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Why Do Countries Adopt Free Trade? Democracy- Versus Elite-Based Explanations Malcolm Fairbrother School of Geographical Sciences University of Bristol University Road Bristol BS8 1SS United Kingdom [email protected] Tel: +44 117 9288303 July 2013 Abstract Since the 1990s, why have so many countries made policy changes liberalizing international trade and direct investment? A number of studies have found a statistical association between economic openness and political democracy, and present free trade as a consequence of states’ increasing accountability to majority interests and preferences. Other research challenges this view, however, emphasizing instead the preferences and power of elites. This article evaluates these two perspectives against each other by assessing evidence for their presumed causal mechanisms. The weight of the evidence, from the secondary literature and case studies of Mexico and Canada, supports the elite-centered perspective more than the alternative, calling into question the theory that democracy fosters free trade. Keywords: free trade; democracy; elites; foreign direct investment; NAFTA 2 Introduction Policy changes have been the source of three-quarters of post-World War II growth in world trade as a share of GDP—much more than technological innovation and diffusion (Baier and Bergstrand 2001). Such policy changes have often taken the form of international “free trade” agreements liberalizing foreign direct investment as much as trade, and substantially expanding cross-border flows of goods, services, and capital (Baier and Bergstrand 2007; Büthe and Milner 2008; Goldstein, Rivers, and Tomz 2007). This article addresses the question of why so many countries have adopted free trade— liberalized trade and direct investment—since the 1980s.1 The literature on this question is sharply divided between explanations pointing to the rise and impact of political democracy and others based on the actions of economic, political, and/or technical elites. To their mutual detriment, neither approach gives serious consideration to the other; if anything, they each give the impression that the other does not exist. This article seeks to overcome this balkanization. The major evidence for the democracy-centered explanation of free trade is statistical: cross-sectional and longitudinal associations between democracy and economic openness. The theoretical rationale for this perspective is that under democracy the interests and preferences of the majority rule, and liberal trade and investment policies are in the interest of the majority. In authoritarian polities, by contrast, states are often tied to local businesspeople who, this view holds, stand to lose out from free trade and so demand autarky instead. The alternative to this approach is one emphasizing elites as the key supporters of free trade, where elites are people in possession of relatively large amounts of some valued resource, such as money, legal authority over public policy, or recognized expertise. Studies emphasizing 3 the roles of economic, political, and/or technical elites suggest a more antithetical relationship between free trade and democracy, wherein majority interests and/or preferences are not overpowering, but irrelevant or even overridden. While sharing a common emphasis on the preferences and behaviors of elites, studies comprising this second literature nonetheless diverge, in that they concentrate on four different kinds of elites with diverse relationships to the policymaking process: businesspeople, state technocrats, international financial institutions, and economists. Implicitly, the literature suggests that these actors work together in two specific combinations, depending on countries’ levels of development. In developed countries, business mobilization has been central to the liberalization of trade and direct investment; in developing countries, on the other hand, states have pursued such policy changes more independently of domestic business. In the latter context, free trade has been a project of state technocrats both empowered and constrained by international financial institutions and markets. The elite-focused literature thus explains free trade as the product of two distinct political economic pathways. This article tests both the democracy- and the elite-based explanations of free trade. To do so, I first compare their presumed causal mechanisms with relevant results from other existing studies, particularly research on public opinion. Second, the article employs Lieberman’s (2005) mixed-method strategy for comparative research, which combines cross-national statistical modeling with studies of specific country cases conforming to fitted statistical models. A valid theory should be capable of predictions consistent both with regressions across countries, and causal processes within them. This paper treats the cross-national regressions presented in other published studies as the first stage of a nested analysis, and both generic and case-based evidence as the second. This article therefore responds to recent reviews of the democracy-centered literature, which note that the mechanisms linking presumed cause and effect remain uncertain, 4 and that there is a need for more work on precisely how democracy, arguably, may foster liberalization (Milner and Mukherjee 2009: 178; also Guisinger 2009: 554). In a literature reliant on observational rather than experimental data, solid evidence for causal mechanisms would seem important if not essential for demonstrating a causal relationship. The two country cases considered here are those of Mexico and Canada. These two countries followed independent but parallel tracks to economic opening from the early 1980s to the mid-1990s, culminating in their common enactment of the North American Free Trade Agreement (NAFTA) in 1994. They both previously restrained their integration with the neighboring, much larger United States economy; they both passed nationalist and restrictive foreign investment laws in 1973; and in 1980 they jointly rejected U.S.-based proposals for continental economic integration (Senate Standing Committee on Foreign Affairs 1980). In 1988, both countries held elections that narrowly returned governments who subsequently dismantled their countries’ long traditions of restraining rather than embracing continental economic integration. Considering their trajectories from the early 1980s to the mid-1990s thus makes each country both a negative and a positive case (Haydu 1998), and allows for an assessment of cases following both pathways implied by the elite-based literature. To preview the paper’s main arguments, both generic and case-specific causal process observations belie key implications of the theory that democracy fosters free trade. In most countries, survey research finds that public support for trade and investment liberalization is lukewarm at best, and not strong enough to have much impact on policymakers. In the specific cases of Mexico and Canada, public opinion was largely irrelevant; free trade derived instead from the changing preferences of political and economic elites, respectively. While this conclusion will be unsurprising to some, for scholars explaining liberalization by reference to 5 democracy and majority interests, the results of the case studies should represent an important challenge. Given the lack of support for the theory’s posited mechanisms, the case for a causal relationship between democracy and free trade is not yet convincing; the relationship may be spurious. The article concludes with suggestions for future research, particularly on the statistical association between democracy and free trade. Free Trade and its Drivers Given the prevalence of liberal trade and investment policies today, it is easy to overlook how different the world was prior to the policy shifts of the 1980s and 90s. According to one influential dataset, which codes countries’ trade regimes as either “open” or “closed” every year since 1950, only 37 out of 140 were open in 1980, and of these only 15 were