Competition and bilateralism in trade policy: the case of Japan's free trade agreements

Why do major economic powers seek more and more free trade agreements (FTAs) with smaller partners? Recently, Japan has joined the bandwagon by signing its first bilateral FTA. The decision, highly contested domestically, represents a sea change in Japanese trade policy and a challenging case for theories of regionalism. This paper lays out a theoretical appraisal for why more and more industrialized countries join FTAs with emerging markets and illustrates the argument with an analysis of the Japanese case. The paper argues that foreign direct investment (FDI) changes the incentives for states in favour of preferential trade agreements. Increased FDI and shifts in multina- tional firm strategies increase flows of intermediate goods. As a result, firms lobby their home governments to bolster their competitive position by sign- ing preferential agreements. Yet, FTAs also discriminate against firms from third parties, motivating them to lobby for defensive agreements. The qual- itative case studies show how NAFTA discriminates against Japanese FDI in Mexico. As a result, firms began to lobby the Japanese trade bureaucracy, changing the perception of key policymakers who developed a strategy of pursuing preferential trade agreements in the Asia Pacific region, as shown in a case study of the initiative for an FTA with Thailand.