Trading with Favourites: Free Trade Agreements in the Asia Pacific

Even a year or two ago, observers could have been relatively sanguine about the boom of interest in free trade agreements (FTAs). Progress was much slower than people originally expected, and negotiations seemed to drag on without agreement being reached. That situation has now changed. The large economies – not just the United States but also China, Japan and South Korea – are pursuing FTAs. Motivations apparently include their contribution to domestic and international political targets, the mobilisation of reform and dealing with new types of impediments in order to intensify trade flows in the region. ASEAN members are also actively involved but there are doubts about ASEAN’s capacity to reach a consensus on trade policy issues. While its members might hope otherwise, a hub-and-spoke outcome in which ASEAN members make up the spokes, and not the hub, is a plausible scenario, and one of the worst in terms of a regional trading regime. We therefore argue the case for the application of a new set of principles to provide a framework for risk management, including progress in the World Trade Organization (WTO) on liberalisation, new WTO rules on regional agreements, higher levels of transparency, and more work on other forms of agreement to facilitate trade. Overall, multilateralisation of preferential tariff reductions should be the main benchmark in any new set of principles for risk management in the tactic of trading with favourites.