developing countries.2 Ten years later, 61 countries were open, and then 103 by 2000.3 With respect to direct investment and the multinationalization of production, the stock of worldwide FDI as a share of GDP increased from 5.92 per cent in 1980 to 31.57 per cent in 2010.4 Until the 1990s, the United States and Western European nations had generally open economies, especially the smaller European nations (Katzenstein 1985). The other western offshoots (Australia, Canada, and New Zealand), and Japan, were a little less liberal though still broadly open to the world economy. In the rest of the world, barring a few outliers like the East Asian Tigers, only starting in the 1990s did trade and direct investment begin to grow steadily. Many developing countries, including large ones like Argentina or Brazil, worked to delink their economies from international markets for substantial periods of time. As late as 1985, one influential scholar, in a book subtitled The Third World Against Global Liberalism, named India and China as “developing countries that are substantially disengaged from the world economy, 6 and are likely to remain so” (Krasner 1985: 296). In the 1970s, there were international conflicts about international economic integration, and heated debates about whether poorer countries stood to gain much from it (Frieden 2006). From World War II until the 1980s, free trade was thus limited to only a minority of (mostly wealthy) countries, while the speed of change since the 1980s has been dramatic. Explanation I: Democracy and Factors of Production5 Coincident with the rise of economic liberalism in the late twentieth century, many countries also transitioned to more politically liberal regimes in the 1980s and 1990s (see e.g., Schwartzman 1998; Wejnert 2005). And statistical analyses have found strong evidence that democracy is positively associated with international economic liberalism.6 Democratization tends to be followed by increases in trade flows, tariff reductions, and the liberalization of nontariff barriers to trade (Dutt and Mitra 2002; Eichengreen and Leblang 2008; Mansfield, Milner, and Rosendorff 2002; see Milner and Mukherjee 2009 for a review). Similar results hold for direct investment (Pandya forthcoming). If democracy is taken somewhat more abstractly to be relative equality of political power in society, there is other evidence for the proposition that democracy and economic openness are associated. For example, post-Communist countries with more fragmented state power have tended to liberalize trade more than similar states where power has been more centralized—and this holds even for non-democratic countries (Frye and Mansfield 2003). In short, the statistical evidence for an association appears strong, though questions remain about its robustness to alternative measures of openness (Kono 2006) and the possibility that democracy is partly a consequence, not just a cause, of free trade (Rudra 2005b). 7 Why might political democracy cause trade and investment liberalization? Advocates of interpreting the association as causal argue both that democratization grants political power to a wider share of the population—making their policy preferences more influential—and that most people will have favorable views of freer trade and other kinds of economic liberalism because liberalism produces economic benefits for the majority (Milner and Kubota 2005). This view of trade rests on neoclassical economic theory, which holds that countries can reap the gains of specialization and comparative advantage irrespective of the types of goods and services they produce (e.g., Krugman 1993). The end results should be greater efficiency and the consumption of more and/or higher quality goods and services; as Destler (1995: 283) explains, “the whole purpose of trade is … to buy from abroad what is less expensive there.” The theoretical rationale for linking free trade to democracy derives largely from the expected benefits of openness versus autarky for different constituencies in a country. The neoclassical Heckscher-Ohlin-Samuelson model of trade (referred to hereafter as “HOS”) predicts that a country’s relatively abundant factors of production stand to gain from international economic integration, and scarce factors do not (see e.g., Goldberg and Pavcnik 2007).7 A scarce factor, by virtue of its being scarce, commands a high price in the status quo situation of economic closure, whereas international integration makes it less scarce and thus undermines its power in the marketplace. In developing countries contemplating integration with wealthier ones, low-skilled labor is the relatively abundant factor, whereas in wealthier nations capital and highly skilled labor are the abundant factors. Given this view of different people’s interests, and the rational choice assumption that interests drive preferences, HOS predicts that capital owners and high-skill workers in poorer countries will prefer economic closure, while lower-skilled workers will support it. There is therefore theoretical reason to expect more 8 liberalism in developing countries where public policies are more accountable to majority opinion; autarky is likelier under conditions of non-democracy, where political rulers cater to the domestic elite of capital owners and highly skilled professionals (Milner and Mukherjee 2009). Governments’ responsiveness to the will of the median voter, and the threat of electoral punishment, therefore drives the liberalization of trade and direct investment; democracy fosters free trade by allowing the preferences of the majority to rule (Busch and Mansfield 2010; Milner and Kubota 2005; Pandya forthcoming). Kono (2008) thus finds that democracy, in interaction with public support, is associated with freer trade—though he also finds that democracy by itself is not, where public support is absent. The democracy-centered literature tends to focus on developing countries, because of the opportunities to exploit change over time in the level of a given country’s democracy; few wealthy countries have recently transitioned to democracy. But the argument does have implications for wealthier (and thus more capital-abundant and labor-scarce) nations. In such contexts, HOS predicts the benefits of opening to flow more to capital owners than to workers (Watson 1993). Yet because the median voter remains a worker, public opinion on trade should be mixed, at best (a prediction which survey data support, as discussed below). If democracy makes policymakers accountable to the preferences of the majority, and the majority of voters in richer countries have ambiguous interests with respect to trade, then there is little reason to expect liberalization in such nations to derive from the democratic accountability of politicians to the electorate. Consistent with this implication, one recent study finds that while democracies and wealthier countries tend to be more open than non-democracies and poorer countries, the interaction between these conditions is associated with greater trade barriers (Tavares 2008). 