From Protectionism to Regionalism: Multinational Firms and Trade-Related Investment Measures

Abstract

Trade-related investment measures (TRIMs) have been a key issue in regional and multilateral trade negotiations, but they have received little attention in theoretical work to date. This article analyzes the political economy of TRIMs to illuminate why regional arrangements have been a popular framework for eliminating them. The main argument is that multinational firms often demand safeguards when TRIMs are being liberalized, particularly if they have large sunk costs due to asset specificity. In general, regional arrangements are better equipped than multilateral rules to incorporate the safeguards these firms demand: regionalism requires governments to make binding commitments, and it creates opportunities to discriminate against outsiders. A case study of lobbying by U.S. companies with FDI in Canada from the early twentieth century to the negotiation of the Canada-United States Free Trade Agreement illustrates these points. The article concludes that regional arrangements are likely to remain more active, and more successful, than multilateral discussions in managing the commitment problems inherent in liberalizing TRIMs.