- A free-trade area is a theoretical concept where a trade bloc whose member countries have signed a free-trade agreement (FTA), which eliminates tariffs,import quotas, and preferences on most (if not all) goods and services traded between them.
- If people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration.
- Countries choose this kind of economic integration if their economic structures are complementary. If their economic structures are competitive, it is likely there will be no incentive for a FTA, or only selected areas of goods and services will be covered to fulfill the economic interests between the two signatories of FTA.
- Unlike a customs union (the third stage of economic integration), members of a free-trade area do not have a common external tariff, which means they have different quotas and customs, as well as other policies with respect to non-members.
- To avoid tariff evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions.