Multilateralisation of Preferences versus Reciprocity when FTAs are Underutilized

Jayant Menon ()

The World Economy, 2014, vol. 37, issue 10, 1348-1366

Abstract: type="main" xml:id="twec12203-abs-0001">

Most studies worldwide, and all on East Asia on the impact of free trade agreements (FTAs), have assumed full utilisation of preferences. The evidence suggests that this assumption is seriously in error, with the estimated uptake particularly low in East Asia. In this paper, we assume a more realistic utilisation rate in estimating impacts. We find that actual utilisation rates significantly diminish the benefits from preferential liberalisation, but in a non-linear way. Reciprocity is an important motivation for pursuing FTAs over unilateral actions, such as multilateralisation of preferences. We isolate the impact of reciprocity, but find that the additional benefits also depend on utilisation rates. Furthermore, the potential for trade deflection combined with possible retaliatory actions could negatively affect members and non-members. In the absence of Doha, unilateral multilateralism or non-reciprocal multilateralisation of preferences is the practical route that is most likely to deliver the greatest benefits.

Date: 2014
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