9 Explanation II: Elites and their Power In contrast to studies focused on democracy and the preferences of the majority, other research emphasizes the agendas and actions of elites. The emphasis on the behaviors and/or interests of the few, rather than the preferences and interests of the many, sets this second literature at odds with the first; the implication is that, if anything, political democracy is antithetical to free trade. The two literatures also differ in that the first expects business to favor autarky (at least in developing countries), whereas the second—depending on the specific variant—views business as a key advocate of free trade. The elite-centered arguments emphasize at least four distinct categories of actors who they claim perform key roles in fostering free trade: international creditors, domestic business, economists, and technocrats. These arguments all suggest that free trade follows from some category of elites favoring international economic opening, acting in pursuit of that policy goal, and possessing sufficient power such that they can instigate a significant shift in public policy, perhaps even in the face of opposition. This section discusses each category of elites in turn. First, one major strand of the political economy literature stresses the power of wellresourced international financial institutions and private creditors, and emphasizes their preference for market-conforming policies (McMichael 2005; Park, Jang, and Lee 2007; Woods 2006). When a state becomes dependent on the IFIs (the World Bank and International Monetary Fund), this dependence allows the latter to dictate policies to the former—such policies typically being liberal and conducive to economic opening and integration. Dependence arises from debt or balance of payments crises, where a state cannot repay its foreign creditors, and so desperately requires short-term financial assistance. In another, somewhat softer variant of this argument, 10 dependence on the IFIs shifts the balance of power in domestic politics, and gives an advantage to actors sympathetic to the same policies as the staff of the IFIs (e.g., Schneider 1998; Teichman 2004). Political actors with the training and connections that allow them to negotiate with a state’s foreign creditors gain an advantage in competing for policymaking control, and are thus eventually empowered to implement market-oriented policy revolutions as an “inside job” (Babb 2001). A final variant suggests that the influence of the IFIs can be intellectual: financial dependence makes it harder for states to ignore the abundance of IFI-generated reports and studies advocating economic liberalism (Broad 2006; Edwards 1997). A second category of explanations looks not to external constituencies, but to a key domestic one: the private sector. Many studies present neoliberal policy changes as the product of proactive lobbying and campaigning by business, especially big business and/or multinational firms specifically (Carroll 2004; Robinson 2004; Rupert 2000; Sklair 2002; Van Apeldoorn 2002). This perspective holds that business wins from freer markets, often at the expense of other interest groups, and presumes that business unity in support of liberal trade and investment policies is high (Harvey 2005).8 Work in this vein often adopts a very class-oriented view of policymaking generally, contrary to work rejecting that business is a unified collective actor (e.g., Hart 2004). Neoliberal agreements and policies benefit business by helping to suppress wage and benefit demands by labor, and/or by entrenching pro-business governance measures in areas like investor and/or intellectual property rights (Gill 1995). Some statistical research has also emphasized business collective action, showing for instance that in the U.S. congressional votes on NAFTA (in 1993) and the GATT (1994) capital and labor groups were bitterly opposed, with business in favor (Beaulieu and Magee 2004). 11 The third approach shifts to another domestic but extra-state constituency: economists. Some literature suggests that recognized technical authorities in relevant policy areas can use the force of their expertise to convince political elites and/or the general public to become favorable to neoliberal policies (Rupert 2000; Sheppard 2005). Economists in universities and think tanks may have no formal policymaking authority, nor exceptional financial resources at their disposal, but they have intellectual authority with respect to economic policymaking, and thus arguably substantial influence over it (Bockman and Eyal 2002; Montecinos and Markoff 2001). This authority increases the impact of their written reports, oral testimony, and statements in the media, and gives them some influence over the views of non-economists in policy-relevant roles—business, law, public administration, and the like. Survey-based research into economists’ policy preferences confirms that they are strongly unified in support of liberal trade policies (Blendon et al. 1997; Frey et al. 1984). The neoclassical framework has long subscribed to the idea of comparative advantage, and rejected mercantilism as internally contradictory (Krugman 1993). Among industrial democracies since the Great Depression, the strength of economists’ support for free trade has been consistently strong, though support among developing country economists has been much more variable, as the discipline of economics has changed substantially over the course of several decades in many developing countries (Coats 1997; Babb 2001; Montecinos and Markoff 2001). As developing country economists have become more similar to their developed country counterparts (i.e., more neoclassical), their policy preferences have converged. One recent study, albeit of another policy domain, therefore finds that the higher the number of American-trained economists in a country, the higher the likelihood of privatization, consistent with the thesis that the preferences of economists carry substantial weight (Kogut and Macpherson 2008). 12 The fourth and final body of literature looks again at economists, but this time within rather than outside the state. “Technocrats” are the final group of actors sometimes said to be key agents of neoliberalism (for discussions see Centeno 1993; Domínguez 1997; Markoff and Montecinos 1993). Technocrats are state actors with formal authority over policymaking, which allows their preferences to exercise significant direct influence over key outcomes. What distinguishes technocrats from other politicians is their prior academic training and possession of recognized credentials in economics. Such training makes them intellectually committed to liberal trade an investment policies, to a much greater degree than other politicians would be, given specified levels of support versus opposition by the general public and relevant interest groups. Non-technocratic politicians may therefore bend with the political winds on trade, with interest group pressures exogenously determining their policy priorities. In contrast, like economists outside the state, technocrats’ own biographies condition their policy preferences. Unlike economists in universities and think tanks, however, technocrats have direct, formal authority over policy. As evidence for the influence of technocrats, Chwieroth (2007) finds that having economists in top government posts increases the probability of a country liberalizing its capital account. Among these various elite-focused arguments, few if any have confronted the reverse thesis that free trade is a consequence of democratization. This paper is the first to use case studies of specific countries to assess both explanations simultaneously. Doing so, however, requires recognizing how the various elite-centered arguments reviewed above do not apply to all countries. Rather, existing studies strongly suggest that in developed countries, states have liberalized trade and investment pursuant to private sector mobilization (e.g., Blyth 2002; Harvey 2005; Levitt 2006; McBride 2001; Rupert 2000; Saad-Filho and Johnston 2005; Sklair 1995, 13 2001). In developing countries, by contrast, states have acted more autonomously from domestic business; they have tended to open their economies under greater influence from abroad, and under the guidance of technocrats whose policy preferences largely dovetail with those foreign influences (Babb 2001; Geddes 1995; Haggard and Kaufman 1992). The lower enthusiasm of business in developing countries is understandable in light of the Heckscher-Ohlin-Samuelson model, discussed earlier, which implies that developing country capitalists are likely to suffer more from international competition. It also follows from the fact that, until the 1980s, many developing states used import-substitution industrialization strategies specifically to foster industries not otherwise viable without state assistance and protection. Evans (1979: 273) and Behrman (1974: 3) therefore argue that prior to the dramatic rise of FDI in recent decades, businesspeople in developing countries often sought state protection in their home markets from foreign-based multinational enterprises. Causal Process Evidence This section assesses the democracy- and elite-centered theories, by examining the evidence for the observable implications of their implied causal mechanisms. Process-tracing, or narrative appraisal, can contribute to theory testing by checking for a previously unspecified chain of events and/or conditions plausibly linking an independent variable or antecedent condition to a dependent variable or outcome of interest (George and Bennett 2005; Mahoney 1999). The absence of such a chain suggests that a statistical association between two variables may well be spurious. 