Mark S. Manger

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.