Free Trade Agreements Economic Aspects And Impacts Economics Essay

After the terminal of the Second World War many states understood that by contending they would finally harm themselves more than derive any benefit. They understood that coaction is the agencies by which they could profit more than any other thing. They besides realized that trade was one of the key tools to accomplish higher public assistance degrees of their societies. This was the rule behind the 1956 understanding in Italy that was the beginning of the formation of the nowadays European Union ( EU ) . Free trade was seen as the agencies by which the European states devastated by war, would lift up once more. It was besides seen as a agency of peace, because states with strong trade ties had less motivations of struggle with each other. Free trade understandings ( FTAs ) were born out of the desire to increase people ‘s public assistance and do them experience more comfy and in power. But still today many inquiries are asked sing the consequence of these free trade understandings. These inquiries were the driving motivation that inspired us to compose this paper.

The intent of this paper is demo what FTAs are and what is their function in the economic life of societies. This will be done by measuring the general rules of a FTA and their function in economic life. More peculiarly, this paper has the purpose to demo in its concluding portion what has been the impact that FTAs have had on the Albanian economic system since their enforcement. This is done by measuring the chief thoughts in macroeconomics sing their influence and impact on selected economic indexs of a state ‘s economic system. Therefore, the ‘general theory ‘ portion will function as a footing for the subsequent analysis of the impacts in the local Albanian economic system of the FTA ‘s this state has in force.

The methodological analysis used in this paper will be that of literary reappraisal of Albanian writers related to the FTA issue combined with a graphical presentation from empirical informations of the effects FTAs have had on Albania. In the first chapter of the paper we have presented the chief facets of free trade understandings, concentrating on the chief definitions related to the subject and on the FTAs aims. The 2nd chapter focuses more on analysing the relation between FTAs and selected economic indexs. The concluding chapter is dedicated to Albania and its FTA ‘s.

Main facets of FTAs

As shown in the debut portion this paper aims at demoing some facets of the free trade understandings and their impact on selected economic indexs. We have tried to cover with the most of import facets of free trade understandings. In order to better understand the issue we have first to specify some basic constructs sing the issue. These definitions are necessary in order to understand the range and aims of free trade understandings.

Main definitions related to the subject

The first definition must be that of free trade. It is defined as the flowing of goods and services across states without barriers of any type ( Bhagwati, 2002: p.5 ) . Its purpose is to supply quality and low-cost goods and services to the markets of the states that participate in free trade. For this ground we apply free trade understandings between assorted ( two or more ) parties. By definition, a free trade understanding is an understanding between states that seeks to increase the degree of free trade ( World Trade Organization, 2009 ) . This begins by making particular revenue enhancement, duty and ordinances that can cut down barriers. A FTA can besides come with a warrant of an investing in one state by another, such as foreign direct investing. It is a signifier of economic integrating. In order to accomplish this, these states need to extinguish any type of barrier sing trade. Trade barriers are considered to be any kind of authorities imposed limitation on the free international exchange of goods or services. They are by and large classified as ( 1 ) import policies reflected in duties and other import charges, quotas, import licensing, imposts patterns, ( 2 ) criterions, proving, labeling, and assorted types of enfranchisement, ( 3 ) direct procurance by authorities, ( 4 ) subsidies for local exporters, ( 5 ) deficiency of right of first publication protection, ( 6 ) limitations on franchising, licensing, engineering transportation, ( 7 ) limitations on foreign direct investing, etc.

A free trade understanding merely encourages trade between two or more states to set up a free trade country where commercialism in goods and services can be conducted across their common boundary lines, without duties or hinderances but ( in contrast to a common market ) capital or labour may ( non ) move freely. Besides, member states normally impose a unvarying duty ( called common external duty ) on trade with non-member states.

FTAs generate a free trade country which is considered to be a geographical country formed by the national boundaries of two or more states belonging to a free trade understanding ( World Trade Organization, 2009 ) . The European Union or the states signers of NAFTA are illustrations of such free trade country.

Main aims

The following stairss are to demo which the aims of a free trade understanding are. There are two types of aims for FTA ‘s, general aims and specific aims. General objectives relate to a theoretical model in general footings of the FTA ‘s. They are common to all the FTAs bing in the universe. Alternatively, specific aims are the 1s set by different states in relation to each other. In this paper we will speak about the general aims of a FTA and will non discourse specific aims because we have non treated any specific FTA.

The range of FTAs is the gradual decrease ( until entire remotion ) of duties and barrier sing trade between the take parting states ( Kola, Teka, 2002: pp. 127-136 ) .

Some of import general aims are as follows:

The primary aim is the sweetening of economic coaction between states with the purpose of increasing the life criterions through addition of existent income per capita ;

A 2nd aim is the addition of production and employment rates ;

Then, gradual riddance of any kind of barrier for trade ;

Making equal chances of investing and competition for the companies of all states involved in the FTA ( Kola, Teka, 2002: pp. 127-136 ) ;

As we can see the aims of a FTA are really of import for each single residing in the states member of the FTA. They have a heavy influence in our day-to-day lives, on income, employment and ingestion. On the following chapter we will handle this influence that FTAs have on our lives by measuring their influence on the economic indexs.

