The European Free Trade Association (EFTA) was established on May 3, 1960, as an alternative to the European Economic Community (EEC), which later evolved into the European Union (EU). The founding members of EFTA were Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. These countries sought to foster economic cooperation and liberalize trade among themselves without committing to the political and economic integration that the EEC required.

The creation of EFTA can be traced back to the late 1950s, during the early stages of European post-World War II reconstruction. At that time, European countries were actively searching for ways to stimulate economic growth and promote international trade. The EEC was established in 1957 under the Treaty of Rome, aiming to create a common market and promote economic integration among its six founding members: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands.

However, not all European countries were ready or willing to commit to the EEC's level of integration. The EEC required its members to remove trade barriers and adopt common policies in various sectors, such as agriculture, transportation, and competition. Moreover, the EEC's supranational institutions, such as the European Commission and the European Court of Justice, held significant authority over member states' domestic policies.

In response to the EEC's formation, the EFTA was established as a more flexible and less politically committed alternative for European countries that wanted to benefit from free trade without relinquishing their national sovereignty. The Stockholm Convention, signed on January 4, 1960, officially created the EFTA, with its primary goal being the progressive elimination of tariffs and other trade barriers on industrial goods among member states.

In its early years, EFTA was successful in promoting trade liberalization among its members. Tariffs on industrial goods were gradually reduced, and by the late 1960s, the majority of trade in these products among EFTA countries was duty-free. The association also sought to foster closer economic ties with the EEC, as many EFTA members relied on the EEC's larger market for their exports. In 1972, EFTA and the EEC signed a series of free trade agreements that eliminated tariffs on industrial goods between the two blocs, further promoting trade liberalization in Western Europe.

However, the EFTA's membership saw significant changes in the 1970s and 1980s. The United Kingdom and Denmark, two of EFTA's founding members, decided to join the EEC in 1973, reducing the size and influence of the association. In the following years, more EFTA members opted for EEC membership, with Portugal joining in 1986 and Austria, Finland, and Sweden joining in 1995.

The changing membership of EFTA led to a reevaluation of the association's role in Europe. In 1994, the EFTA countries that did not join the EU (Iceland, Liechtenstein, Norway, and Switzerland) established the European Economic Area (EEA) in collaboration with the EU. The EEA Agreement allowed these EFTA countries to participate in the EU's single market, benefiting from the free movement of goods, services, capital, and people. In return, the EFTA members of the EEA were required to adopt EU legislation related to the single market, although they had no formal say in the lawmaking process.