Free trade zone
An area comprising several countries that have eliminated customs duties and quantitative restrictions between themselves while each maintaining its own trade policy towards third countries.
Definition and legal framework
A free trade zone (in the sense of a free trade area) is a grouping of countries that have eliminated customs duties and quantitative restrictions on "substantially all trade" between themselves, while each maintaining its own customs tariff towards third countries. This model of economic integration is authorised under GATT Article XXIV.
Distinction from customs union
Unlike a customs union, a free trade area does not have a common external tariff. Each member applies its own customs duties to imports from third countries. This characteristic requires rules of origin to prevent trade deflection (importing via the member country with the lowest duties).
Major examples
- EFTA (European Free Trade Association): Iceland, Liechtenstein, Norway, Switzerland
- USMCA (formerly NAFTA): United States, Canada, Mexico
- ASEAN/AFTA: ASEAN Free Trade Area
- AfCFTA: African Continental Free Trade Area (2021)
Implications for operators
- Proof of origin is essential to benefit from tariff preferences
- Rules of origin can be complex and vary across agreements and products
- Origin cumulation (bilateral, diagonal, full) allows adding up processing carried out in several countries within the zone