Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. Every country with a stake in world trade is now negotiating bilateral free trade agreements — with occasional infusions of regional reduction of barriers to trade and investments, such as the Trans-Pacific Partnership (TPP). Some claim Free Trade Agreements (FTAs) are a second-best alternative to a dysfunctional, if not defunct, multilateral system; others see preferential agreements through the eyes of Jacob Viner and consider them to be “termites of the trading system” (to quote the doyen of trade economics, Jagdish Bhagwati), diverting trade and creating bureaucratic obstacles through “Rules of Origin” regulations and other stipulations that must be abided to enjoy an agreement’s benefits.
Yet, perhaps the most importing thing to know about FTAs is that most of them have, at best, mediocre effects on growth in trade and economic output. While regional efforts to build proximity-based trade policy integration — e.g. NAFTA and ANZERTA — have had noticeable effects on trade and growth, most standard, plain-vanilla FTAs hardly register on the GDP scale. The European Union, for instance, considers its FTA in 2011 with South Korea to be a first-of-a-kind, “new generation,” “deep and comprehensive” bilateral agreement with a medium-sized growth market. Yet its own estimate suggests this FTA will boost GDP in Europe by no more than 0.08 percent. If GDP is the only scale to go by, the time spent negotiating FTAs without trading-partner proximity has been wasted.
TTIP, however, may be different. It has potential to generate meaningful economic gains for both sides. It is also promoted as a platform to accomplish sequential gains, and the composition of those gains depends often on the economic ideology of its supporters. Most commonly, TTIP is said to “set the standards of twenty-first century global trade,” meaning that whatever result will be produced from TTIP’s faculty of regulation, it will be accommodated by others.
On the other side of the ideological fence, it is argued that TTIP will be a shot in the arm for global trade liberalisation. The actual character of the argument does not matter so much; what unites different sides is the guiding view that TTIP can influence trade policy outside the Atlantic and masquerade as an alternative forum of global trade liberalisation. Therefore, is TTIP a euphemism for the death of the WTO? Will TTIP become the organising entity of future trade policy — a secret code for protecting the supreme role of America and Europe (the Tom and Jerry of post-war trade negotiations) in future trade policy? The answers to both questions appear to be: Yes.
Perhaps that will make some WTO purists choke, but it is neither new nor lamentable that economic powers try to use their authority. The more interesting question is: will they use their power to leverage greater freedom of commerce? I will try to answer that question in three parts. First, they will not use TTIP to fortress themselves. Second, they will leverage TTIP for global trade liberalisation. Third, there are clear risks that they will use TTIP to export regulatory failures.
What TTIP is Not
TTIP is not a trade-policy strategy to “gang up on China” or build Transatlantic protection against emerging market competition. Neither the European Union nor the United States is solely focused on this joint project initiative; each is pursuing trade agendas outside the Atlantic hemisphere. The United States is engaged in the Trans-Pacific Partnership (TPP). The European Union is negotiating free trade agreements with India, Japan, Malaysia, Singapore, and Vietnam, and is close to finishing an agreement with Canada. It wants to improve its bilateral trade accord with Mexico, has a broader program for achieving trade deals in Latin America, and has just gone through the process of signing off on a negotiated deal with Andean countries. The European Union also is negotiating a BIT-plus agreement with China; considering launching new negotiations with Australia and New Zealand; and, is active in Geneva-based talks on sectoral agreements and plurilaterals.
The list could continue, but the gist should be obvious: this is not a trade agenda for an entity that wants to build a fortress or shield itself against rising economic powers. Moreover, if a country wants to reduce its exposure to trade with some economies, it is counter-productive to liberalise trade with other economies. In today’s world economy, and under current WTO rules, preferential trade agreements cannot really cause serious trade diversion. Tariffs are too low for their elimination to compel much reorganization of trade, and changes in NTBs/regulations through bilaterals do not really operate in the Viner nexus of creation-diversion — partly because of the indiscriminate nature of reform, and partly because of trade elasticity.
Fear and Greed in Trade Policy
TTIP is an attempt to rekindle Transatlantic leadership of global trade policy and to leverage the combined economic heft to achieve global trade policy outcomes in line with their views of what the trade rules ought to be. There is also a power problem in the current arrangement of global trade talks that only the United States, with the assistance of the European Union, can address.
Like many other things in economic life, trade liberalization tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they resist liberalization. Despite all of the economic successes resulting from trade liberalization , many countries have come to think that they will not stand to benefit much from new trade liberalization, or that the political cost of liberalization is too high to bear. Some of these countries, which have blocked the Doha Round by omission or commission, are too important for global commerce to ignore. For the post-war political compact on trade to hold up, many countries still need them to take on obligations in a global trade agreement. For the past ten years, these new powers have influenced the direction of trade talks by their power to say no.
Consequently, in the past 15 years, the multilateral trading system has been leaderless and without a clear direction to unify key members. The system itself benefited for several decades from the leadership of the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers, but none other than the United States had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalization has somewhat changed. Absent political leadership, the Doha Round broke down and the instinctive reaction in many countries was to do nothing, rather than pursue new channels of liberalization. Without external pressure, doing nothing risks becoming the entrenched, default position.
TTIP may partly change this. When the world’s two biggest economies seek a bilateral agreement, there is a risk for third countries — especially those not pursuing other means of liberalization. That risk results mostly from not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is about the fear of not having equal access to trade that will be liberalized in future. Consequently, if TTIP succeeds, the response from the larger emerging economies will hardly be to have no response. The political and economic opportunity costs will change.
Exporting Regulatory Failures
TTIP, however, is likely to differ from traditional trade agreements, which focus on reducing or eliminating protectionism through proscriptive or “negative” rules that identify actions that governments cannot take. Even if rules harmonization is elusive, the TTIP seeks to construct prescriptive regulatory conditions — regulating what countries should do — for effective market access. As a result, and by extension, both sides effectively aim to export their bad regulations or regulatory failures to the world.
While it has been common for quite some time that regulatory agencies participate in trade negotiations, TTIP has elevated their roles. In order to reduce regulatory divergence, various regulatory agencies are now negotiating agreements with their peers. It is not going very well, and that may be a blessing in disguise. A good deal of the product-market regulations that have been achieved over the past forty years aimed at taking regulators away from issues of market access. Regulators in trade talks are not acting according to free-trade principles, and the results they seek often foster a bureaucratization of trade. Now, we are told that reducing regulatory divergence will cut red tape and smooth market access. That is a proposition that should be considered guilty until proven innocent. Similar efforts in the past (e.g., much of the single market regulation in the EU) have often led to the expansion of regulations of trade. Absent clean mutual recognition agreements, regulators are handed a good amount of discretion, and that discretion can be used for alternate purposes.
As market access has progressively become conditioned upon compliance with some obscure regulation (e.g. renewable energy or “open skies” regulations), both the European Union and the United States have turned to increasingly aggressive forms of regulatory unilateralism, often aiming for extra-territorial reach (e.g. financial, data and environmental regulation). Each wants to use trade agreements to export their costs of regulations to other countries (e.g. broken IP policies). They want to build environmental and labor regulation into trade agreements. They want rules against bad regulatory practices, as long as they are allowed to continue with their current policies (e.g. rules on state aid and state-owned enterprises).
Currently, the differences between EU and U.S. regulations and regulatory approaches are far too wide for the TTIP to be a realistic candidate for setting the global rules in this area. But TTIP will likely push trade agreements further in the direction of prescriptive regulatory conditionality, making it harder for trade agreements in the future to advance global commercial freedom through deregulation and simple, transparent rules.
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.