A Further Perspective

The Missing Word on Trade

President Obama wants trade agreements with Europe -- but how unregulated will they be?

By 2.15.13

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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.

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About the Author

Iain Murray is Vice-President for Strategy at the Competitive Enterprise Institute.