The end of big trade deals

In their current form, large international trade negotiations are politically illegitimate.

The last global trade deal was the Uruguay round, finally agreed in 1994 after seven years of negotiations. The deal included the setting up of the WTO, a stronger organization than GATT, which it replaced. But no further global trade deal has been agreed. The WTO launched the Doha round  in 2001, but it has fittingly run into the sand.

Trade negotiators are nothing if not obstinate, and tried a new tack. If a global deal is too difficult, why not try regional ones? So TTIP,  the transatlantic deal, and TPP,  the Pacific one, were born. Well, conceived.

Both are moribund. Hollande has declared France’s opposition to TTIP in its current form, which is also under sustained attack in the European Parliament, especially over ISDS.  [Update 30/8: the French trade minister has called for the talks to be suspended. If this is a negotiating tactic, it’s reckless hardball – it would be very hard to walk back.] TPP is opposed by both Clinton and Trump. Obama still officially hopes to get TPP through the Senate in the lame duck session. (See supportive comment from Harold Pollack.) Do you credit this? McConnell has not shifted from his policy of Adullamite obstruction of every Obama proposal. Even if he allowed a vote, would senators really vote against the platforms of their parties, which accurately reflect a hostile public opinion?

This widespread failure of the trade liberalisation agenda is usually put down to a widespread turn in public opinion against free trade, now seen by many on both left and the populist right as a callous neoliberal plot to enrich capitalists at the expense of workers. (It is true that the compensatory support for workers who lost their jobs as a result of past agreements like NAFTA somehow failed to materialise.) Some trade advocates resort to the absurd argument that the failure of TTIP and TPP would put existing trade at risk. But there is very little support for proposals to roll back existing trade agreements, from NAFTA to Uruguay to the European single market. There is something in the trade negotiation process of these new deals that gets voters’ goat.

Let me nail up a thesis to the trade church door. Modern trade negotiations are illegitimate. In their current form they cannot possibly lead to a democratically acceptable result. That is why they are doomed to fail.

The argument has two parts.

First, diplomacy and its embodiment in international law has a problem of democratic legitimacy in general. Ever since Grotius, the international community has been seen as a society of sovereign states. (You and I are mere objects of international law, with the odd exception of pirates and the more recent exception of human rights.) When these states were represented by absolute monarchs like the Kings of Spain or France, there was no disjunction between domestic and international law: both were built on a free promise by the autocratic monarch. But when the state is less monolithic, and especially if it is democratic, tensions can and do arise between the domestic and international orders. (Since the United Provinces of the Netherlands were a notorious example of a fragmented, pluralistic state, I wonder if Grotius considered the problem. Enlightenment welcome.)

Bilateral diplomacy is still conducted today by diplomats and foreign ministers, representing the executive, and largely in secret as in 1648. Multilateral diplomacy – as with the Iran nuclear deal – is a bit more open, but not much. Making the results legitimate depends on national mechanisms that allow an approximation to democratic norms of governance. There are in broad terms three methods:

  • political accountability (public statements of foreign ministers, legislative approval of treaties)
  • transparency of process (publication of drafts, procedures defined in advance)
  • participation by stakeholders.

I’m not trying to work out a full theory here, just to establish a presumption that a diplomatic process lacking these features is likely to lead to illegitimate results, while one that has them is likely to lead to legitimate ones. Now, how does this framework apply to the process of trade negotiations?

Today these are no longer about tariffs. After the Uruguay round, tariffs on manufactured goods fell to 3%-10%, though higher on agricultural produce.uruguayround

So attention has shifted to regulatory barriers. TTIP and TPP do include clauses on the tariffs that are left, which blurs the argument; but all the fuss is about regulations that make access difficult, or otherwise hinder foreign-owned businesses.

Some of these regulations are narrowly directed at imports (an onerous and discriminatory régime of inspection in Asia for American beef, say). It is fair to assimilate these to covert tariffs. More are standard measures of public policy, like patent protection for biological pharmaceuticals (an issue in TPP) or restrictions on private education (this has come up in TTIP). They reflect a balance drawn up within each country between the competing interests of consumers, incumbent providers, and potential providers. The balance is informed by general political preferences, say on the place of private versus public education. It is reached following a reasonably transparent and uniform political process, allowing stakeholders a voice and identifying decision-makers for accountability. All these factors contribute to making the apparatus of national regulation politically legitimate.