14 The section begins by presenting broad-based evidence about causal processes in many countries, drawing in particular on results from recent survey data analyses, and then proceeds to discuss the details of causal processes of specific cases. First, the democracy-based explanation of free trade posits that public opinion supports free trade in most countries. Is this view justified? The third wave of the World Values Survey (conducted in the mid-1990s) asked nationally representative samples of respondents in a crosssection of 52 countries: “Do you think it is better if: (A) goods made in other countries can be imported and sold here if people want to buy them, or (B) there should be stricter limits on selling foreign goods here, to protect the jobs of people in this country?” In only eight countries did more respondents answer A than B. Economists might point out that this is a misleading question to ask, insofar as trade actually has little impact on employment (Krugman 1993). That, however, is beside the point under consideration here: if people believe that trade depresses employment, and they support trade restrictions more than trade opening as a consequence, the fact remains that free trade is not a policy rooted in the preferences of the majority. Other survey research finds substantially more support for trade and investment liberalization. Surveys in many countries over multiple waves in the 2000s by the Pew Global Attitudes Project (2009), for example, have found that majorities everywhere think “growing trade and business ties” with other countries are a good or very good thing for their countries. The seemingly contradictory results of these surveys are reconcilable in light of the major effects of question wording. Using survey experiments with samples of American and Argentineans, for example, Hiscox (2006) and Ardanaz, Murillo, and Pinto (2013) respectively find very different responses depending on whether a question about trade includes a preamble about possible effects on jobs.9 While calling into question claims of widespread public opposition to free trade, 15 these results also suggest more importantly that most people hold only weak opinions about international economic policy. Recent work shows that trade as an issue has very low salience for the public, such that voters are scarcely aware of how their elected representatives voted on recent trade legislation, and do not use the ballot box to hold politicians accountable for those votes (Guisinger 2009; Medrano and Braun 2012). Second, arguments about the consequences of political democracy for policy outcomes rest heavily on the HOS trade model, described above. The theory predicts that elites in poorer countries will favor autarky, while the majority will be more pro-trade, while this cleavage should be reversed in richer countries. But do the available survey data actually support these predicted preferences? In the case of the capital-abundant United States, there is indeed a strong positive correlation between various measures of skill (or human capital) and support for free trade, as HOS would predict (Hainmueller and Hiscox 2006; Scheve and Slaughter 2001). And cross-nationally, the more capital-abundant the country, the greater the impact of a worker’s skill on his/her support for free trade, another finding consistent with HOS (Mayda and Rodrik 2005). There is not, however, the expected negative correlation between skill and pro-trade sentiment in poorer countries: skill correlates with support for freer trade even in countries where HOS predicts it should not (Margalit 2012; Medrano and Braun 2012). And analyses of individuallevel survey data belie a Heckscher-Ohlin-Samuelson-based model of people’s policy preferences in other ways too. Some studies find that, contrary to HOS, policy preferences and political cleavages follow the logic of a sectoral model known as Ricardo-Viner, wherein capital and labor are allied within industries and divided across them (Hiscox 2001). Cross-sectionally, preferences are tied to consumption, not just positions in the labor market (Baker 2005).10 16 In sum, there is little evidence that people’s policy preferences are clear and strong, that they reflect the trade model underlying the arguments about the influence on democracy, or that voters take trade and investment policy into account when voting. Case-Specific Evidence about Causal Processes I now turn to causal process observations specific to particular cases of economic closure and opening. In order to select appropriate cases, I follow the recommendations of Lieberman’s (2005) nested analysis approach. According to that approach, in instances where the results of an initial large-N analysis appear broadly satisfactory, cases selected for subsequent qualitative investigation should fall “on the [regression] line.” The rationale is that such cases should possess causal processes that are more representative than exceptional. I chose the case studies that follow because they conform to the key pattern in the large-N democracy-centered literature and in the small-N elite-based literature. I consider the experiences of Mexico and Canada, a developing country that transitioned to democracy at the end of the twentieth century, and a stably wealthy democracy. Each country can be treated as at least two cases—one before and one after a significant episode of economic opening—allowing for contrasts between positive and negative cases of free trade, and avoiding problems of selection bias.11 Developing country cases that fall “on the line” for the democracybased literature are those where democratization preceded the liberalization of trade and investment policies. The experiences of wealthier, more developed countries such as Canada are not typically the focus of the democracy-based literature, much of which considers only developing countries. But the theory that democracy fosters economic openness has implications 17 for wealthy democracies: their openness should be due, in substantial part, to their politicians’ accountability to publics that support free trade. In contrast, the elite-centered view charges that the durability, if not expansion, of economic openness in any country is due to advocacy or pressure from the powerful few, not the majority. According to the elite-based argument reviewed above about the power of international financial institutions and markets, free trade is partly due to external influences. Other studies go further, and suggest that, at least in some instances, free trade is a direct imposition of states and/or private elites in dominant nations—in recent times, the United States above all. Explanations of the rise of the post-World War II multilateral trading system point to the willingness and ability of the U.S. to “both twist arms and offer system-sustaining concessions” (Krugman 1991: 28; Mastanduno 2009). Some nationalist accounts view the willingness of Mexico and Canada to negotiate North American free trade as the continuation or intensification of longstanding U.S. domination (e.g., Calderón and Arroyo 1993; Barlow and Campbell 1993; Hellman 1983; Levitt 1970). As discussed below, the U.S. expressed its interest in an expansive regional economic integration agreement decades before Mexico or Canada. Perhaps American pressure overwhelmed domestic politics? If indeed North American free trade was a U.S. imposition, however, then free trade in Mexico and Canada cannot have been due to either democracy or to the actions of domestic elites; such arguments thus challenge both general approaches. Methodologically, moreover, the cases could not be considered independent. The accounts that follow, however, belie suggestions that North American free trade was a simple imposition of either the American state or American economic elites. Politicians in both Mexico and Canada came to believe in free trade for reasons discussed below, and both countries held out successfully on many contentious issues in the negotiations (e.g., energy, agriculture, 18 cultural industries—see e.g., Cameron and Tomlin 2000). They also made the U.S. wait many years before agreeing to negotiate in the first place. In the Mexican case, the state sought assistance from U.S.