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What is a free trade agreement?

In short a free trade agreement is a bilateral trade agreement between two parties.  It governs the terms of trade in goods between two parties and usually focuses on elimination of tariffs and barriers to trade.  More recent trade agreements concluded by the EU also extend to other areas, including competition, protecting intellectual property rights, customs cooperation, regulation. Services are not typically dealt with as comprehensively in FTA’s as goods. 

Will a free trade agreement eliminate tariffs on all goods moving from Ireland to Great Britain (and vice versa)?

It depends on the terms of the free trade agreement and what is agreed between the parties. 

A free trade agreement will usually remove or significantly reduce the imposition of tariffs on most goods traded between signatory countries but may have a quota for sensitive goods.  The recent free trade agreement the EU has concluded with Canada has been mooted as a model the UK may wish to follow.  As an example it eliminated tariffs on up to 99% of goods traded between Canada and the EU including on up to 92% of agricultural products. 

Note the tariff elimination applies only to goods which originate in a signatory state i.e. which are of origin to the parties to the agreement. 

What does origin mean?

It is important to note that the origin of goods is not determined by where goods are shipped from.  Rather there are complex rules for determining the origin of goods which will be agreed and documented in a free trade agreement. 

For example, in free trade agreements entered into by the EU, as a general rule goods are regarded as of origin to a particular country where;

  • They have been wholly obtained in that country (e.g., plants grown and harvested there, animals born and raised there, raw materials, etc.).
  • They have been produced exclusively from originating materials (e.g. yoghurt produced from EU milk and fruits).  There can be different levels of tolerance for non-originating goods.
  • The goods have been produced from materials which do not originate in the country but which were sufficiently processed in that country to attribute origin.

Will a free trade agreement allow for frictionless trade between Ireland and Great Britain?

A free trade agreement does not offer the same potential for frictionless trade as the single market or indeed a customs union. 

While a free trade agreement may allow for the reduction or elimination of many tariffs it would not eliminate the other potential barriers to frictionless trade such as import and export customs declarations, VAT reporting, regulatory divergence and hence non customs checks.  Many of the issues faced in preparing for trading under a hard Brexit will also apply in terms of trading under a free trade agreement.     

Are import and export declarations needed under a free trade agreement?

As a general rule yes.  

How does VAT work under a free trade agreement?

A free trade agreement does not apply to VAT so the normal VAT rules will continue to apply.