One of the few bright spots during the President’s State of the
Union address was his promotion of two new major trade agreements,
the Trans-Pacific Partnership and a “comprehensive trans-Atlantic
trade and investment partnership with the European Union.” More
trade is generally good news, as both sides benefit by it, almost
by definition. However, missing from the President’s speech was the
word that goes before trade when it is at its most beneficial
— free. No one yet knows what the deals the President
will pursue look like, but if they’re not genuine free trade deals,
they will be a huge missed opportunity.
The benefits of free trade are many, and accepted by virtually
all economists. They include reductions in the cost of living,
greater choice and increased quality of goods, higher incomes on
both sides, economic growth and, perhaps most important in an
increasingly corporatist America, a reduction in the effectiveness
of lobbying. Protectionism provides the reverse in all these cases,
and would be just as foolish now as when the Smoot-Hawley law
deepened the Depression. For this reason, the President’s
willingness to pursue trade agreements is a good thing.
However, that last benefit in the list I just provided has not
escaped the eye of special interests. Indeed, most of the trade
agreements which America has negotiated in recent years have been
heavily influenced by lobbyists, not only from industry, but also
from the environmental and labor organizations. They have
consistently insisted on inserting measures into the agreements
that maintain protections for their interests and reduce the scope
for the full benefits from free trade. Indeed, the
statement from the high level working group on the
trans-Atlantic agreement includes special mention of environmental
and labor agreements. Given the strength of the environmental and
labor movements in Europe especially, this is something to be wary
of in negotiations for a trans-Atlantic deal.
There are other concerns. The economies of the United States and
European Union are both highly regulated, in various ways. Such
heavy regulation places a significant burden on both. The
difference between regulations forms what are called non-tariff
barriers, which impose certain burdensome requirements on imported
goods before they are allowed to enter a country. A recent study
for the European Parliament found that eliminating just half of
these barriers would increase U.S. GDP by over $50 billion annually
and EU GDP by almost $160 billion. Clearly both sides have a lot to
gain from reducing these barriers.
Real free trade allows for regulatory competition, whereby
jurisdictions with less burdensome, more efficient regulation
generally do better, while those with burdensome, inefficient rules
are forced to change. However, there is a strong possibility that
the trans-Atlantic deal will focus on a “harmonization” model under
which trading partners seek to “standardize” rules, which usually
results in everyone’s rules being more burdensome—though equally
so.
As we at the Competitive Enterprise Institute noted in our
comments to the high level working group, “The ‘harmonization’
approach can easily morph into a ‘cartelization’ path — enriching
some within the two blocs but harming the overall economies of
both.” This would be a win for lobbyists and special interests, and
a loss for the consumer and citizen.
Regulatory competition can also force much-needed reform. The
EU’s Common Agricultural Policy has led to African farmers being
frozen out of European markets and its Common Fisheries Policy has
been disastrous for fish stocks. Exposing these policies to
competitive pressures from free trade with the U.S. could force the
EU to modify them, producing massive benefits in overseas
development and to the environment. That’s one reason why the EU is
likely to seek a harmonization approach rather than competition.
American negotiators should resist this.
Similarly, the British government has formally complained about
certain anti-competitive aspects of U.S. financial law dating from
the passage of the Dodd-Frank Act. Exposing this law to regulatory
competition from Europe could benefit U.S. community banks, which
are being squeezed by the law, and help get credit flowing again to
those who deserve it but are denied it under Dodd-Frank’s overly
stringent rules.
The more free these trade agreements turn out, the more they
will benefit both America and its trading partners. Let us hope
that the President has not chosen to trade away competition for
more regulation.