-dominated international institutions in the 1980s (most notably the IMF), which gave the U.S. leverage over Mexican policymaking for a time. But there is otherwise no evidence of direct imposition of free trade on either Mexico or Canada; indeed, short of massive bribery or the threat of war, it is not clear precisely what form “imposition” could take. American businesspeople contributed to North American free trade by lobbying for specific content in the agreements and in promoting NAFTA to the American public, not by pressuring counterparts or politicians abroad. These accounts describe complex historical processes in only summary form. They do not provide comprehensive histories, but employ existing historical materials in ways that allow for assessments of, and thus an adjudication between, the democracy- and elite-based explanations of free trade. They aim to capture each case’s key characteristics, and aside from existing historical accounts they rest on much original data collected by the author in the course of a broader project on North American free trade generally. This entailed 114 interviews with informants in Mexico, Canada, and the U.S. (mostly negotiators, other public officials, politicians, political staff, and private sector representatives); analyses of a wide range of archival evidence (governmental and private sector publications, transcripts of legislative debates, news coverage, and public opinion polls); and a synthesis of many previous academic studies and journalistic accounts of North American free trade. Interviewees agreed to speak on condition that they not be quoted by name, but identified solely by their posts at the time. 19 Mexico From the mid-twentieth century through the early 1980s, Mexico employed a strongly nationalist-statist though still broadly market-based development model, and economic openness was low. Mexico declined to join the multilateral trading system (the GATT), and relied on a complex system of tariffs, quotas, regulations, and import licenses, to restrain its international economic integration via trade and investment (Lustig 1998). In contrast, starting in the later 1980s and through the 1990s and 2000s, Mexico firmly embraced international trade and investment, and saw dramatic increases in its international economic integration. In 1986 it joined the GATT and in 1987 the state unilaterally accelerated its international economic policy liberalization program, in an effort to deal with a surge of inflation. According to the Wacziarg and Welch dataset, Mexico was open starting in 1987. But Mexico’s most important international economic policy shift of the late twentieth century was yet to come: the initiation of talks with the U.S. in 1990 about a free trade agreement (FTA). On January 1st, 1994, as the culmination of trilateral negotiations among Mexico, the U.S., and Canada, the North American Free Trade Agreement (NAFTA) entered into force. Over the course of the 1990s, Mexico built on NAFTA in negotiating a series of bilateral and regional trade agreements with other countries in both the developing and developed worlds (Ortiz Mena 2004). Mexico experienced partial political liberalization in the 1980s and early 1990s. In the minds of most observers, and according to the binary definition of Przeworski et al. (2000), Mexico became a democracy in 2000. In that year, the ruling Partido Revolucionario Institucional (Institutional Revolutionary Party, or PRI) lost the presidency for the first time in 20 decades. But, according to Marshall, Jaggers, and Gurr’s (2010) Polity IV dataset, which treats democracy as gradational, there was a gradual increase in the country’s level of democracy starting in the 1970s. Mexican authoritarianism took the form of a dominant party system, where elections were held and opposition parties were allowed to campaign, but the PRI used state funds to finance patronage and disproportionate campaign spending that consistently ensured its electoral success (Dresser 1991). The system gradually broke down, as opposition parties became increasingly popular and influential; the PRI’s seat share in the lower house of the congress steadily declined from 1961 to 2000 (Greene 2007), and opposition parties won a growing share of sub-national elections. After 1982, conditions of economic crisis and scarcity further undermined the PRI’s financial privilege. At the same time, secular socio-demographic and economic changes in Mexico fostered the emergence of an increasingly autonomous and assertive mass media, important elements of which were strong critics of the ruling regime (Lawson 2002). In 1988, the threat of losing the presidential election, for the first time in decades, forced the PRI to resort to widely decried fraud; whether the PRI candidate, Carlos Salinas de Gortari, really won a majority of the votes cast in that election will never be known. In short, the Mexican state’s democratic accountability was growing just as it deepened Mexico’s economic opening and integration into international markets. Mexico therefore fits the pattern found in the democracy-centered literature. Its trajectory also, however, fits one of the two pathways—the technocratic one— outlined by the elite-centered literature. Over the course of the 1980s, U.S.-trained economists with distinctly market-oriented economic ideas took over the upper echelons of the Mexican state. This new generation of policymakers gradually displaced their older, more statistnationalist competitors, to the point where much of the federal cabinet consistent of economists 21 with PhDs from elite U.S. universities (see e.g., Babb 2001; Centeno 1997; Thacker 2000). Most accounts attribute the rise of these technocrats to some extent to the external constraints on the Mexican state in light of the debt crisis of the early 1980s, and the economic hard times for several years afterwards. In these circumstances, Mexico grew dependent on the World Bank, IMF, and private external creditors—constituencies with which technocrats were well placed to negotiate, and which conversely supported their agendas. According to most qualitative accounts it was this combination of external structural and financial constraints, and internal activism by true-believing technocrats, that led to the replacement of Mexico’s inward-oriented industrialization model with free trade.12 Given the above, was Mexico’s opening a consequence of the state’s growing accountability to a mass public desirous of economic opening, instead of to privileged industrialists favoring closure? Or was it a function of technocrats’ policy preferences? Consistent with the democracy-based view, important elements of the business community in Mexico were hostile to, or at least unenthusiastic, about economic opening in the 1980s and 1990s. Large nationalized enterprises, such as the state energy company PEMEX, and many small manufacturers were critical (Johnson Ceva 1998; Shadlen 2000; Thacker 2000). One negotiator therefore reported that “we had to do [the NAFTA] negotiation with a very protectionist private sector,” and in his view “the internal negotiation was much more difficult than the external one.” Another NAFTA negotiator agreed: “there was a very strong opposition. Because of that, we had to work really, really hard at the consultations … to convince sectors of the benefits.” A third added that: “Before and during the whole negotiation, there were very intense debates