FTA ‘s impact on selected economic indexs

The free trade understandings ( FTA ) have surely an impact on the economic indexs of a state, being that direct or indirect influence. This impact varies harmonizing to the political and economical conditions of each state implemented ( Kola, Teka, 2002: pp. 127-136 ) . For illustration, developed states take a different attack on their execution and the effects FTAs have on them are rather different from the effects on developing states. One of the grounds for differences in effects is the timeframe on which they are implemented. The longer the timeframe of execution of a FTA, the more differs it in consequences. Developing states need more clip to implement the FTA ‘s than developed 1s, because they need to do more readyings. Besides, the shorter the period of execution, the more hard is to do an appraisal of its impact. Every economic system needs a certain period of clip ( a adulthood timeframe ) in order to respond and accommodate to a FTA.

Since different writers pretend that it is still early to do a proper analysis of the empirical effects of the FTA ( Kola, Teka, 2002: pp. 127-136 ) , in this short analysis we will do a theoretical study of the impacts a FTA can hold on a developing economic system like that of Albania.

One thing FTA ‘s straight impact is the volume of international trade ( foreign trade ) of a state, specifically its import and export of different merchandises and services ( Kola, Teka, 2002: pp. 127-136 ) . Trade shortage is the difference between the volume of export and import merchandises. If a state imports more than it exports than it is considered to hold a trade shortage. The wider the border between the volumes of the two, the bigger is the trade shortage which translates in jobs for the economic system. But, in macroeconomic theory, FTA ‘s can do a state benefit from duty decrease and so it can increase its volume of exports. If this export addition is associated with a lessening in imports than the trade shortage would besides diminish. This lessening in imports volume could come due to an addition in domestic production of the imported merchandises or their replacements.

Monetary values are another country where FTA ‘s can hold a positive or negative impact. Imported merchandises can be natural stuffs or finished goods. The remotion of duties and barriers leads to a lower cost for the local concerns importing natural stuffs, which in effect would intend a lower market monetary value for their finished merchandises ( Kola, Teka, 2002: pp. 127-136 ) . This is one of the major positive impacts on monetary values. On the other manus, we must acknowledge that addition in exports could ensue with negative effects if the production capacity of an economic system does non besides increase. This is because houses will concentrate on exporting its merchandises and offer less in the domestic market. Assuming that demand will stay changeless, this would ensue in a diminution in offer, which means an addition in monetary values ( rising prices ) .

FTAs besides have an impact on the degree of fight between local and international concerns. If the quality of merchandises imported is higher, the domestic houses would hold to raise their criterion and quality of production. This would profit the consumer with better quality merchandises ( Kola, Teka, 2002: pp. 127-136 ) . The concern houses will hold to do hard picks. Either they will hold to take down their costs, chiefly by cutting down the size of their work force, or invest in new engineering and production techniques. But if the domestic concerns could non maintain up with the needed investings in engineering and other techniques required for doing their merchandises competitory, they will hold no pick but to close down. This means that the degree of unemployment will lift. This is a negative effect that FTA ‘s have on the domestic economic system of a state.

At the same clip, the market ‘s extension makes the domestic environment more attractive for the aliens and stimulates them to put more and more in the hosting state. The new endeavors provide better employment chances for local workers doing in this manner the decrease of unemployment.

Another of import country of impact from FTA ‘s is the province grosss. The province budget relies to a great extent on duties and revenue enhancements. FTA ‘s cut down, up to get rid ofing, duties for imported merchandises and even for exported 1s, therefore impacting negatively the province grosss ( Kola, Teka, 2002: pp. 127-136 ) .

As we realize from this analysis, FTAs may hold positive or negative impacts on economic indexs. That is why there are pros and cons sing the application FTAs.

The instance of Albania

The Stabilization and Association procedure of the Western Balkan states with the European Union is the concluding measure into entire integrating into the Union. For this ground, regional integrating in trade is a logical measure in the future integrating to the EU market in peculiar, and through that, to the universe markets. The EU itself is an illustration of assorted regional integratings that joined to organize a bigger whole. This experience demonstrated over the old ages that immense additions derive from set uping tight trade links with neighbours, in peculiar through the creative activity of a huge and efficient regional market. This was the logical thinking behind the bilateral free trade understandings that Albanian signed with its neighbours and with the European Union. An of import piece of this mystifier was the rank in the World Trade Organization ( WTO ) that for Albania became world in September 2000. At the clip, this was commented as a farther sweetening of regional and European trade ties for the state. Regional integrating was an nonsubjective that Albanian could non hold afforded to lose.

Trade liberalisation in Albania

Trade liberalisation and facilitation was the meat for a positive regional integrating. Trade liberalisation is besides indispensable for economic development. As we have tried to demo before it is a requirement for foreign direct investings, which are a impulsive force for economic development. In theory, exposure to foreign competition leads domestic industries to go more efficient and competitory reduces the cost of cardinal inputs and will develop inducements to put in research and development to go more competitory ( Mancellari, 2005 ) . Another factor is that openness to imports influences the lessening costs for consumers and increases the assortment and quality of the goods available on the market. Overall, trade openness is assumed to increase the public assistance of the population ( Kruegman, Obstfeld, 2003: p.3 ) .

