A marked trend in world affairs since the 1980s has been a series of bilateral and regional free-trade agreements, or FTAs, in Australasia, the Americas and Asia, not to mention Europe. Japan, having largely stayed out of these, is now at least contemplating the idea with some selected trade partners. Why this trend, and what might be the possible gains, costs and risks? According to the classic liberal theory of economic exchange, two trading partners benefit when each specializes in goods it can produce cheaply, while acquiring through trade those goods produced at a higher cost, relative to the other.
Of course, the real world is not quite as simple as this. The flow of goods and services is subject to politics. Globalization has diminished the salience of national frontiers and produced growing interdependence among consumers, producers, suppliers and governments. It has forced many governments to rethink domestic industrial policies, and many industries (automobile, commercial aircraft, television, semiconductors) to restructure and become truly global. Low-wage countries are used to make components requiring unskilled labor, while high-skill jobs are concentrated in highly industrialized countries.
In such a world, trade barriers generate inefficiencies, while free trade permits the realization of economies of scale and other benefits of specialization by the exploitation of comparative advantages. Against this backdrop, the motives behind FTAs include domestic, foreign, political and economic calculations: