As Theresa May arrives in Washington, Jos Gallacher explains the complexity of her task
How easy would it be to agree a quick trade deal? Do negotiations need to drag on for seven years or more? Can a UK-US trade deal really be done in three months? If trade is a win-win, agreement should be simple.
There are two problems. Firstly the economics of trade deals are straightforward; the political economy is not. Secondly, modern trade deals are mostly not about trade. They are about the free movement of capital, the protection of intellectual property rents and the subjugation of regulatory policy to commercial interests.
The key economic fact is that the benefits of trade come from imports: consumers have more choice, cheaper goods and services become available and resources are released for more productive use. Exports, according to economists, are needed to pay for imports.
In trade talks, by contrast, the aim seems to be to promote exports. Negotiators reluctantly accept imports as the price of access to export markets. To liberal economists trade negotiations are a game where delegates pretend to care about exports when in fact they want the benefits of imports.
Political economy explains the paradox. Consumers seeking more choice or cheaper products have little power. Firms which might employ the resources freed by imports have less power than existing incumbent producers.
Incumbent firms have developed their business strategies based on a competitive advantage that wins extraordinary profits. For some trade offers the capacity to extend their competitive advantage into new territories. The more successful incumbent firms are, the greater their influence will be with governments and trade representatives. They can point to the jobs and tax revenues generated by access to new markets. Thus exports become the focus of attention.
Some incumbent firms may be threatened by competition from more efficient foreign producers. While their arguments have less appeal to policy-makers than those of successful companies, it does explain why certain favoured sectors are often exempted from trade deals. Agriculture is the obvious example.
Deals should not be called “free trade” deals. Most agreements are a mix of market opening and protection driven largely by the power and influence of incumbents.
Non-Trade Trade Issues
Protection is evident in some of the non-trade issues in modern trade agreements. Intellectual property rights were a major item in TPP, the US-Asian deal recently abandoned by President Trump. IP rights are a source of market power and so of extraordinary profits. US firms were keen to extend the generous protection offered by American rules to Asian countries.
The I in TTIP stands for investment and created one of the most controversial problems for the US-EU talks. People making inward investment decisions want to minimise the risk of their capital being appropriated or their contracts not being honoured. Special arrangements to settle investment disputes have been included in many recent trade agreements.
In countries where the rule of law is well established, courts are independent and corruption is low this should not be a concern. In fact the reputation of Britain’s courts is a source of comparative advantage much valued by the finance sector among others. Investor protection clauses are not needed in deals between advanced democratic countries.
Government procurement is another item on the agenda of modern trade deals. Government purchasing can favour domestic suppliers and so act as a form of protectionism. Equally, such purchasing can be a major tool of industrial policy not just supporting favoured sectors but also to encourage investment in innovation.
From a trade perspective, standards and regulations are seen as non-tariff barriers. For example the EU ban on growth hormones in beef production was seen by US producers as a trade barrier. The EU saw the application of the precautionary principle and the dispute was taken to the WTO.
More recent deals have sought mechanisms to harmonise standards. The problem here is that rules designed for consumer safety, public health, environmental protection and so on can all impact on trade, but they need to be set through mechanisms which are democratically accountable not frozen in trade agreements.
It is significant that when the EU created its single market it did not just have a court it created a parliament as well.
Trade deals might be easy if they were just about trade. Traditional issues of tariffs, quotas and subsidies have been joined by a vast new agenda of complex issues. With traditional barriers to trade already low, some claim that the future benefits will come from removing non-tariff barriers.
Economic analysis shows that these benefits are tiny. The extensive agreement which the EU was seeking with the US included all of these new issues. Its expected impact on the EU economy was an eventual increase in GDP of 0.5 per cent, according to the EU’s own analysis. To be clear that is not an increase in growth of 0.5 per cent but an increase after 10 years equal to about two months of growth.
Even tinier is the expected benefit of the ‘comprehensive’ agreement with Canada. The EU forecast an eventual increase in GDP of just 0.02 per cent to 0.03 per cent .
The secret to a quick trade deal is to limit it to trade. The more linkages there are with other issues the more difficult become the trade-offs and the longer the process will take.
Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party
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