Trade Policy under Siege

Writing in the wake of the Brexit vote, my colleagues Vijaya Ramachandran and Jennifer Richmond declared the result a wake-up call for development economists. They warned the enormous benefits to developing countries from open markets in rich countries are at risk without increased attention to the costs of trade-related job loss. I said much the same thing in my chapter on trade and development in CGD’s first White House and the World Publication, published in 2008. At the time, the Doha Round of multilateral negotiations was in its final throes (de facto if not de jure). Since then, things have gotten worse. In addition to Brexit, both major US presidential candidates oppose President Obama’s signature trade initiative, the Trans-Pacific Partnership (TPP), and congressional leaders say they do not have the votes to pass it without changes. In the other direction, negotiations towards a Transatlantic Trade and Investment Partnership (TTIP) have stalled in the face of civil society protests in parts of Europe.

A key argument for trade liberalization is that benefits are generally large enough to compensate the losers and leave no one worse off. In practice, compensation rarely occurs. So part of what is happening is the chickens are coming home to roost for policymakers, especially in the United States, who paid too little heed to the losers from trade. But there is more to the opposition to trade agreements, especially in Europe where the safety nets and adjustment programs are more robust. As I wrote in a recent piece for World Politics Review:

Even free trade’s most strident critics usually assert that they are not opposed to trade per se. But they are concerned about where trade agreements are headed, and whether the benefits of trade are broadly shared. While the net benefits of trade are generally positive, there are losers as well as winners, and the losses are getting more attention in a period with globally stagnating middle-class incomes and rising inequality.

In addition, trade policy is to some degree a victim of its past successes. Traditional tariffs are mostly in the low single digits in high-income countries, so trade negotiators increasingly focus on regulatory and other behind-the-border measures that impact trade. This new agenda raises concerns about national sovereignty and the democratic legitimacy of trade deals. The perception that trade agreements are more about protecting the interests of multinational corporations than those of consumers, workers and the environment also reinforces concerns about fairness.

A recent Chicago Council poll affirms Americans across the political spectrum generally accept that trade is good for the US economy, good for US companies, and good for consumers like them. But two-thirds are concerned about the impact of trade on job security. That suggests that better policies to address the costs of job loss would go far to mitigate concerns about trade.

Citizens across the United States and Europe, however, are also concerned about other issues policymakers increasingly want to include in “deep integration” trade agreements. There are chapters in both the TPP, and the proposed TTIP, which aim to reduce the impact on trade of domestic laws and regulations in the areas of food safety, the internet, and drug patents that affect the price of medicines. Just a few days ago, more than two hundred law professors and academic economists sent a letter to members of Congress urging them to vote against the TPP as long as it includes an investor-state dispute settlement (ISDS) mechanism that allows private firms to sue governments over regulatory issues. Using the ISDS mechanism, multinationals can sue governments for compensation if they believe environmental or other regulations unfairly impinge on their businesses.

The opaque process surrounding the negotiation and implementation of these 21^st Century trade agreements further undermines their legitimacy in democratic societies. Particularly in the United States, these agreements are negotiated in secret, after which the US Congress must vote on them without amendment. What might have been acceptable when trade agreements were mainly about cutting tariffs and other border measures is no longer justifiable when the agenda includes behind the border, domestic regulatory issues that have been debated and approved through open, democratic processes. Where there are technical regulatory differences across countries that impede competition and trade without any offsetting public benefit, “regulatory coherence” agreements would be valuable. But they should be negotiated transparently and openly.

My twitter summary of the WPR article on how to address the backlash was “stronger safety nets, more transparency, less behind the border.” Trade policy in the United States and Europe is foundering and business as usual is no longer good enough.