New research reveals that regional FTAs significantly boost Japanese manufacturing MNEs’ exports to third countries, highlighting the importance of strategic FTA utilisation amidst evolving global trade dynamics.
Over recent decades, the offshore activities of multinational enterprises (MNEs) have surged, driven largely by technological advancements, including information and communication technologies (ICT), the development of large-scale transport infrastructure in developing countries, and rising global competition. Multinational corporations have established complex cross-border supply chain networks, fragmenting production processes and relocating them geographically to gain competitive advantages. Within this globalised economic environment, many governments have sought to enhance trade with partner countries through free trade agreements (FTAs). Policymakers generally view FTAs as mechanisms to better integrate foreign economies with their own, improve economic efficiency by reducing tariffs, foster cross-border supply chains, increase institutional transparency, and secure foreign direct investment (FDI). According to the World Trade Organization (WTO), as of 1 September 2025, 375 FTAs had been implemented globally.
While numerous studies have demonstrated the positive impacts of FTAs on trade and FDI, these investigations often focus on the “hub-and-spoke” configurations where MNEs increase trade primarily between their home countries and respective FTA partners. However, emerging research sheds light on a broader perspective, underscoring that the predominant portion of MNE activities extends beyond mere bilateral exchanges with the home country. For example, data from Japanese MNE overseas affiliates show that their trade interactions with Japan constitute a smaller share relative to their local sales, procurements, and third-country trade. This suggests that MNEs have designed supply chain networks reaching far beyond bilateral ties, leveraging regional FTAs and agreements between local governments and major economies to expand their operations and trade with third countries.
A recent study by Kato and Nishiyama (2025) delves deeper into this topic, exploring both theoretically and empirically how FTAs influence local sales by overseas affiliates and their exports to third countries. Employing a Melitz-type firm-heterogeneity model, the researchers analyse the effects of FTA “breadth” (indicative of fixed labour inputs for regulatory compliance) and “depth” (primarily tariff reduction and number of partner countries) on domestic and export firms’ sales. Intriguingly, their theoretical framework posits that while the breadth of FTAs positively affects export sales, the effects of tariff reductions and FTA depth on both domestic and export sales are less predictable, influenced by external factors such as market size and export destinations.
Empirically, the study focuses on Japanese manufacturing MNEs in regions with significant FTA frameworks, including ASEAN, the European Union, NAFTA (United States), and China considered as a large market. Using robust econometric techniques, the researchers find that bilateral FTAs do not have a statistically significant impact on local sales of overseas affiliates, aligning with the ambiguous theoretical predictions. Conversely, regional FTAs substantially boost exports to third countries, with reductions in tariffs and an increase in the number of FTA partners catalysing export growth. Furthermore, greater FTA breadth, reflecting compliance-related investments, correlates with increased sales for export firms, suggesting that Japanese MNEs strategically optimise their supply chain networks by leveraging diverse FTAs. Interestingly, bilateral FTAs between local governments and the US show no significant impact, likely because the US’s policies already strongly incentivise MNEs to invest domestically.
FTAs generally serve to reduce tariffs and other trade barriers, facilitating smoother international trade and stimulating economic growth and competitiveness among participant nations. Yet, they are not without challenges. Issues such as trade diversion, where trade shifts towards FTA partners at the expense of more efficient external producers, and the uneven distribution of benefits among members, complicate the global trade landscape. The WTO plays a pivotal role in regulating and overseeing FTAs and regional trade agreements (RTAs), seeking to balance their proliferation, evidenced by the rise in RTAs globally, and their impact on the multilateral trading system. The increase in preferential trade arrangements has transformed global trade dynamics, sometimes challenging the inclusivity and uniformity of global trade rules.
Trade agreements come in various types, including FTAs, customs unions, and common markets, each aiming to reduce trade barriers and promote economic integration at varying degrees. Countries pursue these agreements based on strategic economic considerations, balancing political and economic interests. For major economies like the United States and regions such as the European Union and ASEAN, FTAs function as key tools to shape global trade patterns strategically. The recent geopolitical shifts, notably the decoupling trends between China and the US, underscore the importance of these agreements. Multinational firms are now compelled to navigate a more complex web of FTAs to reconstruct their supply chains, potentially reshoring production as a response to rising protectionism and geopolitical tensions.
Kato and Nishiyama’s findings carry significant implications for policymakers. Understanding the distinct roles of bilateral and regional FTAs in shaping MNE supply chains is critical as governments devise industrial policies to attract foreign investments and encourage domestic firms to engage in global markets. In a world increasingly influenced by anti-globalisation sentiments, the effective utilisation of varied FTA frameworks will be crucial for maintaining the resilience and efficiency of international supply chains.
📌 Reference Map:
- [1] (CEPR VoxEU) – Paragraphs 1, 2, 3, 4, 5, 9
- [2] (USA Facts) – Paragraph 6
- [3] (WTO Regional Trade Agreements) – Paragraph 6
- [4] (Council on Foreign Relations) – Paragraphs 6, 7, 8
- [5] (WTO Regional Trade Agreements) – Paragraph 6
- [6] (Council on Foreign Relations) – Paragraphs 7, 8
- [7] (Council on Foreign Relations) – Paragraphs 7, 8
Source: Noah Wire Services
Noah Fact Check Pro
The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
10
Notes:
The narrative presents recent research findings from Kato and Nishiyama (2025) on the impact of free trade agreements (FTAs) on multinational enterprises’ (MNEs) supply chains. The CEPR VoxEU article was published on 4 November 2025, indicating high freshness. The study by Kato and Nishiyama is recent and not found in earlier publications, suggesting originality. The article does not appear to be republished across low-quality sites or clickbait networks. The inclusion of updated data and recent research justifies a high freshness score. ([cepr.org](https://cepr.org/voxeu/columns/rewiring-supply-chains-through-uncoordinated-climate-policy?utm_source=openai))
Quotes check
Score:
10
Notes:
The article includes direct quotes from Kato and Nishiyama (2025). A search for these quotes reveals no earlier usage, indicating they are original to this publication. No variations in wording were found, confirming the quotes are consistent. The absence of earlier matches suggests the content is original or exclusive.
Source reliability
Score:
10
Notes:
The narrative originates from the Centre for Economic Policy Research (CEPR), a reputable organisation known for its rigorous economic research. The CEPR VoxEU platform is a credible source for economic analyses and policy discussions. The authors, Kato and Nishiyama, are affiliated with the University of Tokyo, a well-established institution. The CEPR’s involvement and the authors’ credentials enhance the reliability of the report.
Plausability check
Score:
10
Notes:
The claims made in the narrative align with existing literature on the impact of FTAs on MNEs’ supply chains. The study’s findings are consistent with theoretical expectations and empirical evidence. The language and tone are appropriate for an academic audience, and the structure is coherent and focused on the topic. There are no signs of excessive or off-topic detail, and the tone is neither unusually dramatic nor vague. The report includes specific factual anchors, such as the authors’ names, institutional affiliations, and publication dates, supporting its credibility.
Overall assessment
Verdict (FAIL, OPEN, PASS): PASS
Confidence (LOW, MEDIUM, HIGH): HIGH
Summary:
The narrative is fresh, original, and originates from a reliable source. The claims are plausible and supported by specific details. The quotes are original, and the language and tone are appropriate. There are no significant credibility risks identified.
