Why do countries seek trade agreements? Despite numerous and vocal critics, virtually every World Trade Organisation (WTO) member is involved in at least one (and often numerous) FTA or preferential trade agreement (PTA). Sometimes it is for no other reason than being left behind, as a competitor has trade preferences in your markets. Sometimes, as in the case of the smaller open economies such as Chile and New Zealand, it is a desire to complement their unilateral domestic reforms, while at other times it is the desire of a large economy to force a smaller country into granting trade concessions.

There are dangers and pitfalls in trade negotiations to be aware of. One of these is policy space, which should be an ongoing concern for many developing countries as negotiated concessions restrict future government policy options. Associated with policy space is the particular concern that some developed countries are insisting upon a clause that entitles them to automatically have any future concession negotiated with a third party to be granted to them as well (analogous to the WTO Most Favoured Nation (MFN) clause). Another danger is trade creation versus trade diversion. Only by a careful analysis of these overall effects can an indication be made as to whether or not an FTA will be unambiguously positive for a country.

The objective of this paper is to outline the process of a trade negotiation and, in particular, a pathway to follow. This paper runs a parallel pathway to a companion paper assessing the China-New Zealand Free Trade Agreement (FTA), and both heavily rely upon the New Zealand Ministry of Foreign Affairs and Trade publications for background data and information. It also references extensively the 2005 paper on regional and bilateral FTAs by Martin Khor, the Director of the Third World Network, and refers to the Chilean examples as, along with New Zealand, this South American country leads the world in ‘genuine FTA relationships’. And the term ‘genuine FTA relationships’ is emphasised as many so-called FTAs are in reality less rigorous preferential trade agreements (PTAs), with a genuine and comprehensive FTA being a PTA ‘on steroids’ (note in particular the term ‘comprehensive’).

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