This Rapid Evidence Assessment (REA) addresses two questions through a review of the literature on free trade agreements (FTAs) that gives particular attention to impact assessments of substantially or fully implemented agreements.

1. What has been the impact of Free Trade Agreements (FTAs) between developed and developing countries on economic development in developing countries?

2. What does this evidence tell us about how developing countries might best benefit from new FTAs (such as Economic Partnership Agreements (EPAs)), and how can they avoid harm?

Focusing particularly on analyses of fully or substantially completed FTAs, the REA finds that although some aspects of these questions have been assessed extensively, others have been largely ignored and that, even in the areas where coverage is good, findings differ markedly between studies. It is based on a detailed quality assessment (QA) of 45 FTAs involving most Organisation for Economic Cooperation and Development states and 35 developing countries and regions. Most are North-South, but a strong sample of South-South agreements is also included. No systematic difference in the impact of North-South and South-South agreements was found in the assessed literature.

Evidence on FTA impact

The literature provides clear guidance to policy-makers in several areas. It is good at estimating the effect of FTAs on the parties’ trade flows. All but one of the 19 high or moderate quality primary studies that estimated trade growth found that the FTA had positive effects in at least some cases, and none found it to be negative. But the picture is mixed, with the range of estimated effects wide. In some cases the estimated trade effect was substantial, in others it was modest, and some partners were found to have gained nothing.

It also explains key factors that influence the scale of effect – many of which are within government control (although some only in the longer term). They include the following.

• The specific features of the FTA: how deep and broad are its provisions and how much policy change do they herald – and how fast? Unsurprisingly, deeper, broader, rapid change produces a bigger effect. Firms are less likely to incur additional administrative costs if the tariff advantage provided by the FTA is small. And a ‘small’ advantage can result not only from ‘residual protectionism’ (if the FTA fails to cut some tariffs) but also from ‘broad liberalism’ (if tariffs outside the FTA are already low).

• What the wider ‘trade-related’ environment looks like and the small print of the FTA (such as on rules of origin (RoO)). The FTA impact will be greater if the impediments to trade removed by the FTA are large relative to those that remain untouched.

• The most fundamental factor is the capacity of an economy to increase supply of products for which the FTA has boosted demand. This ‘supply-response’ is touched on only briefly in the literature because it is determined by a wide range of factors, many of which fall outside the ambit of an FTA (and, hence, of the impact assessments). They include not only government policies but also the country’s physical and institutional infrastructure, its human resources and all the other elements determining the short-term flexibility of an economy.

Gaps in knowledge

The literature provides little guidance on what happens in practice. None of the high and moderate quality studies estimated the distributional impact or the employment and environmental effects of fully or substantially implemented FTAs. Two studies of FTAs near the start of their implementation period flagged the potential loss of government revenue from reduced tariffs – but no study of a mature FTA estimated the actual effects (or analysed the impact of government’s response).

The minimum lesson is that at an aggregate level FTAs are in most cases neither ‘a golden bullet’ that will automatically destroy impediments to trade nor a potent source of the harm envisaged by critics. But the operative words are ‘at an aggregate level’ – particularly, though not exclusively, as regards the potential for harm.