Should Free Traders Support Free Trade Agreements?

With the Trans-Pacific Partnership negotiations allegedly near completion, the transatlantic talks kicking into higher gear, and debate in Congress over U.S. trade policy objectives about to intensify, 2014 is shaping up to be the most consequential year for the trade agenda in a long time. Whether real free traders should rejoice over these developments depends on the emerging details, as well as the ability to avoid making the perfect the enemy of the good.

Real free traders abhor domestic trade barriers and want them removed regardless of whether other governments remove their own barriers. The benefits of trade are the imports we obtain, not the exports we give up. The immediate benefits are measured by the value of imports that can be purchased for a given unit of exports – the more, the better – and domestic barriers reduce those terms of trade. Of course, there are also the secondary benefits of imports, which include greater variety, lower prices, more competition, better quality, and the innovation spawned by those and other factors.

The process of U.S. trade policy formulation has never been particularly accommodating of free traders’ perspectives. Free trade views have been marginalized by their being subsumed within a broader category of views labelled “pro-trade,” which is dominated by business lobbies and other “pro-export” mercantilists. As the definition of free trade has been expanded to mean pro-trade, the definition of protectionism has been narrowed to exclude views, such as: “I’m not a protectionist; I just want a level playing field,” or; “I’m for free trade, as long as it’s fair trade.” Those are the clichés of protectionists, who are now popularly grouped under the pro-trade umbrella.

So, today’s trade debate (framed as it is by media, lobbyists, and politicians) does not feature free-traders on one side and protectionists on the other. Instead, one is either pro-trade or anti-trade, supports corporations or their workers, and believes free trade agreements are either good or evil. In a world with these binary choices, nuance gets squeezed out. Where do you fit if you support the tariff reductions in a trade agreement, but are unhappy with the corporate welfare it bestows on particular industries? What if you know that trade liberalization is good for both corporations and their workers alike? What if you’re pro-market, but not pro-business?

Given these and other ambiguities, should free traders support free trade agreements? Let me lay down a marker for free trade – “real” free trade, that is.

Free markets are essential to our prosperity, and free trade is the extension of free markets across political borders. Making markets freer and expanding them to integrate more buyers, sellers, investors, and workers deepens and broadens that prosperity. When goods, services, capital, and labor flow freely across borders, Americans can take full advantage of the opportunities of the international marketplace. Free trade provides benefits to consumers and taxpayers in the form of lower prices, greater variety, and better quality. And, it enables businesses and workers to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Countless studies have shown that economies that are more open grow faster and achieve higher incomes than those that are relatively closed.

The mission of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies is to increase the public’s understanding of the benefits of free trade and the costs of protectionism. The focus of most of our work over the years has been on U.S. trade barriers, which we have identified and criticized as costly forms of corporate (and other special-interest) welfare that can never be justified by the existence of trade barriers abroad. U.S. trade barriers hurt U.S. citizens, as consumers, taxpayers, workers, producers, and investors. Removing U.S. barriers to trade is a purely domestic decision, which answers the question of whether policymakers think U.S. citizens are worthy of the freedom to make their own economic choices. It is a reform to which all free people are entitled, and can be achieved without need of any foreign government’s consent.

Since the founding of Cato’s trade center, our scholars have argued consistently that Americans would be better off if we simply undertook our own reforms – on tariffs, regulations, and other artificial impediments to commerce – without regard for what other government’s do. Free trade is about the freedom of people to transact as they wish, when they wish, with whom they wish, and without politicians and bureaucrats as gatekeepers.

There is generally broad agreement among economists and think tank scholars that free trade is a good thing. Many even call themselves “free traders.” But in too many cases, what these self-identified free traders mean is that they support free trade over there, in other countries, but not really over here in the United States. In other words, they are not free traders at all. They are mercantilists. They see increasing “trade” and increasing “exports” as synonymous. They are the trade establishment, routinely reinforcing the myth that imports are a drag on the U.S. economy and that existing U.S. barriers are not impediments but, rather, excellent leverage for securing better market access abroad through negotiations. Regrettably, this view remains fairly strongly entrenched in Washington.

