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Competitive liberalization : the proliferation of preferential trade agreements Manger, Mark S.

Abstract

In recent years, preferential trade agreements (PTAs) have proliferated rapidly, creating a spaghetti bowl of bilateral treaties. A growing share are North-South- FTAs between developed countries and emerging markets. Why the sudden proliferation of these agreements, when most-favoured-nation tariffs are at a historically low level? This dissertation argues that PTAs are the product of a competitive dynamic among states—but not a competition over export markets. Rather, firms and countries compete over access to locations for FDI. Growth of the service sector and global integration of production networks motivate multinational firms to invest in emerging market countries. At the same time, manufacturing firms have strong incentives to seek strict rules-of-origin. In service industries, market structures work against late entrants. Preferential liberalization thus discriminate strongly against third parties. The combination of bilateral agreements and increased FDI flows has an unintended effect: excluded firms lobby for defensive agreements with host countries, triggering a rapid proliferation of FTAs. This study develops a model that explains these dynamics and tests it in several case studies. The in-depth case studies cover the North American Free Trade Agreement (NAFTA) and the two defensive agreements Japan and the EU signed with Mexico, followed by a range of survey cases, including the Japanese initiative for an FTA with Thailand and US and EU FTAs with Chile. The findings of the study imply that bilateral agreements come close to sectoral liberalization and threaten to undermine the multilateral trade regime. However, given the competitive dynamic of PTAs, preferential liberalization is going to become even more popular in the future.

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