Legitimate does not mean sensible, let alone optimal. Regulatory capture is real. The recent growth of occupational licensing in many US states, extending to hairdressers and florists, offers a good example. A more serious one is the laxity of European standards on diesel engine emissions, revealed in the VW scandal – by American investigators. However, the stigmatising of regulations as such as obstacles to business is merely conservative propaganda. It disappears once the issue is the extension of state-created monopolies, as in intellectual property law.

Even in the case of hairdressers, there is a genuine though weak argument from the benefits to consumers: a failed hairdo is a social embarrassment, and nobody wants to sit in a chair in front of Sweeney Todd. It will be generally agreed that occupational regulation is essential for professions where incompetence can be fatal: doctors, gas installers, pilots, handlers of explosives. The spectrum from these to manicurists is long and there are many hard cases. Just how much regulation is needed for child-carers or roofers? The lower cost of solar panel installation in Germany and Australia than in the USA may well be linked to stronger systems of accreditation: picking a firm at random from the yellow pages is much less of a risk.

Schematically, the regulatory process for access to occupations has to deal with three interest groups, with six interests potentially in conflict:

  • consumers, who want both low prices (low regulation) and an expectation of decent quality (higher regulation),
  • existing providers, who want both low compliance burdens (low regulation) and high barriers to entry by competitors (high regulation),
  • potential new providers, who generally want low barriers to entry (low regulation) – but if they are prepared to make the investment in training and accreditation, they may align their views with those of existing providers.

This complexity extends, I suggest, to most regulations on business. It is also typically impossible for third parties such as policymakers to assess the weight of these interests a priori. They have to find out, and this is normally done by allowing representatives of the affected groups to state their case.

We would therefore expect trade negotiations over regulations to be more problematic than those about tariffs. And so they are.

When trade negotiations were about tariffs, there was only one variable per commodity – the tariff rate, a price. Consider the simplest case: a bilateral negotiation between England and Portugal over the tariffs on cloth and wine (the example is a hat-tip to David Ricardo’s classic text on comparative advantage). Basically the negotiation is a bargain: a lower English tariff on wine in exchange for a lower Portuguese tariff on cloth. The interests involved are:

  • Portuguese cloth producers and English wine producers (there are some today), who will lose from cheaper imports,
  • Portuguese wine producers and cloth importers, and English cloth producers and wine importers, who will gain from more trade,
  • consumers of both products in both countries, who will gain from lower prices and more choice.

Suppose, not unrealistically, that the trade negotiators on both sides are incorruptible Benthamite officials. They know in general terms about the consumer benefits. Their problem is to ensure that for their national capitalists and their workers as a whole, gains will exceed losses. For this, they will need to learn the elasticities, and the only source of this information is the businessmen. So they have to be invited to have a say. There is no need to bring in consumers; they benefit whatever the deal, and detailed information about consumer surplus is unnecessary. The interests of English wine drinkers are adequately represented by Portuguese wine exporters. The interests of workers are aligned here with those of their employing capitalists, and do not need separate representation. The process thus reflects adequate input from stakeholders. As far as transparency goes, it’s a haggle – a monopolistic seller against a monopsonistic buyer. Keeping your real intentions and reserve price secret is the only plausible strategy on both sides.

Trade negotiations have elaborated on this model but not changed it fundamentally. Trade negotiators are card players who keep their hands secret. They consult affected businesses systematically, and nobody else. The resulting deals are packages, and can be accepted or rejected en bloc by the principals, but not changed.

Now change the negotiation from one in which tariffs are exchanged for tariffs, to one in which regulations are swapped for regulations. (Modern trade deals like TPP and TTIP are giant bundles of such swaps.) As we have seen, regulations involve stakeholders in a different and more complex way.

Suppose (counterfactually) that one of the regulatory trades on offer is access to US job markets by Mexican plumbers, in exchange for better IP protection for US pharmaceuticals. At the very least, the consumers and safety watchdogs involved in the domestic US regulation of plumbers should have a seat at the table. Worse, the whole idea of the swap upsets the domestic legal and political order. Why should Texan plumbers face more job competition purely so as to benefit the stockholders of US pharmaceutical companies? The regulation – previously a state or local responsibility – has been federalised, and the secrecy has lowered transparency and accountability.

