IB International Economics Higher Level (HL) Practice Exam

The agreement that allows for reduced tariffs among member countries while maintaining separate tariffs for non-members is indeed a Free Trade Agreement (FTA). A Free Trade Agreement is designed to enhance trade between participating countries by eliminating or reducing tariffs, quotas, and preferences on most goods. However, each member of a free trade area retains the ability to set its own tariffs and trade policies toward non-member countries, which is a defining characteristic of FTAs.

In contrast, a Customs Union requires its member countries to adopt a common external tariff for non-member countries, eliminating their ability to independently establish separate tariffs. A Preferential Trade Agreement seeks to lower tariffs among specific countries but does not necessarily eliminate all tariffs or impose a common external tariff. Lastly, a Common Market extends beyond just a free trade agreement by allowing for the free movement of factors of production (labor and capital) as well as goods and services, while also implementing a common external tariff.

The unique feature of a Free Trade Agreement, therefore, is its flexibility in allowing member countries to maintain their own distinct trade policies towards non-members, making it the correct choice in this context.