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Tuesday, May 27, 2003
INSEAD, Fontainebleau, France
Hosted by the Research Group on Global Financial Governance, the Guido Carli Association, the G8 Research Group, the EnviReform Project, INSEAD, the Club of Athens-Global Governance Group, le Comité pour un Parlement Mondial, Futuribles and the Académie de la Paix
Regional Multinationals and Regional Trade Policy: The End of Multilateralism
Alan Rugman, Indiana University and University of Oxford
This paper investigates the current interaction between states and firms within the institutional context of international trade and investment agreements. The basic logic of the paper is that, today, multinational enterprises (MNEs) largely operate within their home-triad markets, or, at best, are bi-regional (competing only across two of the triads of the EU, NAFTA and Asia). Few MNEs are "global" and thus few MNEs are really interested in multinational trade and investment agreements. Instead, today, most of the largest 500 MNEs are interested in the deepening of regional agreements in Europe, the Americas and Asia.
The data to support the regional nature of MNE activity is now becoming better understood. At an aggregate level it shows that the majority of trade of the triad is intra-regional (62% in the E.U.; 56.7% in NAFTA and 56% in Asia), Rugman (2000). The trend towards intra-regional trade is increasing over the last 20 years. In addition, foreign direct investment (FDI) is mainly undertaken between the EU and NAFTA, or is intra-regional within each region of the triad. There is relatively little FDI on a multilateral basis. The economic picture is one of increasing regionalization and decreasing "globalization", Rugman (2000), Rugman and Verbeke (2002). This indicates that there is increasing economic interdependence both within each region of the triad, and also between the regions of the triad.
At the micro-firm level the evidence of regionalism is even stronger. Of the largest 500 corporations in the world, 320 of the 380 for which geographic sales data are available have, on average, 80% of their sales in their home region of the triad. For example, the world’s largest company, Wal-Mart, has 94% of its sales in NAFTA. Of the other top 30 companies, General Motors has 81% in NAFTA; Mitsubishi has 87% in Asia; Mitsui has 79% in Asia; TotalFinaElf has 56% in Europe; Allianz has 78% in Europe; VW has 68% in Europe; Deutsche Bank has 63% in Europe; Credit Suisse has 61% in Europe. Of the 380 companies for which data are available, only eight are "global" in the sense of having at least 20% of their sales in each region of the triad. There are mainly MNEs in electronics such as IBM, Sony, Philips, Nokia, Intel, Canon and Flextronics. The others are: Coca-Cola and LVMH. There are also a score of "bi-regional" MNEs with at least 20% of sales in two of these regions of the triad. These include: Toyota; Nissan; DaimlerChrysler; Honda; AstraZeneca; GlaxoSmithKline; Ericsson; Diageo; Michelin, etc. Overall, there are incredible few truly global firms and most MNEs operate mainly in the home region of the triad, Rugman and Verbeke (2003).
From the viewpoint of the state, we observe a greater emphasis by trade experts and trade negotiators to facilitate regional agreements than to complete the Doha Round of the World Trade Organization (WTO). Within a few weeks, in Fall 2002, the following events occurred:
a) The EU agreed to a list of ten accession countries in Central and Eastern Europe, to negotiate to join the EU by 2005. In Brussels, a vast bureaucracy of many thousands labors to deepen the economic, social, cultural, political and financial integration of the EU.
b) In Quito, Ecuador, trade ministers for 34 countries agreed to continue to negotiate the terms and conditions for a Free Trade Agreement of the Americas (FTAA), first accepted by them, in principle, at the Quebec City Summit of April 2001. The FTAA is due to start in January 2005, and the implementing committee is co-chaired by the United States and Brazil. The FTAA builds on the twin principles of tariff reduction and national treatment for foreign direct investment, established in NAFTA, (Rugman 1994).
c) On 4th November 2003, the 10 members of ASEAN economies agreed to a new trade and investment agreement with China. This may well be expanded to include Japan and South Korea.
In Spring 2003 the war in Iraq also illustrated the military power of the U.S. hegemon, operating in a world where most European countries (except for the UK) were not initially supportive of the war and Asian countries (with the primary exceptions of Japan and Australia) were also critical of the U.S. military power. The result of the war will likely be to reinforce regional economic policies, at the expense of multilateral institutions, such as the United Nations and the WTO. The United States already exports 37% of its goods and services to its NAFTA partners and its trade with Canada alone exceeds U.S. exports to all 15 member states of the E.U. In terms of energy, the United States already obtains the majority of its oil and gas from the Americas and this regional self sufficiency is likely to increase as security concerns remain.
The issues to be explored in this paper are the following:
a) Given the evidence on the economic interdependence within each region of the triad, is this being facilitated by regional or multilateral trade agreements? The EU is much more of an integrated common market than the looser free trade agreements of NAFTA, the FTAA and the Asian Agreement of November 2002. Do international agreements really matter when 56% of all Asian trade was already intra-regional in 2001, before a formal trade agreement was announced?
b) With the trend towards increasing regionalism, is the WTO doomed? The United States is now negotiating many bi-lateral trade agreements, and the USTR is not really focused on the WTO. The EU and United States still disagree over agricultural subsidies; China still has difficulty in respecting intellectual property; the dispute settlement system at the WTO is being challenged not just by governments, but by NGOs, especially environmentalists. The agenda of the civil society has targeted the WTO but largely neglected regional trade agreements, except for Mexico’s role in NAFTA. Can the small staff of 300 people at the WTO deliver on multilateralism when they are vastly outnumbered by the E.U. bureaucracy and a growing NAFTA-based set of environmental and labor/human rights institutions?
c) How do MNEs and states actually interact today on a regional and multilateral basis? Are MNEs beginning to develop "regional" strategies instead of "global" ones? Do states understand this new emphasis?
Rugman, Alan M. (1994). Foreign Investment and NAFTA. Columbia, SC: University of South Carolina Press.
Rugman, Alan M. (2002). The End of Globalization. London: Random House.
Rugman, Alan M. and Alain Verbeke (2002). "Regional Multinationals and Triad Strategy", Mimeo.
———. "Regional and Global Strategies of Multilateral Enterprises", JIBS, forthcoming.
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