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This section also empirically evaluates the quality and the impacts of FTAs. The final section presents some concluding comments. Economic analyses of FTAs Contrary to the most favored nation principle of the WTO, the essence of FTAs is the exchange of trade preferences that are not made available to third parties. Preferential liberalization, therefore, creates new incentives for private sector lobbies and governments to achieve competitive goals through these agreements. These objectives include the desire to gain preferential access to a main market of destination, to counter the trade and discrimination effects from existing FTAs, and to leverage tariff concessions in one FTA negotiation into more substantial gains in subsequent trade talks.
The terms of trade effect is another factor leading to the formation of FTAs. 7 The incentive is that a ‘large’ country can exploit the benefit in the form of terms of trade improvement. Very few empirical studies on the formation of FTAs have been conducted. One of them is by Baier and Bergstrand (2004), which examines the economic factors affecting the formation of FTAs for 54 countries. They find that the probability of the formation of an FTA increases when two countries are in close geographical proximity, both relatively large and similar in economic size.
It is important, however, to point out that ROOs have become an important tool for protectionists to restrict trade. Under an FTA treaty, products qualified as local products by passing ROO test can be exported to an FTA partner country without facing import tariff. Under such situation, the FTA partner interested in protection adopts very stringent definition of ROOs, in order to restrict imports. Indeed, in many FTAs, countries have established very complicated and restrictive ROOs. A hub-and-spoke FTA system has emerged in many parts of the world.
101 glorious ways to cook chicken