The embattled future of global trade policy

Should proposed United States plurilateral trade agreements be welcomed? This is a big question, not least for those who consider the liberalisation of world trade to be a signal achievement. It is also highly controversial.

Since the failure of the Doha round of multilateral negotiations, launched shortly after the Sept 11 terrorist attacks, the focus of global trade policy has shifted towards plurilateral agreements restricted to a limited subgroup of partners.

The most significant are led by America — the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). As a study by the US Council of Economic Advisers (CEA) put it, the Obama administration’s trade agenda aims to put America “at the centre of an integrated trade zone covering nearly two-thirds of the global economy and almost 65 per cent of US goods trade”.

The TPP is a negotiation involving 11 countries, most importantly Japan. Its partners account for 36 per cent of world output, 11 per cent of population and about a third of merchandise trade. The TTIP is between America and the European Union (EU), which account for 46 per cent of global output and 28 per cent of merchandise trade. The main country not included in these negotiations is, of course, China.

Some of the nations participating in the TPP still have high barriers to imports of goods. The CEA notes the relatively high tariffs in Malaysia and Vietnam, and agricultural protection in Japan. It also argues that TPP partners and the EU have higher barriers to imports of services than the US.

Yet, lowering barriers is only a part of America’s aim. The CEA report added that, in the TPP, Washington is proposing “enforceable labour protection and greener policies”.

However, it is also seeking “strong enforcement of intellectual property rights”. In the TTIP, “both sides seek agreement on crosscutting disciplines on regulatory coherence and transparency” — in other words, making rules more compatible with each other and more transparent for business.

Thus, both the TPP and TTIP are efforts to shape the rules of international commerce. Mr Pascal Lamy, former director-general of the World Trade Organisation (WTO), has argued that “the TPP is mostly, though not only, about protection-related market-access issues ... the TTIP is mostly, though not only, about ... regulatory convergence”.

Whether these negotiations succeed will depend on whether the administration obtains trade-promotion authority from Congress. However, should we want them to succeed?

In favour of success are the following reasons: Plurilateral agreements are now the best way to liberalise global trade, given the failure of multilateral negotiations; their new rules and procedures offer the best template for the future; and they will bring significant gains.

RISKS OF OVERREACHING

These arguments have force. Yet, there are also counter-arguments.

With limited political capital, the focus on plurilateral trade arrangements risks diversion of effort from the WTO. That may undermine the potency of global rules. Columbia University’s Jagdish Bhagwati has stressed such risks. Furthermore, preferential trading arrangements risk distorting complex global production chains.

Another concern is that America is using its clout to impose regulations that are not in the interests of its partners. I would be less concerned about labour and environmental standards, though both may be inappropriate, than about the protection of intellectual property.

It is not true that tighter standards are in the interest of all. On the contrary, if US standards are to be imposed, the costs may be very high.

Finally, the economic gains are unlikely to be large. Trade has already been substantially liberalised and any gains decline as barriers fall.

A study of the TPP by the Peterson Institute for International Economics in Washington suggested that the rise in US real incomes would be below 0.4 per cent of national income.

A study of the TTIP published by the Centre for Economic Policy Research in London comes to slightly higher figures for the EU and US. Completion of the TPP and TTIP may raise real incomes in America by 1 per cent of GDP. This is not nothing, but it is not large.

The US-EU agreement does not raise concerns about America’s ability to bully its partners. In trade, the two sides are equally matched.

However, there are three further concerns with the TTIP. First, Tufts University research fellow Jeronim Capaldo has argued that estimates of the gains ignore macroeconomic costs. His Keynesian approach argues that the EU will lose demand because of a fall in its trade surplus.

This is ridiculous. Macroeconomic problems should be addressed with macroeconomic policies. Trade policy has different goals.

Second, some of the barriers they are attempting to remove reflect different attitudes to risk. Negotiators will have to devise a text that allows coordination of regulatory procedures — over drug testing, say, without imposing identical preferences.

If Europeans do not want genetically modified organisms, they must be allowed to preserve that preference. If trade policy treads on such sacred ground, it will die.

Finally, we have the vexed issue of investor-state dispute settlement. Many have complained that political choices — such as publicly funded health systems or the right to control drug prices — might be put at risk by systems in favour of business. Negotiators have fervently denied this. They had better be right.

On balance, the benefits of the TPP and TTIP will probably be positive, but modest. But there are risks. They must not become an alternative to the WTO or an attempt to push China to the margins of trade policymaking. They must not be used to impose damaging regulations or subvert legitimate ones. Tread carefully. Overreaching may prove counterproductive, even to the cause of global trade liberalisation. THE FINANCIAL TIMES

ABOUT THE AUTHOR:

Martin Wolf is associate editor and chief economics commentator at the Financial Times.