Rorotoko

In a nutshell

One of the most notable developments in international trade after the end of the Cold War has been the explosion of preferential trade agreements (PTAs). In 1990, there were about two dozen. Today, we are looking at several hundred, with many more under negotiation. PTAs come under various names and guises—free trade agreements, economic partnership agreements, regional integration agreements—but they have in common that they liberalize trade barriers between their members only. They are also the only legal exception to the rule of non-discrimination in the World Trade Organization (WTO), the legal principle that is supposed to put all members on equal footing.

Just as striking as the rapid growth of PTAs is that the majority today are North-South agreements. The North American Free Trade Agreement (NAFTA) was the first of this kind of trade deal that spanned the North-South divide.

Yet “trade agreement” is actually a misnomer. Investing in Protection argues that North-South agreements are much less about exports and much more about foreign investment. In fact, negotiators from the North often go to great lengths to exclude large shares of trade between the partners. They also try to delay the reduction of their own tariffs as much as possible, especially for goods from the developing country partner that threaten jobs in the North. In contrast, barriers against foreign investment and the trade closely related to it are eliminated rapidly.

The actors behind this story are multinational firms. In manufacturing industries, they move production into developing countries where labor costs are lower. In the services sector, they buy up recently privatized assets in order to enter markets. Because they provide jobs in both countries, they have greater influence over politicians than labor, consumers, and even conventional exporters.

Politicians and multinational firms therefore strike a bargain. Given the differences in wage levels, any North-South agreement is politically difficult: It threatens to move jobs offshore, and it might open a backdoor to competitors to enter the home market. For example, during the NAFTA negotiations, many US firms were afraid that European and Japanese competitors would build factories in Mexico and sell into the US market. Most PTAs are therefore written to include various barriers against outsiders, from obscure “rules of origin” to different standards and regulations.

This in turn has an unintended consequence: Those who are excluded lobby for their own agreements to level the playing field. Following NAFTA, the European Union and Japan moved to establish trade agreements with Mexico. North-South PTAs create a competitive dynamic that draws in ever more countries into the trend toward discriminatory trade.

The wide angle

The idea for the book was born from a conversation with Noboru Hatakeyama, a former top official in Japan’s Ministry of International Trade and Industry—the (in)famous MITI—in the fall of 2002. I had just arrived in Japan with a completely different research project in mind, but found that the foreign policy establishment was wholly occupied with the free trade agreements that Japan had just started to negotiate. Hatakeyama was one of the key figures in promoting the new policy.

Since the end of the US occupation, Japan had relied on multilateral trade institutions, avoided any preferential agreements, and only reluctantly negotiated bilaterally with the US, which were worried about the strength of Japanese exports in the 1980s. Now Japan turned its policy completely around, engaging in a flurry of bilateral negotiations. The driving force behind this change was a realization that Japanese firms were strongly discriminated against in their activities abroad. Seen from Japan, NAFTA appeared almost purposefully designed to make it hard for the likes of Nissan and Panasonic to operate in Mexico.

It was an exciting time to be in Tokyo, and I spent the next six months running from meetings with trade officials to workshops with academics to interviews with company and trade association representatives. Some of the work was more like investigative journalism than social science research. In Japan, the private sector prefers to let the government take the lead; getting the unofficial version of a policy is often hard.

Because of this reluctance to discuss views publicly, especially with foreigners, and because the English-speaking, urbane, elite bureaucrats are much more accessible, many at the time thought that Japan’s trade agreements were a government-driven project. But once I scratched the surface of this new strategic policy consensus, I came upon a fierce battle between different interest groups whose strategic priority was their own material gain. In short, despite a different institutional and cultural context, it was a way of policymaking that any observer of US politics would immediately recognize.

This allowed me to extend the study into large, comparative framework. It turns out that North-South PTAs follow a similar pattern, whether the powerful party is Japan, the US, or the EU. The developing country usually swallows whatever is offered in return for the promise of more foreign investment, or the veiled threat that others are standing in line ready to sign their own deal. In the book, I analyze the cases of NAFTA, the EU-Mexico and Japan-Mexico FTAs, the agreements that the US and the EU have negotiated with Chile, and the “Economic Partnership Agreements” that Japan has sought with Thailand and Malaysia.

Approaching the analysis through such qualitative case work has its risks. It seems almost a universal rule of human behavior that whenever we pursue our naked self-interest, we justify it with reference to the greater social good. Politicians and lobbyists have mastered this to the point where they believe their own words—turning them into what Marx called “character masks.” For the researcher, this means that we can never take statements at face value and must avoid asking for motivations, and instead trace decisions and identify critical junctures. In short, we must objectify our subjects, and ask if our theories predict their actions rather than their words. But doing so also gives us a much deeper insight into the policy-making process than looking for statistical correlations.

North-South agreements are much less about exports and much more about foreign investment