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FTAs in the 21st Century & the “Domino Effect”

Shutterstock / nicolemoraira Shutterstock / nicolemoraira

 

In our last Blogpost we showed you our new data visualization tool FTA Vis.

FTA VIS visualizes 789 trade agreements from 205 countries over the last 66 years. And each of these visualizations has its own story to tell. In today’s blogpost we want to tell you another one of those thousands of stories.

 

The number of global FTAs skyrocketed in the early 90’s

Looking at the worldwide timeline of FTAs, it is very clear that the fall and breakup of the Soviet Union opened a new era of Free Trade Agreements. Not only did the number of FTAs flare up, but their depth, too, increased dramatically. Playing the FTA VIS tool from the 1990s onward gives a good illustration of this merely thanks to the sudden change in colors.

 

But what triggered this? What explains this sudden increase in FTAs all around the globe? Theories to explain this amazing increase are numerous: opening up of former communist ruled nations and slowdown of the multilateral framework is one of them, a “domino effect” of FTAs is another. FTA VIS helps us visualize this “domino effect”.

 

Early in the 1990s, a series of deep FTAs have created substantial trade diversions for traditional trade partners of the signing parties. Fearing market losses, exporters within these third party countries started lobbying their government in the hope that the latter would negotiate free trade agreements with the signing countries. Focusing on Japan and Chile within the FTA VIS tool provides interesting support for this scenario. Indeed, throughout the 1990s, the Japanese government was strongly opposed to signing any free trade agreements. However, after Chile signed an FTA with Canada in 1996, and Central America in 1999, pressure increased on Japan to conclude an FTA with the country. The signing of a 2003 FTA between Chile and South Korea proved even more problematic for Japanese automobile exports and, in 2007, Japan finally signed a deep FTA with Chile.

 

Chile 2003

Chile Japan 2007

 

NAFTA illustrates the Domino Effect FTA’s can have on other Countries

Similarly, after Mexico signed the North American Free Trade Agreement in 1992, Japanese exporters found themselves victims of trade diversion. Because of these pressures, in 2004, Japan signed an FTA with Mexico. As a general rule, playing the FTA VIS for Mexico, we see that after it signed a first deep agreement with the United States, its traditional partners rushed to sign deep agreements, probably for fear of trade diversion effects.

 

Nafta 1992

Mexico 1994

Mexico Japan 2004

 

Aware of this “domino effect”, it seems that the once-FTA averse United States has embraced them as a global liberalization tool. Starting from 2001, the country greatly increased its number of FTAs as a new trade liberalization strategy. This “competitive liberalization” approach has so far bore fruits.

 

This use of FTAs is unprecedented. During the Cold War period, FTAs were indeed more often used to protect markets (or simply forge political alliances) rather than open them or to function as a development aid tool to strengthen third world markets. As put by Robert Z Lawrence, “The forces driving the current developments differ radically from those driving previous waves of regionalism in this century. Unlike those in the 1950s and 60s, the initiatives involving developing countries are part of a strategy to liberalize and open their economies to implement exports – and foreign-investment-led policies rather than to promote import substitution.”

 

Visit FTA VIS here and start exploring

 

Interested in more FTA VIS data stories? Read our last blogpost here if you haven’t already or check back on Sunday for one more interesting story!

You want to learn how to use FTA VIS? Visit our YouTube Channel for a tutorial video as well as additional data stories.

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