between the government and private sector—very intense. In whatever area.” 22 And an industry representative focused on the issue of government procurement, for example, explained that: As advisers to the government, we had the following position: We don’t want a chapter on government procurement. … If there is a chapter on government procurement, it should be [a limited one]. If it’s opened up, we want important exceptions for sectors like energy, that are fundamental. And we lost it all! The Mexican state thus faced, and successfully mitigated, the risk of substantial business dissidence, especially from smaller firms and those supplying state-owned enterprises. However, larger private firms—whose weight was growing in Mexico’s economy as a whole—were substantially more enthusiastic (Flores Quiroga 1998; Shadlen 2000; Thacker 2000). And, though it took some of them until after the formal negotiations had concluded, all of Mexico’s major national business associations eventually endorsed NAFTA.13 It is not the case, then, that democratization undermined the power of a domestic economic elite that supported autarky: Mexico’s very top businesspeople were advocates of opening, as were the key associational voices bringing together major sectors of domestic business, even if many of their members were unenthusiastic. Overall, then, the preferences of Mexican businesspeople were mixed, with many uncertain about their interests. The malleability of many businesspeople’s views allowed the Mexican state, in tandem with supportive large business, to cultivate their support. The official private sector advisory structure set up for the NAFTA negotiations proved especially helpful in this regard. Known as COECE (Coordinadora de Organismos Empresariales de Comercio Exterior, or Business 23 Coordinating Council for Foreign Trade), one interviewee described this structure as “fundamental—we had very specific interlocutors for each issue, and we established working groups, since the beginning of the preparatory work, to review all the issues.” The Mexican state used COECE to get the private sector involved in the definition of NAFTA’s content, which gave potential business dissidents a reason not simply to lobby against the agreement in general. In exchange, as one negotiator put it, “Mexico tried to put on the negotiating table the position of the private sector.” To participate in COECE, however, firms had to fund their own representatives; for that reason, and also because of the way that responsibilities were allocated, bigger business was by all accounts much better represented (Alba Vega 1997; Johnson Ceva 1998; Thacker 1999). Much like business, the available evidence suggests that Mexicans as a whole were uncertain about the costs and benefits of economic opening.14 Some public opinion data—from 1990 onwards, regarding NAFTA specifically—suggest that the majority of Mexicans generally accepted the idea of free trade with the U.S. (e.g., Dyck and Greenfield 1994), with support highest among higher income earners (Wilson 2001). As a sign of the state’s growing sense of democratic accountability, in the early 1990s the Salinas administration became the first in Mexico to hire an in-house pollster, and subsequent polls found majority support for NAFTA.15 On the other hand, far more Mexican respondents to the 1996 World Values Survey favored “stricter limits on selling foreign goods here, to protect the jobs of people in this country” than allowing “goods made in other countries [to] be imported and sold here if people want to buy them” (76 to 16 per cent). Most importantly, however, there is little evidence to suggest that the preferences of ordinary Mexicans figured in the state’s pursuit of economic opening. The state’s decisions to 24 propose a free trade agreement with the U.S., to negotiate it, and to ratify it were all largely orthogonal to public opinion. One interviewee, involved in Salinas’ public opinion polling, bluntly explained that: “the decision to initiate the process to sign a Free Trade Agreement with the United States and Canada ... was taken without taking any surveys beforehand. … The decision did not depend on whether people wanted it or didn’t want it.” On the contrary, “there was never a direct, immediate rationale for the structural reforms in terms of the effects they could have on voting. To the contrary. There were two very large concerns. Losing the support of the PRI itself ... And losing voters.” So when President Salinas instructed his staff to broach the subject of an FTA with their American counterparts in early 1990, according to interviewees, they feared a public backlash far more than they expected public enthusiasm, and they made no announcement about the talks until the media broke the story. Once the plans went public, opponents of NAFTA rapidly began organizing. A Mexican Action Network on Free Trade (Red Mexicana de Acción Frente al Libre Comercio, or RMALC) emerged out of meetings among a small number of academics, trade unionists, and civil society organizations—plus counterparts in Canada (Massicotte 2001; Calderón and Arroyo 1993). Most of organized labor in Mexico was closely tied to the PRI, but one alliance of independent trade unions, the Frente Auténtico del Trabajo (FAT), became a key player in RMALC and provided funding and office space. While influential among intellectuals and civil society organizations, these opposition forces were not able to generate a large-scale public debate about NAFTA on the part of the mass public, however. While the authoritarian Mexican state was prevented from repressing critics by the threat of non-ratification of NAFTA in the U.S., the state used the channels of influence at its disposal simply to outweigh them (Poitras and Robinson 1994). 25 Canada For Canada, even more than for Mexico, the late-twentieth century embrace of free trade was centered on the negotiation of a specific agreement with the United States. Like Mexico, Canada had historically sought to restrain, rather than deepen, its relationship with its much larger neighbor. But once it stopped rejecting the idea of bilateral free trade, foreign trade and investment expanded rapidly relative to GDP. The Canada-U.S. bilateral free trade agreement (CUFTA) went into effect at the start of 1989, five years before the trilateral NAFTA. From a Canadian perspective, NAFTA was largely an extension and expansion of the earlier bilateral agreement, and it was CUFTA that embodied an enormously controversial policy change in Canada. The public debate about it in the late 1980s was intense, and arguably more so than for any other international economic policy change in Canada’s history. Like for Mexico, causal process observations from the Canadian case are consistent with one of the elite-centered arguments discussed above—though in the Canadian case, the originating advocates of free trade were based in the private rather than public sector. Canada’s post-World War II international economic policies were broadly liberal, but less so than the median developed country.16 While many Canadian bureaucrats and politicians were sympathetic to economists’ arguments for free trade—and leading academic economists in Canada were strongly supportive of free trade both generally and with the U.S. specifically (Economic Council of Canada 1975; Johnson 1968)—Canadian business was not. The result was a sometimes hostile standoff between the private and public sectors over the issue of Canada’s economic openness, with opposition to freer trade being particularly rooted in the manufacturing sector. Only in the early 1980s did Canadian manufacturers became much more sanguine about 26 their ability to thrive in international markets, and with their reversal of views, the Canadian private sector as a whole became very motivated to pursue a bilateral Canada-U.S. free trade agreement (Richardson 1992; Langille 1987). Between the late 1970s and the mid-1980s, the preferences of Canadian business changed substantially. In 1977, the Canadian Manufacturers’ Association (CMA) stated that “at this stage in Canada’s development as an