A Free Trade Agreement (FTA) is an agreement or treaty under international law between two or more countries to form a free-trade area. The core purpose of an FTA is to reduce or eliminate trade barriers, such as tariffs and duties, on imports and exports between the cooperating states, thereby encouraging international trade. FTAs are a deviation from the Most-Favored-Nation (MFN) principle of the World Trade Organization (WTO), which requires a member to grant the same trade advantages to all other WTO members.
The modern framework for FTAs emerged after World War II, with the General Agreement on Tariffs and Trade (GATT), established in 1947, providing a legal basis for regional trade blocs under Article XXIV. This provision solved the problem of allowing preferential trade arrangements while still operating within the multilateral trading system. FTAs can be bilateral (between two countries) or multilateral (among three or more countries).
An FTA works by granting preferential tariff treatment to goods originating from a partner country. A key mechanism is the Rules of Origin, which are product-specific criteria—like a tariff-shift test or a regional value content test—that determine if a good qualifies for the reduced tariff rate. Modern FTAs extend beyond just goods, often including clauses on trade in services, investment, intellectual property protection, government procurement, and technical standards.
FTAs are closely connected to the WTO and its agreements, such as the GATT 1994 for goods and the General Agreement on Trade in Services (GATS), which covers similar agreements for services under Article V. The proliferation of FTAs, sometimes called the "spaghetti bowl" effect, has been partly prompted by the slow pace of multilateral trade negotiations at the WTO.
A significant recent change was the replacement of the North American Free Trade Agreement (NAFTA), which took effect in 1994, with the United States-Mexico-Canada Agreement (USMCA) in 2020. While the USMCA preserved the core benefit of zero tariffs on most goods, it tightened the Rules of Origin for automotive goods and strengthened labor-enforcement provisions.