Japan's FTA Strategy in Context: Multinational Firm Strategy and the Global Move to Free Trade Agreements

 During the past ten years, developed countries have signed numerous free trade agreements (FTAs) with emerging market countries. As the last of the major economic powers, Japan has abandoned its purely multilateral stance,  pursuing bilateral trade agreements under the label of a “multilayered trade policy”.
What caused this major change in Japanese foreign trade policy? This paper argues for the centrality of two factors: first, the increasing importance of foreign direct investment (FDI) for international economic relations, and second, the discriminatory effects of other regional agreements. FTAs become a non-market strategy for multinational firms seeking to reduce the cost of intra-firm transactions, triggering a competitive dynamic between the major home and host countries of FDI.
In the case of Japan, the discriminatory effect of NAFTA on Japanese production in Mexico led trade policymakers to pursue an FTA as a defensive move with Mexico and as a preemptive strategy in Southeast Asia. Notably,  similar reasons were behind the EU’s Association agreement with Mexico,  aimed at achieving “NAFTA parity”, and the recent EU-ASEAN initiative.