Editing Free trade area (section)

==Qualifying for preferences under a free trade area==

{{Further|Rules of origin}}

Unlike a [[customs union]], parties to a free trade area do not maintain common external tariffs, which means they apply different customs duties, as well as other policies with respect to non-members. This feature creates the possibility of non-parties may free riding preferences under a free trade area by penetrating the market with the lowest external tariffs. Such risk necessitates the introduction of rules to determine originating goods eligible for preferences under a free trade area, a need that does not arise upon the formation of a customs union.<ref>{{Cite web|url=https://www.instituteforgovernment.org.uk/explainers/rules-origin|title=Rules of origin|website=Institute for Government}}</ref> Basically, there is a requirement for a minimum extent of processing that results in "substantial transformation" to the goods so that they can be considered originating. By defining which goods are originating in the PTA, preferential [[rules of origin]] distinguish between originating and non-originating goods: only the former will be entitled to preferential tariffs scheduled by the free trade area, the latter must pay MFN import duties.<ref>{{cite web |title=Customs unions and FTAs Debate with respect to EU neighbours |url=http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/608797/EPRS_BRI%282017%29608797_EN.pdf |website=EU Parliament Policy Briefing |access-date=5 June 2019}}</ref>

It is noted that in qualifying for origin criteria, there is a differential treatment between inputs originating within and outside a free trade area. Normally inputs originating in one FTA party will be considered as originating in the other party if they are incorporated in the manufacturing process in that other party. Sometimes, production costs arising in one party is also considered as that arising in another party. In preferential [[rules of origin]], such differential treatment is normally provided for in the cumulation or accumulation provision. Such clause further explains the trade creation and trade diversion effects of a free trade area mentioned above, because a party to a free trade area has the incentive to use inputs originating in another party so that their products may qualify for originating status.<ref>{{cite web |title=Comparative Study on Preferential Rules of Origin |url=http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/origin/instruments-and-tools/reference-material/170130-b_comparative-study-on-pref_roo_master-file_final-20_06_2017.pdf?la=en |website=WCO |access-date=5 June 2019}}</ref>