During the last decennary Albania made great attempts toward trade liberalisation, by opening up the national boundary lines. It signed its first free trade understanding in 1998. Walking on the footfalls of other states, Albania is seeking to open its market to the universe but so far the consequence of trade liberalisation is non being the one the state hoped they would be.

Since 1998 Albania has signed and enforced FTAs with 8 regional states. These are bilateral free trade understandings with Macedonia, Bulgaria, Romania, Serbia & A ; Montenegro ( at the clip ) , Turkey, Croatia and Moldova. Whereas a free trade understanding between Albania and EU was incorporated into the Stability-Association Agreement enforced since 2006.

Equally far as disadvantages are concerned, the chief challenge of FTA posed to the national economic system is increased competition in the market. This state of affairs may take up to bankruptcy for houses which can non last such competition. However, despite of such short term challenges and costs, in the long term FTA make possible the re-allocation of resources into more effectual utilizations.

“ If a company is non able to confront competition it should non screen itself behind protectionist steps enforced from the authorities because there are a twine of negative effects as follows:

There is no allotment of investing into the best possible undertakings ;

Consumers are penalized through lower quality of merchandises and services ;

It is a restraint on economic growing which needs wider market chances ” ( Mancellari, 2005 ) .

Problems of the Albanian economic system

Below we are supplying a graphical presentation of the ongoing of the trade flow since 1999.

Figure 1

Development in clip of trade flows in million lek since 1999

Beginning: INSTAT ( 2008 ) , author computations.

The in writing reflects some positive effects of Albania ‘s regional bilateral FTAs, as can be read from the general tendency of increasing exports and imports. This consequences with a higher trade volume which means that Albanian exchanges with other states has raised. This happening leads to lift of fight in goods and services, better quality of merchandises, lessening in monetary values for the consumers and besides attractive force of foreign direct investings.

Although the exports have risen, the trade shortage is still high, which means that Albanian merchandises are non preferred in the international market. In the same clip we may state that the high degree of imports is because of the fact that the Albanian economic system does non hold the ability to carry through the domestic demands.

There are besides other factors which affect the sum of imports and exports such as remittals etc, but they are non focus of our paper.

Some grounds why the FTAs may non hold generated positive impacts on the Albanian economic system are as follows:

As a state with a low degree of openness prior to 1998, Albania adopted liberalisation political relations really fast possibly faster than it should hold.

It pursued an accelerated monetary value liberalisation policy, abolished the province monopoly over foreign trade, and introduced convertibility of domestic currency ( Mancellari, 2005 ) .

Albania fulfilled its duties from the WTO rank refering the riddance of custom responsibilities on certain merchandises, such as: alcoholic drinks, wood merchandises, paper merchandises, furniture and assorted playthings at a edge rate of zero per centum without countermeasures to protect a delicate place concern environment. Albanian companies were non ready to vie when the market opened to foreign merchandises which were cheaper and of a better quality but crashed internal production. Based on old engineering manufacturers could n’t bring forth an sum of merchandise that could provide place demand and the sum of merchandise was besides of a lower quality than the import merchandises. Besides, being “ new ” at viing merely with the merchandise ( because the monetary value was about the same ) Albanian manufacturers were n’t able to pull off the resources right pretermiting comparative advantages for certain merchandises.

Since there were no created establishment to supervise the market, supervising the demand and supply of different goods and services place manufacturers were slow in their reaction towards the market.


The range of Free Trade Agreements is the gradual decrease ( until entire remotion ) of duties and barrier sing trade between the take parting states. The terminal consequence of this procedure is the creative activity of free trade countries. These understandings are really of import to heighten the cooperation between states in order to raise national public assistance of these states. They may hold a positive or negative impact on economic indexs such as unemployment rate, rising prices, trade balance.

Free trade understandings have impacts even in other economic indexs such as GDP, Foreign trade investings, buying power, etc. Nevertheless these were non focus of this paper due to analysis restriction. Protectionism and openness index are non focus of this paper excessively. Surely they are a motive for subsequent paper.

As Albania ‘s primer end is European Integration, economic system is one of the cardinal factors that can speed up this procedure or detain it. Even though Albania has made stairss frontward by subscribing many free trade understandings with regional and European states, the state continues to hold a trade shortage which may be a effect of many grounds. Some of them may be: low degree of openness, accelerated monetary value liberalisation policy, low degree of fight of the Albanian merchandises etc. Home merchandises still feel threatened by the quality and the measure of foreign merchandises, inquiring many times for protectionist steps.

Despite these incommodiousnesss Albania shows besides positives marks sing FTAs, such as higher trade volume as a effect of increasing exports and imports. This means that the state has forced its cooperation with spouse states.

There are batch of ways to better the economic public presentation of trade between Albania and other states. What we have to make is to get down bring forthing and merchandising harmonizing to our comparative advantage.