Trade Pessimism Reigns Supreme

The Economist magazine has an article worrying that the proposed US-EU trade talks – discussed in this Cato paper and at this recent event – are floundering.  They say, “[r]ight now, the pact is in trouble, beset by small-mindedness and mutual suspicion.”  All is not lost, though: “Time, then, for a big push on both sides; this pact can still be saved.”

Now, I can see why people get concerned about trade negotiations.  Many of them drag on for years, and the prospects for completing large-scale negotiations look dim these day.  But there’s something that should be kept in mind about the US-EU talks:  They haven’t even started yet!  The negotiations won’t start until July, and it’s still only April.  So everyone needs to relax a bit.

Having said that, I can see why people would express concern.  The pre-negotiation jockeying suggests there will be serious difficulties.  For example, France wants “cultural sectors,” like TV, radio and film, exempted.  On this point, the Economist notes:

European governments recently sent trade officials to Brussels to a first meeting on their offer to America. Led by the French, envoys from southern and eastern Europe called for a long list of red lines. These covered the usual stuff: agriculture, public services and “audio-visual” content (eg, bungs for French cinéastes, airtime quotas to keep Flemish hip-hop on the radio). That appals Team Obama, though not because Americans are blameless. From financial services to air passenger services, America maintains lots of barriers to trade. The real fear is that if Europe starts setting out red lines, trade sceptics in America will draw their own.

There is no doubt that this kind of economic nationalist thinking gets in the way of trade liberalization.  Instead of recognizing the benefits of opening the domestic market to imports, too many countries try to “protect” their economy from foreign competition.  The reality is that the economy benefits from this foreign competition, and governments should be fighting to see who can liberalize the most.

Unfortunately, based on what they see as rational domestic political calculations, governments do not think or act this way.  They try to use trade negotiations to open up export markets, while maintaining import protection.  Not surprisingly, this undermines the potential benefits of the negotiations, and makes it very hard to get deals done.

In order for the proposed US-EU pact to avoid stalling out, as some other trade negotiations have, some realism could be helpful.  We shouldn’t expect a trade deal to lead to complete and total free trade.  At best, it will simply make some progress towards more liberalization.  And if it can do that, that’s a good thing.

To make real progress, though, trade negotiators need to change their mindset.  Protection from foreign competition is not something to be maintained through special exceptions in trade deals; rather, protection is bad for the economy as a whole (despite any benefits to particular interest groups), making us all worse off.  If some day trade officials can recognize this basic economic truth, trade negotiations will become much easier!