The world has seen a rapid spread of preferential “free” trade agreements between pairs of highly unequal developed and developing country governments since NAFTA was negotiated in the early 1990s. Today they number about a hundred pacts (p. 6), and government leaders advertise them as valuable forms of trade liberalization. This trend has attracted considerable attention from economists, political scientists, and policymakers.
Mark Manger has added a high-quality, original contribution to this literature and one with clear policy relevance. Its central argument is that contrary to much commentary, the main drivers behind the proliferation of North–South preferential trade agreements (only a subset of all PTAs) have been plans by northern multinational corporations (MNCs) for particular investments in the South, and southern governments' desires for more inward foreign direct investment, not a general desire to expand trade. In many cases, MNC managers such as the U.S. auto industry lobby their home government for a special-interest agreement to help them integrate their production vertically and to rig markets against their oligopolistic northern competitors using restrictive rules of origin. Hence, the derogatory title Investing in Protection more than in liberalization. Multilateral agreements do not offer this protectionist advantage. In other cases, northern telecom or banking giants seek to gain a first-mover advantage to dominate a southern economy before a competitor does.
NAFTA's creation (“the original sin”) then provoked European and Japanese auto and electronics firms to lobby their own capitals to launch talks for “defensive” PTAs with Mexico, hoping to claw back what their U.S. rivals had taken from them. “North-South PTAs thus trigger an endogenous dynamic unanticipated by earlier proponents of PTAs” (p. 4).
This book's theory works within the exclusively material, unbounded rationalist tradition, without using formal methods. It starts with a remarkably spare model: The interests of multinational firms lead to government policies and outcomes (p. 4). A theoretical chapter then spells out four specific hypotheses that predict which interest groups, including agriculture and labor, will lobby for or against an offensive or defensive PTA. Here, Manger manages to isolate a few key elements of firms' interests that can be expected to drive them toward or away from this type of policy. One hypothesis predicts how restrictive the rules of origin will be. One price of this highly focused theory is that it does not include any hypotheses that would explain government behavior itself. Strikingly, states in this theory have no interests or ideas of their own; they simply bend however they are pressed. The framework also does not include rival hypotheses for the spread of PTAs to facilitate comparison of rivals' contributions. The book does introduce several rival interpretations from the literature without formulating them as hypotheses, and shows convincingly that these are not sufficient.
The author presents narrative case studies of 7 PTA negotiations. One chapter each is devoted to NAFTA, the 1999 EU-Mexico agreement, and the 2004 Japan-Mexico agreement. Another shows that Chile's smaller market also triggered MNC competition, especially over its services markets, and explains resulting Chile-EU and Chile-U.S. PTAs. One chapter argues that bilateral agreements between Japan and Malaysia (2005) and Japan and Thailand (2007) also support his model. Each chapter presents data on industry interests and a narrative of the politics surrounding the negotiation, emphasizing who lobbied and who did not.
The book's most novel contributions are its emphasis on foreign direct investment (FDI) and services as drivers and the claim of an endogenous political-economic process through which one PTA generates others. This firm's-eye view helps explain why these agreements are so different from one another and so particularistic—they reflect different MNCs pushing for different particular interests; why the deals liberalize trade only selectively—in certain products of interest to these firms; and why southern governments have accepted “free trade” deals that exclude some of their most competitive exports—they want FDI more.
The original evidence supporting the central argument in these cases is impressive. Manger conducted field work on four continents in Brussels, London, Ottawa, Mexico City, Santiago de Chile, and Tokyo. These cases confirm almost all of his theory's predictions about which interest groups will lobby for or against an agreement; anomalies are also identified and discussed. In several cases, lobbying coalitions based on vertical “rent chains” were at work, such as the main firm plus its suppliers and dealers who earn rents from working with the firm.
In a larger sense, this book reads more like PTA cases chosen to illustrate these hypotheses than an evenhanded test that could have been failed. True, selecting cases is particularly challenging when one key argument is about endogenous pact proliferation, and seven is a large number of case studies for one book. But it would have been even more convincing to at least think about the universe of possible cases—the universe of multinational corporate investments, PTA negotiations, agreements, or sequences of pacts—and speculate briefly about which, if any, of the 93 or more omitted cases might have changed the conclusions.
Even good books leave something for others to study. This one does not investigate several influential theoretical alternatives as explanations of this spread. For instance, others have maintained that democracies are more likely than nondemocracies to sign free-trade pacts. Diffusion and emulation theorists have applied their models to trends like these. Negotiation analysts and constructivists are concerned with the international negotiation process at the delegation level, and why governments reach agreements in some negotiations and not in others. Realists investigate national interests, security motives, power differences, and the distribution of gains and losses between states. Other books make greater effort to speak to broader social science theory. But even if this book's theory is more limited than many, any other social scientist who wants to write about North-South preferential trade agreements will have to contend with it.
Its policy implications are also significant. Manger adds a strong voice to the side that has been arguing for more than a decade that PTAs are harmful to the multilateral trade system. They are stumbling blocks, not building blocks toward wider trade opening, but for a new reason. The traditional fear that PTAs reduce welfare by diverting imports from more efficient producers outside the area to less efficient ones inside turns out to have been exaggerated for these cases. Many had already noted that the “spaghetti bowl” of incompatible rules of origin in different pacts increases the transaction costs of doing international business, and that managing PTAs diverts scarce government attention away from the World Trade Organization. It is worse than that, Manger says. These deals tend to spawn more of the same, multiplying the costs. He concludes with a hope, however, that if selective opening is widespread enough to force adjustment on many domestic industries in developing countries, eventually southern governments will be able politically to lower their most-favored-nation tariffs.
