Lanka free trade agreement and found that its utilization has significantly decreased since its inception due to non-tariff barriers, such as the administrative process and costs, problems with certificate of origin issuing, and increased time during trade, which is important in the trade of food products. Overall, while free trade agreements do help increase the trade between countries, there are some concerns in their use and not all firms choose to utilize the agreement.
Benguria, F. (2022). Do US exporters take advantage of free trade agreements? Evidence from the US-Columbia free trade agreement. Review of International Economics, 30(4), 1148-1179. https://doi.org/10.1111/roie.12598Links to an external site.
Fiedler, A., Fath, B., & Whittaker, D. H. (2020). The
Please respond to the post below. Minimum 100 words.