Politics & Policy

Why We Need Big, Ugly Trade Treaties

Container ship docked at Quingdao, China. (Stringer/Reuters)
The choice is between big documents or big bureaucracies.

Free trade is, in 2016, a cause without a champion. The two great populist currents of the moment — really a single current with two faces, Donald Trump’s and Bernie Sanders’s — are resolutely opposed to free trade. Mrs. Clinton, a sometime supporter of the Trans-Pacific Partnership negotiated by the Obama administration during her service as secretary of state, is walking sideways away from it.

Even among libertarian-leaning conservatives and free-market liberals (there are a few left), trade pacts such as NAFTA and the WTO are in bad odor. The ideal free-trade agreement is what I have nicknamed the Goldberg Treaty, in honor of my friend Jonah Goldberg, who wrote that a real free-trade pact would consist of a single sentence reading: “There shall be free trade between . . . ”

But there is a problem with the Goldberg Treaty, which is that most of the relevant barriers to trade are not, contra Trump et al., tariffs. Nor are they quotas or other explicitly trade-inhibiting policies, though these do exist and so require liberalization. In truth, countries such as China do not for the most part apply extraordinary tariffs to U.S. goods, and such tariffs as they do apply have been reduced in recent years, not as the result of any get-tough trade policy pursued by the United States but because of the complaints of Chinese consumers, who may spend their lives immersed in nationalist propaganda but who still do not enjoy paying artificially high prices for household goods. Beijing recently cut the tariff on imported cosmetics, proof again that the two most dangerous places to stand are between a politician and a microphone or between a woman and her favorite lipstick.

More typical are the difficulties that U.S. automakers have had in cracking the Japanese market. Japan has no import duties on automobiles, but U.S. makers complain of other problems, particularly the difficulty of establishing dealer networks to help them connect with potential Japanese buyers. The relevant laws are complex, they are in Japanese, some aspects of them (such as commercial zoning rules) vary from jurisdiction to jurisdiction, etc. Dealing with that is a great deal of work, and it is very expensive, though the Japanese domestic auto lobby does point out that while the number of dealers selling U.S.-made cars has declined by 74 percent in the past couple of decades, the number of dealerships selling European-made cars has increased by almost the same proportion. European marques make cars that are more like domestic Japanese cars (the Japan Automobile Manufacturers Association reports that 93 percent of Japanese passenger cars have engines smaller than two liters, while U.S.-made cars are mostly larger than that), and European manufacturers have found it easier to comply with Japan’s safety and emissions rules.

These are not issues that can be resolved by a one-sentence free-trade pact.

Consider the question of military procurement: The United States, like many other countries, prefers to buy its military hardware from domestic sources when possible. There are some defensible and obvious reasons for this, though they sometimes are overstated. That disadvantages European armament-makers and aerospace firms. Many countries do not have those kinds of rules, not because they have a stronger commitment to free trade but because they do not have domestic industries capable of supplying their demands. (The uniforms of the mighty Kuwaiti air force were made, for a time, by Georgio Armani.) Other countries maintain preferential procurement policies to benefit domestic farmers, who in many parts of the world, such as India, are desperately poor. Some countries subsidize pharmaceuticals or put controls on their prices, others have unusually stringent environmental or safety standards.

There are exactly two ways to sort out these issues, and neither of them is a simple, one-page trade treaty, as attractive as that might be in principle. The first option is that these differences, and the processes for resolving them, are codified in big, complex trade accords such as NAFTA and the TPP, which produces those 1,000-page documents that we all have come to abhor and distrust.

(Speaking of which: I have been convinced that my own earlier reservations about TPP, that certain parts of it could be used as a backdoor method of imposing certain environmental standards sought by the Obama administration, were in error. I thank K. William Watson and others for the correction.)

It is better to limit the politicians’ role to yes-or-no votes and to exercising effective veto power via the right of exit and leave the rest to arbitration and quasi-judicial processes.

The second possibility, the alternative to the 1,000-page treaty, is the delegation of power to international trade arbitrators such as the WTO. This has some appeal, inasmuch as the reality of fast-moving markets and technological innovation means that many policy factors that might inhibit trade are not foreseeable and cannot be effectively incorporated into treaties. The tradeoff is that such delegation takes power out of the hands of national authorities and puts it into the hands of international authorities, generally transferring decision-making from the elected and the accountable to the unelected and the unaccountable. This is often understood as a loss of sovereignty, though that isn’t exactly right, since we have the power to withdraw from such associations. But it is something like a ceding of sovereignty.

That’s our choice: big documents or big arbitrators.

The reality of the WTO regime and the like is that we generally get a bit of both, and that it works reasonably well. My own feeling on the matter is that it is better to limit the politicians’ role to yes-or-no votes and to exercising effective veto power via the right of exit and leave the rest to arbitration and quasi-judicial processes. In the case of trade relations between large economies with high volumes of trade (such as our own), those processes have the virtue of requiring lots of steady, iterative, repeat interaction over long periods of time, when generally encourages cooperative behavior.

Brad DeLong of the Washington Center for Equitable Growth estimates that even with very conservative assumptions, TPP would add something like $3 trillion to the stock of world wealth. Peter Petri and Michael Plummer of the Peterson Institute for International Economics estimate that TPP would raise the real incomes of the participating nations (which mainly are rich nations such as the United States, Canada, Australia, and Japan) by about 0.5 percent, which may sound trivial but is in fact significant when you consider the size of the economic bloc in question and the effect of such additional income over time.

Those are gains worth realizing. But the means of realizing them will never be politically popular.

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