IntroductionIn an increasingly globalized world, in which international trade is constantly growing, the creation of free trade areas and trade facilitation are increasingly at the center of the debate. Trade is generally believed to be beneficial as it allows countries to use their comparative advantage on specific products, leading to lower prices and greater choice for consumers; however, trade is often hindered by trade barriers such as tariffs and lag times, among others (OECD, 2005). The creation of a free trade agreement offers a solution to these problems. Depending on the economic and political situation of the countries adhering to the agreement, a different model of free trade area may be chosen; for example, free trade areas where tariff barriers for member countries are abolished but no single tariff policy with outside countries, or customs unions that include a common tariff policy with non-member countries. The most advanced trading bloc is currently the European Union, with a single market and currency and freedom of movement of people, goods, resources and capital (European Union 2013). But what is the impact of free trade agreements on member countries and the rest of the world? Free Trade Areas: Direct Effects in the Short Run In the short run, the formation of a free trade agreement has a dual impact on domestic and global markets; The first is the creation of trade and leads to increased trade in member countries who can now sell their products duty-free to other member countries. The second is trade diversion and involves shifting consumption from a low-cost producer to a higher-cost producer within the FTA. Figure 4 Trade Creation and Diversion As illustrated in Figure 4, when establishing a trade agreement with a partner country, let ... .... half of the paper ......ng number of countries. References Anderson, J., Yotov, Y.V. (2011) Good news on free trade agreements. Vox (http://www.voxeu.org)European Union (2013) The European Union explains: Internal market. Luxembourg: Publications Office of the European Union FATF/OECD (2010) Money laundering vulnerabilities of Free Trade Zones. FATF Report, March 2010Newron, P. (2006) Proton announces first quarter net loss more than quadruples due to falling sales. Global Insight Analysis DailyOECD (2005) The Costs and Benefits of Trade Facilitation, Policy Brief of the Public Affairs Division, Public Affairs and Communications Directorate. Sloman, J., Hinde, K. and Garratt D. (2013) Economics for Business, 6th ed., Prentice Hall / PearsonWTO (2007) International Trade Co-operation 2007 World Trade Report. Sixty years of the multilateral trading system: achievements and challenges