My contention is that conducting trade negotiations over business regulations in the way developed for tariffs is fatally flawed. It would need a radically different system, with true participation of stakeholders, transparency of process, and better political accountability.

You may say: this is Utopian. These requirements would make trade negotiations impossible.

I have two responses to this. First: freezing international trade rules in their current state would not be a disaster. The tariff reductions under the Uruguay round and previous negotiations have led to an enormous expansion of world trade, including substantial and contentious shifts in employment and wages. There is no pressing need for yet more trade. There are diminishing returns in gains from trade, as with most things.

Second, there is one example of a politically legitimate market-opening process. It is the European Single Market. When the newly democratic countries of Eastern Europe applied to join the EU, they were presented with a huge pile of the acquis communautaire, previously adopted legislation. At the time this was often cited as 50,000 pages, but other estimates come out much higher – up to 170,000 pages.  The applicants were not given the choice – all of it it had to be swallowed unchanged. Much of this was regulations for the single market. There aren’t British and French and German standards for washing machines or food labels (etc. x 1000) any more, just European ones.

In many ways, the process was radically different from standard trade negotiations.
1. Everybody understood from the outset, including Mrs. Thatcher, that the single market involved a wide transfer of sovereignty over business regulation. The scope of the transfer was pretty much agreed in advance.
2. The process was uniform and (just) comprehensible, with opportunities for input from stakeholders. These were better for businesses than for workers and consumers, but that’s true of national regulation too.
3. The process was not designed to facilitate arbitrage and bundling across different areas. I may be wrong, but I don’t think much took place. The regulations were adopted separately and at different times.
4. There was real and visible political accountability at two points: approval by the European Parliament, and by national governments in the Council. Most of the dumb ideas that fed the appetite of the British press for Euro-idiocies were proposals that died young, like the proposal by olive-oil producers to ban open bottles of olive oil in restaurants in favour of sealed containers.

So it can be done elsewhere. Will it? No. Regulation is an exercise of sovereignty. The European Union is a quasi-confederation, with its own political institutions, reflecting both democracy and a democratic deficit, to which elements of state sovereignty have been ceded by members. I can’t see any other regional grouping of states heading down the same path in the near future.

My guess is that regulation trading will either go back to being bilateral, or become sectoral on a global scale. The WTO could draw up treaties just on IP or food inspection or on education. With successive drafts, published for comment by all and sundry. That’s how the Paris Agreement was done, and the huge Law of the Sea treaty. Westphalian diplomacy can be carried out in a reasonably democratic way.

* * * * * *

Where did I go wrong? Feedback really welcome – I’m not temperamentally radical and am rather shocked by my own argument.

I have not emphasised ISDS in these trade deals, the lightning-rod for much criticism. It strikes me as a try-on by the well-paid little club of international commercial lawyers. It’s obvious overreach, and the whole wretched scheme could be jettisoned without damage to the rest of the trade negotiations, so it’s not really part of the wider failure of legitimacy. Companies can put compulsory arbitration clauses in contracts without ISDS. If they don’t trust a foreign court to respect these, they should stay out of the kitchen. Hatchet jobs on ISDS by Chief Justice Robert French of Australia and Professor Siegfried Broß, former judge on the German Constitutional Court. The argument from authority saves time.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

23 thoughts on “The end of big trade deals”

  1. Very much enjoyed the piece. Lots of ideas here that I didn't know about.

    A quibble: The graf about the incorruptible Benthamites and how the relevant interests get represented is terrific. It's obviously a set-up for some equally heavy paragraph about how, in a regulation-swapping context, this negotiating model is seriously flawed. When that plumbers-and-pharma graf arrives, the blow doesn't land with as much force as it might. Perhaps because I haven't done the required reading, the bit about the regulation getting federalized feels like a loose end or a broken link–I'm not clear on how that amplifies the argument. And the point about accountability and transparency lacks some force because it's not crisply connected to the plumbers.

    1. Yeah. Very much a first draft for the full case. I was rather hoping that somebody more competent than me would take it up and rework it.

      Part of the problem is that I could find a paradigm for the tariff negotiation, and I don't think it's far from the one they use. But there is no paradigm for the formulation of regulations. The trade guys are just applying one that does not fit.

  2. "There is no need to bring in consumers; they benefit whatever the deal"

    Do they? I mean, on average, sure, but you know about the camper in Alaska who fell across his camp fire; On average, he was comfortable.