industrial nation, our industry is in general not as capable of benefiting from trade concessions gained as it is vulnerable to trade concessions granted.” By 1984, the CMA had substantially changed its tune, saying “Canadian industry needs further multilateral trade liberalization… Moreover, it needs to [give] consideration to entering into a trade agreement with the U.S.” Although some previous studies have found sectoral divides with respect to free trade, starting in the early 1980s the business community in Canada became strongly united in favor of greater opening, with the few dissenters being relatively small industries (e.g., furniture, wine). The catalyzing event was the early 1980s recession, which was not only economically damaging to Canadian firms, but also produced a brief spike of protectionist sentiment in the U.S., leading some Canadian exporters to fear for their access to their most important foreign market. One business association interviewee summed up that “it's in that recession, in the early 80s, that the understanding of the economics of Canadian manufacturing started to change.” The shift in business priorities reflects the growing robustness of the Canadian corporate sector. Several authors have noted how, after a nadir in the early post-World War II period, by the 1970s Canadian firms were starting to invest substantially more abroad and to some extent retaking control from foreigners at home (e.g., Niosi 1981), and that trend continued (Carroll 2004). Rather than a defensive posture in the face of foreign (especially American) corporate dominance, in the 1980s Canadian business adopted an outwardly oriented, even aggressive 27 perspective, perceiving international markets as opportunities rather than threats. Canada’s experience is thus consistent with Japan’s, for example, on which basis Yoshimatsu (2000: ix) concludes that “as firms strengthen international linkages in the form of multinational operations and international corporate alliances, they become more committed to trade liberalization of the global market.” It was in 1985, soon after it became clear that the trade policy preferences of the Canadian business community had changed dramatically, that the Progressive Conservative (“Tory”) government of Prime Minister Brian Mulroney accepted a long-standing tacit invitation from the U.S. to negotiate a bilateral free trade agreement. Before taking that step, the government consulted extensively with horizontal and industry-specific business associations (Simeon 1987), such that, as one business association leader put it, Mulroney “took what was generally seen as a political risk for the country as a whole, but … not a political risk in terms of being in tune with the business community. In fact, quite the opposite.” The same interviewee confirmed that the CMA “adopted a position fully and aggressively supporting the free trade negotiations, which was diametrically opposed to the historical position of the association.” Private sector priorities—above all secure export access to the U.S. market—heavily shaped the government’s priorities in the subsequent negotiations. Business campaigning for free trade was extensive before, during, and after the negotiations, and dovetailed with a longstanding enthusiasm for the idea on the part of liberal-minded bureaucrats in Ottawa, as well as outside economic policy experts in Canadian universities and think tanks (Golob 2003). The Tory government had numerous ties to the private sector, shared many of its views, and generally sought to pursue business priorities as a matter of course (Watson 1987). 28 Business support for free trade was therefore substantial in Canada—significantly stronger and broader than in Mexico during the creation of NAFTA. What though of Canadian public opinion, and the state’s accountability to it? CUFTA’s passage came to depend on the re-election of the Tory government that negotiated the agreement between 1985 and 1987. In the federal parliamentary election of 1988, only the Tories promised to enact the agreement if elected; the other two major parties (the Liberals and New Democrats) made their opposition central to their platforms. Their opposition was shared by a civil society alliance, known initially as the Pro-Canada Network, and later as the Action Canada Network (see Ayres 1998). This alliance emerged out of meetings between the Canadian Labour Congress and a left-nationalist association known as the Council of Canadians, and also organizing by church-based activists.17 As the election campaign unfolded, the free trade agreement became the main debate and issue—a rare instance where trade became a salient public concern. In the end, the Tories were successfully re-elected, with more than half the seats in the parliament—but only a plurality (43 per cent) of the popular vote. The centrist Liberals and labor-allied New Democrats received 32 and 20 per cent of the popular vote respectively: a majority, if combined. There is good reason to think that these vote shares derived in substantial part from people’s opinions of free trade: a poll taken in the same month as the election found 39 per cent support and 51 per cent opposition to the FTA (LeDuc 1989). The evidence about public opinion does not therefore suggest that the Canadian electorate supported the principle policy change by which Canada adopted regional free trade in the late twentieth century. CUFTA would not have passed had public opinion alone determined its fate. 29 Public support would likely have been even lower, however, but for substantial business campaigning for free trade between 1986 and the 1988, and during the 1988 election campaign. The country’s three major business associations—the Canadian Manufacturers’ Association, Canadian Chamber of Commerce, and the Business Council on National Issues—joined and campaigned together, through an alliance they called CATJO (“Canadian Alliance for Trade and Job Opportunities”—see Ayres 1998; Doern and Tomlin 1991). As the Prime Minister’s thenChief of Staff writes in his memoirs, in the 1988 election “the business community rallied in unprecedented fashion to demonstrate support for the agreement” (Burney 2005). Or, as a business association leader, put it, “the manufacturing community fought on [Mulroney’s] side.” During the negotiation and ratification of NAFTA in the early 1990s, public opinion in Canada turned even more negative about free trade. The Canadian economy went into recession just as it was beginning to adjust to new market conditions under CUFTA. In 1993, 33 per cent of respondents to one survey reported supporting free trade, while 60 per cent were opposed; regarding the then still-to-be-enacted NAFTA, 23 per cent were in favor and 69 per cent were opposed.18 Survey respondents with more education and higher incomes tended to be more supportive (Mendelsohn and Wolfe 2001). Conclusions In Canada, economists’ views about the desirability of free trade did not change over time, bureaucrats’ views changed little, the views of business changed a great deal, and the priorities of politicians followed those of Canadian business. The pattern of changes over time differed substantially from the pattern in Mexico, where business views evolved little (remaining 30 mixed), and the priorities of politicians and top bureaucrats evolved dramatically, as technocrats replaced previous generations of political elites. In neither case, however, was the state’s democratic accountability an important impetus to free trade. Mexico’s technocrats were so concerned about a public backlash that they delayed announcing their intention to pursue free trade with the U.S. for as long as possible; in Canada, if anything, public opinion weighed against North American free trade—though support increased later in the 1990s (Mendelsohn and Wolfe 2001). More generally, in the typical country public opinion is mixed about free trade; the highly educated are consistently supportive but other people are not; voters are generally uninformed about international economic policies; and what preferences people do have in this domain do not make much