Commentary

Free Is the Important Part of ‘Free Trade’

United States Trade Representative Ron Kirk, speaking recently to the House Dairy Caucus, threw out the trade-negotiating handbook when he assured U.S. dairy producers that the USTR has their back.

His signal to a powerful interest group that the Trans-Pacific Partnership (TPP) may be an opportunity to increase trade barriers will further fuel the skepticism with which free-trade proponents greeted the Obama administration’s announcement late last year that it would formally enter into negotiations to join a new Asia-Pacific trade bloc even as other, more economically significant agreements waited in the wings.

Mr. Kirk rightly refused to take U.S. barriers to dairy completely off the negotiating table, as the producer lobbyists wanted, and he pointed to the need for the U.S. dairy industry to be more competitive. At one point, however, he justified keeping the trade barriers as part of the talks in a manner that is not often associated with “free trade” negotiations. He reportedly said he saw an opportunity to use the negotiations to “rationalize things” and introduce new quotas on a certain class of dairy product that has been making serious inroads into the domestic market in recent years.

The products in contention are “milk-protein concentrates.” MPCs, used often in cheese and other processed dairy foods, are made when milk is ultrafiltered, draining out the lactose and leaving the protein and other large molecules as a powder. (Milk-protein concentrate also can be made by blending nonfat dry milk with concentrated proteins, although that technology is increasingly obsolete.)

The U.S. dairy lobby is concerned because while high “tariff quotas” protect them from competition in most tradable dairy products, such as nonfat dry milk, milk-protein concentrates are not subject to quotas. The U.S. dairy lobby has become increasingly concerned that MPCs made with dry milk are enabling overseas sellers to bring in dry milk by stealth, in effect circumventing trade barriers.

American dairy farmers, especially those in the Northeast, are fearful of competition from the competitive dairy farmers of New Zealand, a prospective member of the TPP. The U.S. government keeps dairy prices high by a complex system of trade barriers and price supports that transfer money from consumers, dairy-using industries and taxpayers to dairy farmers and ensure that prices for dairy products never dip below a certain level. While producers like the guaranteed income, it means they are producing for the program rather than what the market demands. Reducing barriers to imports of dairy products, whether through much-needed domestic reform or as part of commitments in a trade agreement, would force them to be competitive and market-driven, and that has the domestic dairy lobby in defense mode.

The whole point of trade negotiations usually is to reduce barriers to international commerce. Consumers gain, as do U.S. firms that benefit from cheaper imports. The benefits of free trade to an economy overall have been known for more than 200 years. What also is known is that powerful special interests that gain from keeping out the foreign competition will fight tooth and nail to prevent consumers from having access to new and cheaper products.

Negotiated — as opposed to unilateral — trade liberalization historically has been a way for governments to do what they know is right for an economy under the guise of giving access to the home market as a “concession” in order to gain access to other markets. They have their free-market detractors, but trade negotiations have achieved some good by giving political cover to politicians trying to do the right thing on trade.

That requires, however, the negotiators — in this case led by Mr. Kirk — to see freer trade as the ultimate end goal. The fear is that this administration, more than others in recent years, sees trade policy as a way to advance environmental and social goals not strictly related to the movement of goods and services across borders. The USTR himself pitched the TPP to a trade-skeptic congressman as a way to “update the U.S. approach to traditional trade issues, address new issues, incorporate new elements that reflect our current values and priorities and respond to 21st-century challenges.”

Now, as if loading up trade agreements with social standards and other yet-to-be-revealed updates were not enough to threaten any deal, he is giving oxygen to a protectionist cause and to the novel and dangerous idea that the “free-trade agreement” might include new trade barriers. That’s a step very much in the wrong direction.

Sallie James is a policy analyst with the Cato Institute’s Center for Trade Policy Studies and author of the new study Is the Trans-Pacific Partnership Worth the Fuss? (Cato Institute, 2010).