    Consumers are also workers. What happens to the textile worker in Portugal? Will he really manage to find a job at a vineyard? Will cheaper fabric compensate for being out of work? I mean, sure, the gains are enough to compensate the losses, but will they actually be used to compensate the losses, or will the losers just be out of luck, and the winners better off?

    Part of the problem here stems from exactly that issue, I think. That, while in theory the gains are enough that the losers can be compensated in some manner, they don't actually get compensated, they just lose.

    1. Mark covered the compensation issue very well in his earlier piece, to which I linked. He argued that Republicans and similar conservatives elsewhere have destroyed the political case for free trade by systematically blocking the spending programmes that could compensate the losing workers. You can't blame the trade negotiators for this. Aren't they entitled to assume that other areas of public policy will be handled fairly and efficiently?

  3. I don't even know how I feel about it… but the California legislature now requires state licensing agencies to treat undocumented people the same as citizens. And it passed without a peep in the local rag. I for one found it rather shocking. Which isn't to say the sky will fall… it probably won't.
    http://www.pe.com/articles/law-775007-state-calif

  4. Also, just fyi… people pick up all kinds of nasty infections in beauty parlors and nail salons… meanwhile, those workers are getting poisoned. The states barely do a thing. I guess it is different where you are.

  5. "However, the stigmatising of regulations as such as obstacles to business is merely conservative propaganda. It disappears once the issue is the extension of state-created monopolies, as in intellectual property law."

    Why does it disappear? State-created monopolies are precisely extreme forms of obstacles to business. Intellectual property, however, is still the only type of property than people are forced to ever give up without compensation (well, other than tax money, that is). If I create a movie or a book, it is not clear to me why I should ever relinquish the rights to that. The purported purpose is to provide incentives to create.

  6. "If I create a movie or a book, it is not clear to me why I should ever relinquish the rights to that." But with or without copyright, it's still yours – you can make as many copies as you like and sell or give them away! What IP does is stop me from making more copies without your consent to feed my starving children. (The sob story was already deployed by the authors and booksellers who lobbied for Queen Anne's Act in 1709 – "and too often to the Ruin of them and their Families" – , but the pirates can write as good a one.) You can make a case that a measure of IP is natural justice, but unlike landed property, we have a clear historical record, and it is as I wrote a monopoly created by statute. There is no case whatever for eternal IP.

  7. I'm not sure how the arguments you make don't apply to almost all international treaties, and I'm pretty sure you don't want to abolish those. Or, for that matter, all legislation dealing with regulatory matters.

    1. I supplied examples why trade negotiations are different. The Paris Agreement went through numerous published drafts. I commented here on two of them. More's the point, NGOs could follow the negotiations, and lobbied vociferously. The European Single Market regulations were also comparatively open. I'm not an expert on UNCLOS (adopted in 1982), but I easily found this note on the history of Article 65, which shows that whale conservation NGOs were able to influence the process on what to most negotiators was a side issue. There's always an element of secret bargaining in the sausage factory, but in these examples it was kept within bounds. The secrecy and absence of stakeholder participation in trade negotiations is the outlier, a throwback to the world of the Molotov-Ribbentrop Pact and secret annexes.

      1. How about the Iran nuclear deal? Or the India-U.S. Civil Nuclear Agreement? Or the START treaties? Or the Oslo Accords? I think these sorts of negotiations are far more common than you are admitting. Beyond that, I am unpersuaded that there's anything unique about large multilateral trade deals. All of the treaties you listed could have been negotiated behind closed doors and subject to everything that you worry about. And NGOs could be admitted to trade deals. There's nothing exceptional about the latter.

        1. Your first examples are classical negotiations about national security, a core and exclusive competence of the state. The diplomats can reasonably claim that opening them up would make deals impossible.

          It would be a revolution in trade negotiations to make them open. How would the current haggling work? The general structure is "my regulation X for your regulation Y". I reckon it would break down completely. In my example, the interests involved in pharmaceutical IP in both countries have no connection to those involved in the licensing of plumbers; why should they be set against each other?

          Update: COP21, the meeting to adopt the Paris Agreement, had 7,000 accredited representatives from NGOs, not counting the demonstrators in the streets. That's what an open multilateral negotiation looks like. Trade negotiators would have a fit.

