I am grateful to Prema-chandra Athukorala, Chris Milner and Peter Warr for detailed comments and to participants at the GEP Conference, University of Nottingham, Kuala Lumpur, 15–16 February 2012 and at the ARTNeT Seminar, Trade and Investment Division, UNESCAP, Bangkok, 7 November 2012. The simulations reported in this paper were conducted with the assistance of Yinhua Mai. Anna Cassandra Melendez provided excellent research assistance. The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent.
Article first published online: 14 JUL 2014
© 2014 John Wiley & Sons Ltd
The World Economy
Volume 37, Issue 10, pages 1348–1366, October 2014
How to Cite
Menon, J. (2014), Multilateralisation of Preferences versus Reciprocity when FTAs are Underutilized. World Economy, 37: 1348–1366. doi: 10.1111/twec.12203
- Issue published online: 8 OCT 2014
- Article first published online: 14 JUL 2014
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.