Commentary

Obama’s Not-So-Modern Trade Policies

The Obama administration portrays itself as the steward of modern “21st century” trade policy, which it contrasts with the presumably more backward “19th century” trade policy. Unfortunately, the specific elements of Obama’s trade policy do not suggest any real progress. Today’s policy is often more about responding to the demands of big business, by inserting into trade agreements new issues with a tenuous connection to core trade issues, rather than about fighting protectionism.

The recent Trans-Pacific Partnership negotiations provided some clear details on the contrast that the Obama trade team is trying to draw, when U.S. ambassador to New Zealand David Huebner argued that New Zealand should look to “21st century” issues, such as greater investment, migration and intellectual-property links, instead of focusing narrowly on “19th century” concerns such as tariffs, subsidies and quotas. The specifics he offered to distinguish between the “21st century” and the “19th century” highlight how trade policy has become less about good economics and more about giving business what it asks for.

Tariffs and quotas are classic methods of protectionism. While these measures can be used to promote other policies, they are generally used for giving advantages to domestic producers at the expense of foreign competitors. Subsidies are a little more complex, but the WTO’s rules on subsidies can be thought of as targeting those subsidies that are protectionist, while allowing subsidies used for other purposes. So, when Ambassador Huebner talks about tariffs, quotas, and subsidies, he is referring to three classic forms of protectionism.

U.S. trade policy has become less about good economics and more about giving big business what it asks for.”

By contrast, his “21st century” concerns are of a very different nature, with a limited tie to trade. Over the past several decades, rules on intellectual property have been incorporated into trade agreements. But these rules are not about limiting protectionism. They are a substantive expansion of the scope of global governance into an area with only a limited connection to traditional trade policy concerns. Furthermore, the inclusion of these rules in trade agreements can be seen as an attempt at giving an advantage to domestic producers. When a country has many companies who hold lots of intellectual property, and that country argues for stronger intellectual property protection rules that benefit those companies, its position seems to be about promoting its domestic interests.

Investment is somewhat more complicated. In many ways, investment is simply a counterpart to trade. The rules about limiting protectionism in the context of trade matters could also be applied in a similar way to foreign investment. In practice, though, international investment rules go well beyond placing limits on protectionism, and focus on helping domestic companies who invest abroad. The investment rules in trade agreements provide broad guarantees against “bad” treatment of foreign investors by host governments, even where that treatment is not protectionist, and allow for foreign investors to sue governments directly.

Finally, Ambassador Huebner talks about migration. This is not, of course, a general call for a more open immigration policy, which would be of great value. Rather, as it pertains to trade agreements, it is focused on providing a limited opportunity for some skilled workers to work abroad.

Arguably, the common theme in the contrast between the two centuries is that “21st century” trade agreements are focused on what big businesses want, rather than what makes for good economic policy.

When economists talk about free trade and trade agreements, their focus is on protectionism. Reducing protectionism — i.e., the “19th century” issues — is good for overall economic welfare. It creates more competition among producers and, as a result, provides consumers with access to higher quality, lower priced goods and services.

By contrast, the “21st century” version of trade agreements shifts the focus from reducing protectionism and to the demands of big businesses. In this way, political support can be generated for trade agreements. Businesses want stronger intellectual-property protection, the ability to hire skilled workers from abroad and the possibility of protecting their foreign investments by suing foreign governments in international tribunals. Consequently, this has become the focus of U.S. trade policy, regardless of the overall benefits.

Meanwhile, the many tariffs, quotas, and protectionist subsidies that remain are increasingly ignored under our “21st century” trade policy, creating a huge drag on the economy. Is this really progress?

The proper scope of international trade rules is certainly open to debate. The question of what trade agreements should be about is a challenging one, requiring a broad discussion of what policies we should be pursuing. But the Obama administration’s simplistic labeling of trade policies by century doesn’t address this issue, and, furthermore, undermines the important task of fighting protectionism at home and abroad.