Cato Online Forum

TTIP’s High-Wire Act: Balancing Trade Policy and Geopolitics

By Peter S. Rashish
September 2015

In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, one of the founding fathers of free-trade theory, defended the Navigation Acts, the series of laws enacted in the mid-17th century that prevented the use of foreign ships for trade between Britain and its colonies. In justifying this mercantilist exception to his doctrine, Smith wrote, “As defense, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”

Smith suggests that defense and opulence are two distinct, mutually exclusive goals. But what if opulence can serve the interests of defense? In today’s highly interconnected global economy, the distinction between opulence and defense – between economic goals and national security – is fading. Trade policy, and the Transatlantic Trade and Investment Partnership (TTIP) in particular, can not only enhance prosperity but also promote the broader national interest. This policy evolution is something to be welcomed, and the United States needs to think carefully about how to make best use of it. “Securitizing” trade policy is not without risks, however, and these should also be in the forefront of policymakers’ minds.

There are two main factors driving trade policy towards a stronger role in geopolitics: accelerating globalization and in particular the phenomenon of global value chains; and the lack of global consensus on the economic principles that should govern commerce.

The emergence of global value chains means that what is a domestic and what is a foreign product is no longer a matter of black and white. There is an increasing gray zone where a product may contain inputs from one or more markets before final assembly and export to its ultimate destination. This evolution creates a much deeper form of interdependence between economies and governments than traditional trade and investment. When “my product is your product,” countries cannot separate their commercial destinies so easily, and over time will be encouraged to lessen the likelihood of conflict between them - and even to find common ground on foreign and security policies toward third countries.

A vivid example of this dynamic is Mexico’s economic integration with the United States through NAFTA, which has led it to become a leading U.S. partner in support of an open, rules-based global economy and democratic governance, both key U.S. national interests.  In this regard, it is noteworthy that because of the considerable number of supply chains between the countries, 40 percent of the content of U.S. imports from Mexico is originally produced in the United States.

While Mexico (or Canada, the other U.S. partner in NAFTA) may be unusual because of its close proximity to the United States, geography is not a limiting factor for greater economic integration through supply chains. Indeed, 50 percent of trade between the United States and the European Union, separated by the Atlantic Ocean, is intra-firm trade conducted by a company’s headquarters and subsidiaries, and it can be assumed that including intra-industry trade – where companies are supplying each other inputs for their final production – would raise that percentage significantly.

If global value chains present a benign example of how trade relations and trade policy can further the national interest, the growing ideological diversity of the global economy offers a more cautionary development.

When the Berlin Wall fell in 1989, and communism ended first in Central and Eastern Europe and then in Russia, there was a distinct sense that the world was converging on a single economic model based on the liberal, internationalist ideals that the U.S., Europe, and Japan (the “West”) had promoted since the creation of the Bretton Woods institutions after World War II. China’s adoption of a number of the attributes of a capitalist economy and its subsequent acceptance into the World Trade Organization in 2001 reinforced this optimism, which gained momentum in the 1990s.

Events of the last 10 years have led to a course correction. Now, there is no longer an emerging consensus on global economic values and interests but rather a clear diversity of views on the rules that should underpin the global economy.  The “Western” (in political and economic orientation) countries continue to uphold the principles of open markets, free trade, and the need for fair and transparent rules to govern international commerce. At the same time, China and Russia, though different in many ways, have held to a state-driven concept of the domestic economy that fits with difficulty into the objectives for global economic governance that the United States and the European Union are pursuing in TTIP.

Lying between the U.S., the EU and Japan on one side, and China and Russia on the other, are a number of countries that are strong democracies and share many Western political and security interests but have traditionally maintained a strong role for the state in the economy – Brazil, India, South Africa, and Indonesia, for example. These countries and others like them are likely to play an important role in determining where the balance of power lies as the next generation of rules for global commerce is forged.

Trade policy can and should be at the leading edge of U.S. efforts to promote its national interests within a globalized but ideologically diverse international economy. The Trans-Pacific Partnership has already been a key element of this policy, aiming as it does to create high-standard rules governing the role of state-owned enterprises (SOEs), innovation, Internet freedom, the protection of intellectual property, the environment, labor rights, and investment. TTIP, bringing together the United States with the EU, its most like-minded major trading partner, will likely produce even higher-standard rules. And given the fact that the transatlantic economy represents half of the global total, the rules that result from TTIP will have considerable impact on the international economic system as whole.

But even if TTIP can be a valuable geopolitical tool for the United States, policymakers need to weigh carefully how far trade policy should go in promoting U.S. foreign policy objectives.

First of all, given the range of threats that face the United States, it would clearly be wrong to overburden trade policy. The adherence to common rules and standards and deeper economic integration are ill suited to deal with both “hard” security threats such as terrorism, and trans-boundary challenges such as immigration or climate change. These are areas where military, diplomatic, humanitarian, and scientific tools are required.

Second, and equally important, it should not be forgotten that the fundamental goal of trade policy is to create increased commercial exchanges between countries and peoples that raise the prosperity of all parties to a negotiated agreement. If national security concerns become paramount in the conduct of trade negotiations, there is a strong chance that the results will be sub-optimal economically, leading to a potentially lower level of prosperity and thus fewer economic resources with which to support a country’s pursuit of its national interests.

TTIP is instructive in this regard. Beyond the inherent challenge of integrating the two largest economies in the world, one reason that successive U.S. administrations and EU leaders did not initiate a bilateral trade negotiation until 2013 was that the economic rationale was not strong enough. Even without a negotiated framework to govern their trade relations, the U.S. and the EU had been each other’s most important commercial partner for decades. It was not only, or even primarily, the geopolitical imperative of strengthening the liberal international economic order that explains the timing of TTIP’s launch; it was the joint need in the U.S. and the EU to boost growth after the largest economic downturn since the 1930s.

U.S. trade policy in the 21st century needs to perform a balancing act. It must ensure that trade negotiations stand on their economic merits, with a strong prospect of increasing opportunities for U.S. businesses of all sizes and raising the level of prosperity for American workers. But given the highly integrated state of the global economy, and the diversity of economic models within it, a forward-leaning trade policy also needs to take account of and serve broader national interests. High on this list is the need to create updated structures of governance for the global economy that reflect U.S. and European values of openness, free and fair competition, and the rule of law. TTIP is well-designed not only to bridge the two sides of the Atlantic, but these two all-important policy objectives as well.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.

Peter S. Rashish is a senior advisor for Trade and Transatlantic Relations at Transnational Strategy Group LLC.