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Tools to lock away global trade

Published in Business Spectator (Melbourne), 28 June 2013

After decades of loose discussions about a trans-Atlantic common market, serious talks on a free trade agreement between the US and the EU are finally about to begin. The Transatlantic Trade and Investment Partnership will formally start to take shape with a first round of negotiations in Washington on July 8.

In its statements, the European Commission is typically optimistic and bold about the agreement. Meant to be the biggest bilateral trade deal ever negotiated, it is hoped to result in millions of euros of savings to companies, the creation hundreds of thousands of jobs, and a boost to the European economy of around 0.5 per cent of GDP.

The Americans are equally determined to proceed swiftly to realise similar gains on the other side of the Atlantic. President Obama has already set the deadline for the completion of the agreement: He wants to sign the deal before leaving office in January 2017.

The big question is what kind of treaty the Americans and Europeans will produce over the next two and a half years? Will it have anything to do with free trade? Or will it just set a bad precedent?

Since Adam Smith and David Ricardo demonstrated how free trade benefits countries with different absolute (and even comparative) advantages, economists have been in favour of policies promoting free trade.

In opinion polls among economists, the benefits of the free exchange of goods and services between countries is the issue on which there is the most agreement. That’s not a small feat considering economists usually try to avoid agreeing with each other as a matter of professional pride.

With trade it is different. Almost all economists understand and agree that trade enables countries to specialise in what they are doing best. It allows an international division of labour that enhances prosperity for all participating nations.

So any step towards free trade should be a welcome one. Yet the move towards the US-EU partnership is not even welcomed by some of the world’s leading trade economists such as Jagdish Bhagwati. And there are good reasons to be sceptical about the trans-Atlantic trade agreement – not least from an Australian perspective.

Of course, the usual professional campaigners are also against TTIP – and they are against it for the same reasons that they object to the Trans-Pacific Partnership, the World Bank, the International Monetary Fund, the G8 or any other organisation that appears to be promoting globalisation. In essence, their objections are a deeply ideological, anti-capitalist reflex.

In their view, world trade is just a cunning ploy to exploit workers, deceive consumers, pollute the environment or even, heaven forbid, run profitable companies. “The free trade agreement between the US and the EU is just a Trojan Horse for corporate interests,” explained a spokeswoman of Campact, a self-declared ‘campaign network’.

Apart from such ideological opposition, which often smacks of conspiracy theory, there are better reasons to be concerned about TTIP: The commitment to the ideals of free trade is dubious on both sides of the Atlantic. A potential US-EU agreement may just divert trade without creating new opportunities. And above all, it could be an obstacle towards a truly global free trade order.

For a start, if Americans and Europeans really cared as much for free trade as they pretend now in their TTIP talks, there is nothing that would have stopped them from leading the global trade talks under the former GATT and now within the WTO to a more successful result. Instead, the latest Doha round is dead in the water not least thanks to US resistance. Meanwhile, the protectionist nature of the European Union’s agricultural policies is legend.

Even in the preparations for the TTIP talks, it was obvious how wafer-thin the support for free trade is in some countries. France, in particular, was concerned about its entrenched culture of subsidies and protectionism. If the French had had their way, they would have liked to exclude anything from French films to French wine from the negotiations before they had even begun.

To put it mildly, it is not credible for either the Americans or the Europeans to unite under the banner of free trade. This then begs the question what both sides really aim to achieve.

Creating a trans-Atlantic free trade zone would not only increase trade opportunities – it would also redirect trade from one world region to another. Countries outside the US-EU trade area would lose out with potentially substantial effects on their economic development.

One of the biggest losers would be Australia. A new study by Munich based research institute Ifo comes to the conclusion that if the TTIP became reality, Australia’s long-term per capita income might fall by 7.4 percent. Only Canada (-9.5 percent) would be worse hit by the US-EU deal. Ifo also estimates that Australia would lose 52,000 jobs in the process – unless Australia managed to somehow join the deal or imitate its conditions with both the US and the EU.

However, the biggest victim of TTIP may not be any individual country but the dream of global free trade. The beneficial economic effects are obvious, at least to economists, but lobby group pressures have again and again thwarted any hopes for a comprehensive free trade framework for the world. The WTO process is stuck – and it has been for many years.

Instead of focussing their efforts on reviving these multilateral trade talks, over the past decade there has been a trend towards smaller scale trade deals. Although this trend is understandable in the absence of a global agreement, it nevertheless means that the global trade order becomes more complicated with every single one of these bilateral treaty. Such deals, though promoting trade between partners, are also preventing trade with parties outside of them.

In this sense, the Americans and Europeans would make any future global trade deal less likely. If so far progress on Doha has been prevented by particular American interests, just imagine how in the future such resistance would become stronger if the US and the EU entered global negotiations as a new trade bloc.

After more than 200 years, the case for free trade remains as strong as in Adam Smith’s times. But the so-called free trade agreements such as the trans-Atlantic deal are not the best way to promote this ideal. The result of such initiatives may well be a step in the opposite direction.

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