          1. The diplomats also reasonably claim that opening up trade deals would make them impossible. And I don't see how the sort of regulation we are talking about is not a core and exclusive competence of the state. So, again, I do not see how large trade deals are unique.

            Your update, I think, argues against you. The climate talks are very much like trade deals: they involve regulations; they involve complex trading; countries don't want their negotiating strategies to be open; and there are huge tradeoffs in the various things that are discussed. Please explain how your example does not mean that trade deals could be done like that.

          2. They should certainly try.

            "The climate talks are very much like trade deals." Huh? The basis of the Paris Agreement is that each country adopts its own climate plan. The current one for Pakistan has 350 words, a bad joke. So there is no harmonisation of policy actions at all, no cap-and-trade scheme taking over from Kyoto, no international carbon price. The binding part is the mechanism for submission and review of the plans. Pakistan will be severely embarrassed by the comparison with say Ethiopia, about which I wrote, and especially India. More, Ethiopia is much more likely to get the concessional finance.

  8. Perhaps I didn't read carefully enough, but these ideas seem to be neglecting concentration of wealth and industry concentration. Both of those are legitimate democratic concerns that trade agreements can render impossible to legislate.

    (I think there are protections against monopoly and predatory behaviour in the EU, but I am dismally ignorant about it.)

    Can you expand on these issues as well?

    1. I can't think of anything useful to add. Mark covered the non-compensation issue.

      Is there a demonstrated effect of trade on inequalities of income and wealth? Low-skilled manufacturing workers in rich countries do seem to have suffered from trade recently The effect in China is less clear. Oligarchs have done well, but then so have Chinese workers. Bangladeshis and Cambodians, not far away from a Malthusian trap, maybe not so much. But those are impressions not facts. With my level of knowledge, I would just be weakening the strong political case Mark and I made.

      Monopoly I don't get at all. The lobbing by US corporations for to impose stronger IP protection for their products in Asian countries is lobbying for monopoly. But generally, merchandise trade (eg in solar panels) should weaken monopolies, not strengthen them. You can certainly devise scenarios in which a monopolistic exporter throws a competitive set of low-productivity domestic producers out of business (Indian handloom weavers in the 19th century, say.) What were you thinking of?

      THe EU is pretty good on monopolies. It goes back IIRC to the German Cartel Office. The postwar occupying powers and German liberals blamed prewar cartels and monopolists like Krupp in part for the rise of the Nazis, so the Bunderesrepublik had the strongest anti-monopoly policies in Europe. This carried over to the nascent EEC. Google and Microsoft know the Commission's Competition Directorate is not to be trifled with.

  9. I wasn't looking for demonstrated effects so much as looking for the problems of protected inequalities and facilitated monopolies through free trade. When individual government policies for reducing inequality and monopoly power can be hampered by trade regulations.

    Perhaps what I want is a list of reservations of government power or mechanisms for governments to utilise that allow them to combat monopoly and inequality. The EU seems to be doing some things better than the USA, as in the Google and Microsoft cases. But do nations need ANY oligarchs? Individual or corporate? That seems to be an important challenge for the future, which could be preempted by trade law.

  10. For this, they will need to learn the elasticities, and the only source of this information is the businessmen.

    When I first realized exactly how total the realm of data warehousing was, my first thought was, "Now private interests know exactly how elastic prices are. They can diddle with prices over a vast region and measure exactly what happens." I've never seen anyone else mention it. The concern is usually about someone's individual privacy–important!–and seldom about the power of corporate interests (can you say information asymmetry?) over the populace as a whole.

    Am I simply unread? Or did I have an idea which is actually not just original to me, but genuinely original?

    1. You may well be right that the elasticities could today be found by modelling and data mining. SFIK trade negotiators don't in practice have big teams of econometricians, they have fat Rolodexes (or the modern equivalent) of business lobbyists.

      This provides an additional argument for running the negotiations through a regular international bureaucracy like the WTO, not in ad hoc groupings like TPP withouf a proper secretariat. IGOs aren't all top gun experts, but they can be.

      1. And experiment. There's nothing to keep a large chain of retailers, which controls store pricing and product layout from a central office, from playing with prices. One store has one price; the nearest five stores all have different prices. Tomorrow, those prices have randomized to the other stores. Repeat over and over throughout the world and you've got pretty good data. It's not a perfectly controlled experiment but it's pretty good. Good enough for government work, as they say. 😉

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