Anticipating Access: Policy Uncertainty in the Negotiation of NAFTA
Enacting a trade agreement lowers barriers to trade and reduces trade pol- icy uncertainty. Negotiating these agreements, however, may increase uncer- tainty, either because of bargaining difficulties, regulatory complexity, or the risk that the agreement fails legislatively. Given these costs, why do parties fail to push for an early conclusion? One reason is that trade policy uncertainty can produce benefits as well as costs, particularly across firms. Uncertainty may deter investments among marginal exporters but, as a consequence, ben- efit those that survive. Examining the case of NAFTA, we find that the firms most able to benefit from the intra-negotiation uncertainty are multinational producers with substantial supply chain linkages within North America. We investigate the effects of trade policy uncertainty on investments by the Big Three and their German and Japanese counterparts in the Mexican automotive sector during the contentious and uncertain automotive negotiations. Region- ally integrated firms were able to invest in anticipation of the outcome of the ongoing negotiations, increasing trade well before the implementation of the agreement, while marginal firms were forced to adjust. Taken together, our results suggest that the uncertainty produced by negotiations can counteract the otherwise pro-competitive effects of a regulatory agreement.
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