A Free Trade Agreement (FTA) is a treaty or legal agreement under international law that establishes a free-trade area between two or more cooperating states. FTAs are a concept and a mechanism for trade liberalization, categorized as either bilateral (between two countries) or multilateral (among three or more countries).
The modern concept gained prominence after World War II, following the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT provided a legal exception under Article XXIV for nations to form regional trade blocs, solving the problem of high protectionist tariffs that had hindered global commerce.
An FTA works primarily by mandating the reduction or elimination of tariffs and duties on goods and services traded between member countries. Key provisions also address non-tariff barriers, such as import quotas or technical standards. To prevent non-member countries from exploiting the preferential tariffs, a crucial mechanism is the Rules of Origin (RoO), which defines which goods qualify as "originating" in a member country. Modern FTAs are comprehensive, often including chapters on investment, intellectual property, and government procurement.
FTAs are an exception to the Most Favored Nation (MFN) principle, a core tenet of the World Trade Organization (WTO), which succeeded the GATT in 1995. Unlike a Customs Union, FTA members retain the right to set their own independent external tariffs with non-member countries.
India has recently pursued a new generation of FTAs, signing seven new agreements since 2021. Notable recent changes include the India-UAE Comprehensive Economic Partnership Agreement (CEPA), signed in February 2022 and implemented in May 2022, and the India-Australia Economic Cooperation and Trade Agreement (ECTA), implemented in December 2022. These new agreements are comprehensive, covering not just goods but also services, investment, and the mobility of skilled professionals. The India-EFTA Trade and Economic Partnership Agreement (TEPA) was also signed on March 10, 2024.