Free Trade Agreement

Normally, when a country imports goods, a tariff (a tax on foreign products) is charged at the border. Say an imported fruit costs 10,000 won (about $7) and carries a 30% tariff. The price tag at the store ends up above 13,000 won. This tax pushes up the price of imports, which protects goods made at home.

When two countries sign a free trade agreement, they lower or completely remove the tax barriers they had placed on each other. Without the tariff, there is room for the price of imported fruit to drop. Shoppers get a wider choice of products at better prices. How much of the tariff cut actually shows up on the price tag depends on how the goods are distributed and sold.

Korean companies get a much bigger playing field, too. When they export cars or smartphones to the partner country with no tariff, they can gain a big edge on price. It opens a path beyond a small home market to hundreds of millions of customers.

When both countries freely trade what they each make best, the total amount of trade tends to grow. Many people expect a bigger economy and more jobs. But there are different views on how big the real effect is.

When a free trade agreement is signed, does everybody end up smiling? Sadly, not always. High-tech manufacturers that export a lot and shoppers who get cheaper goods come out ahead. But producers at home who make similar goods can face a serious crisis.

If cheap, good-quality farm products and meat pour in from abroad, local farmers lose out on price and can take heavy losses. Unlike a factory making industrial goods, farming is tied to seasons and land, so it's hard to change methods quickly. That's why free trade creates a problem where some sectors win big while others lose big.

Factories and jobs can also move to other countries, and jobs at home may shrink. If one industry collapses, the whole economy of its region can sink. The biggest shadow over free trade is that the gains from growth don't spread evenly across society.

So when governments sign these deals, they build in a cushion: tariffs on sensitive products are phased out slowly, sometimes over more than 10 years. They also tend to set up relief funds and job-transition programs to help the farmers, fishers, and small businesses that get hurt.

It's easy to think of a free trade agreement as just a piece of paper that cuts tariffs to zero. To be a bit more precise, though, a modern agreement goes beyond trade in visible goods. It lines up a big set of rules across the whole economy.

It can open up service industries like banking and telecommunications, not just plain manufactured goods. Most agreements also include terms that align intellectual property protection, covering things like movies, music, and patents on new drugs. The goal is a setting where companies from the partner country can invest safely, trusting the other country's laws and systems.

They also spell out strict rules of origin, so no one can sneak in parts from a third country just to grab the tariff break. For clothing, for example, the rules look at where the yarn was knitted and where the buttons were sewn on. Only goods truly made in the partner countries get the benefit.

Recently, environmental standards and protections for workers' rights are also being written into agreements. So a modern free trade agreement can be seen as a comprehensive contract that goes beyond the border between two countries and coordinates both economic and social standards.