Despite what we call them, free trade agreements are not really about free trade at all. Rather, they are institutions of managed trade, premised on assumptions that are anathema to real free traders. At the most fundamental level, free trade agreement negotiators see imports as the price we pay for exports, while free traders consider exports the price we pay for imports. Negotiators treat production as an end in itself (maximize exports over imports), while free traders see consumption as the sole purpose of production (maximize imports over exports). Managed trade is about the proliferation of often labyrinthine rules intended to benefit chosen producers, labor unions, and other NGOs, while free trade is about removing impediments that benefit some at the expense of others so that each of us individually has the fullest battery of choices to decide how best to use our own resources.

In many respects, free trade agreements give free trade a bad name. But does that mean free traders should oppose them?

Despite their flaws, free trade agreements have helped reduce domestic impediments to trade, expand our economic freedoms, and lock in positive reforms, even if only as the residual byproduct of an ill-premised mercantilist process. Ultimately, free trade agreements have delivered freer trade. Is that not good enough?

The question of whether free traders should support free trade agreements, then, hinges upon whether they can see past these shortcomings and inconsistencies to the end result. If one’s fealty is to the logic of free trade and its underlying assumptions, then those characteristics of trade agreements are not shortcomings, but fatal flaws. But if one is more concerned with the end result – the expanded economic liberties and the bounty of its promise – then that free trader might be more inclined to forgive the indiscretions and support an imperfect trade agreement.

Over the years, the default position of Cato’s trade scholars – more or less – has been the latter view. We have identified the flaws in the assumptions underlying mercantilist reciprocity, assailed the corporate welfare it bestows, and advocated for unilateral free trade, while still finding our way to supporting free trade agreements because, warts and all, they still increased economic liberty. That said, not all free trade agreements are the same. Ideally, the texts would be short, sweet, and unequivocal: “There shall be free trade among the parties.” But, regrettably, it’s more complex than that. So the devil is in the details.

What were once primarily rules addressing border issues, trade agreements nowadays penetrate much more deeply into traditionally domestic policy areas. The demand for trade rules in these areas has followed the proliferation of cross-border investment, global production and supply chains, and intermediate goods trade. (Ironically, these manifestations of globalization weaken the links between companies and their original home countries, yet trade agreements are negotiated by governments on behalf of these companies, as though it were a national imperative to guard their interests.) But as trade governance bumps up against issues of domestic sovereignty, the potential downside risks of trade agreements increase.

Consider the Trans-Pacific Partnership. The TPP is the largest free trade agreement to date – in terms of the volume of trade and share of global output represented by the 12 countries involved. Though the agreement has not been concluded, nor has any “official” draft text been released, the public has a decent idea of the deal’s coverage, if not its specifics.

The agreement (should one be had) will likely include 29 chapters dealing with traditional issues, such as: market access for goods, services, and agricultural products; rules of origin, and; other customs-related issues. It is also expected to include rules that discipline competition policy, government procurement, regulatory coherence, intellectual property, investment policy, labor policy, environmental policy, and others. It is this second grouping of negotiating areas that is fertile ground for potentially objectionable provisions – rules that might undermine the exercise of domestic sovereignty.

There has been a great deal of opposition expressed by certain civil society groups over various aspects of the TPP. Much of it is hyperventilation, stoked by interest groups like the AFL-CIO and Friends of the Earth, who oppose the agreement for other reasons and have no qualms about scaring people to their cause. Nevertheless, there is legitimate concern about potentially overreaching provisions on labor and environment, as well as on intellectual property and investment, which could threaten the exercise of domestic sovereignty in the United States and in the other member countries. And that would be something to weigh against the likely benefits of liberalization in the agreement.

Where there are provisions that undermine economic freedom or domestic sovereignty, expect Cato’s trade scholars to criticize and recommend changes, as we have. But an agreement that is clearly a net positive on all of the relevant factors is likely to have our support.