difference to how they vote. Both generic and case-specific causal process observations therefore belie the proposition that mass public opinion and/or voters’ demands drive the policy changes that open national economies to international markets. Instead, arguments about the power of elites are more convincing—though the relevant elites vary across national contexts, given the important political economic differences between developing and developed countries in particular. Contrary to the implications of some studies (e.g., Harvey 2005; Richardson 1992), free trade is not always a project of business, and business is not always in favor of free trade. In Canada, prior to the 1980s, the national business community—particularly given the strong views of manufacturers specifically—was hostile to free trade. In Mexico, free trade was a project of the state—under the guidance of neoclassical economic technocrats—not the private sector, the latter being internally divided and thus as a whole relatively passive.19 31 Given the above, the case for a causal relationship between democracy and free trade is questionable. Nevertheless, the statistical association between them remains to be explained. In this regard, it would be useful for future research to address the possibility that the association is due to the presence of some common driver of both democratization and free trade. One possibility is that the rise of certain kinds of political elites in authoritarian states, such as technocrats with substantial previous exposure to world culture, may create the conditions for the adoption of free trade and subsequent transitions to democracy. Both democracy and free trade could be more likely to occur in countries with greater exposure to a world culture sympathetic to political and economic liberalism (Finnemore 1996). One key means by which world culture is transmitted is epistemic communities, or groups of recognized experts (Simmons, Dobbin, and Garrett 2006). The relative population of such experts varies from country to country, as does experts’ freedom to travel or study abroad, and thereby to absorb norms and ideas which they may import back home. It would not be surprising if the same non-democracies that came to be governed by technocrats—highly educated individuals exposed to foreign expertise and ideas— were also more likely to transition to democracy. The highly educated tend to be strong supporters of both state accountability and free trade (Hainmueller and Hiscox 2006), such that while technocracy only emerges in non-democratic contexts, many technocrats may nonetheless believe in the value of democracy, and be more likely to introduce it.20 Once they gain power, and perhaps implement some of their highest-priority economic policy changes, they may take steps to transition to democracy. Or they may at least be less likely to use violence in repressing popular demands for democracy, setting technocratic non-democracies apart from other, more intellectually and economically autarkic nations. 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Houndmills, Hampshire: Macmillan Business. 1 Trade and direct investment are distinct, but often linked through their inclusion in the same agreements, and for reasons explained further below, explanations of their recent liberalization have been similar. 2 The dataset, described and made available in Wacziarg and Welch (2008), is an updated and refined version of Sachs and Warner’s (1995). 3 The binary measurement of economic opening reflects that countries have tended to make transitions to free trade at distinct and identifiable moments in their histories, such as in acceding to GATT or negotiating and ratifying an agreement with one or more sizeable neighbors. Binary classifications are not perfect, but neither are other possible indices (Milner and Kubota 2005: 122-3). Tariff rates alone do not reflect important non-tariff barriers (Kono 2006), and it is not straightforward to combine tariffs and nontariff barriers into a single summative index. 4 These figures come from UNCTAD’s Foreign Direct Investment on-line database. 45 5 Studies of trade and investment liberalization have also pointed to a variety of influences not otherwise addressed here, including domestic electoral institutions, party cleavages, and economic geography (for a review see Busch and Mansfield 2010). These other arguments have however focused much more on differences across the treatment of industries within a given country, or differences across countries, at a given point in time. As explanations of change over time within countries, existing literature has placed primary emphasis on the influence of political democratization, or of elite action. 6 Many studies do not define provide formal definitions of democracy, but simply work with measures from large datasets like Polity IV and Freedom House, which concentrate on procedural and institutional criteria like the existence of elections and constraints on the executive, or on the protection in practice of political rights. I adopt this approach here as well. 7 Underscoring its importance, Goldberg and Pavcnik (2007: 58) call the Heckscher–Ohlin model “the best known general equilibrium model of international trade”. 8 Consistent with this view, for example, Rudra (2005a) finds that the bargaining power of labor has declined as economic openness has increased across most of the developing world. 9 Margalit (2012) and Ehrlich and Hearn (2013) also demonstrate the sensitivity of measured public opinion to various kinds of survey stimuli. 10 Other studies link policy preferences to psychological and/or cultural factors (e.g., O’Rourke and Sinnott 2001). 11 Canada was a broadly open economy even before the 1980s. But the stark differences between its policies before and after the 1980s make for a useful comparison with cases of transition in developing countries. 12 The Mexican negotiators hoped NAFTA would attract more foreign investment to Mexico, and so accepted a series of U.S. demands for business-friendly intellectual property and investor rights, as well as disciplines on interventionist policies in these areas. These measures, which have been replicated in 46 various ways globally and/or in other agreements, have subsequently been decried as constraints on legitimate public policies and on democratic governance (Clarkson 2002; McBride 2006; Shadlen 2005). 13 The National Chamber of the Manufacturing Industry (Cámara Nacional de la Industria de Transformación, or Canacintra) was divided by the process of opening in the 1980s, with a splinter group forming a rival association (Shadlen 2000). But even Canacintra eventually endorsed NAFTA, in 1993. 14 An important exception in this regard may be for labor mobility. 15 Some of the resulting datasets are now available from the Centro de Investigación y Docencia Económicas in Mexico City. 16 Hart (2002: 75) notes that until the Canada-U.S. free trade agreement of the 1980s, the “basic orientation” of Canadian trade policy included a heavy dose of protection. 17 Church-based activism in Canada latter would also prove instrumental, in the early 1990s, in the alliance-building with Mexican dissidents critical of NAFTA. 18 POLLARA: Canada Perspectives, Quarter 3, 1993. N=1100. 19 Since NAFTA, political and economic elites have proposed further forms of “deep integration” (on which see for example the volume edited by Grinspun and Shamsie 2007). For the most part, Mexicans and Canadians warmed on free trade after the implementation of NAFTA (Mendelsohn and Wolfe 2001; CIDE, COMEXI, and the Chicago Council on Foreign Relations 2004), though somewhat less so on “globalization” than “trade agreements” (Wolfe and Mendelsohn 2004). Mendelsohn and Wolfe (2001: 237) argue that even after CUFTA and NAFTA "Canadians do not think or know that much about trade," and that “the public possesses little information about foreign affairs generally and about trade specifically” (ibid., 242). 20 Bernhard and Karakoç (2007) find that education is positively associated with participation in both organizational life and political protests.