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Response to Mercatus Center's Dan Griswold on Trade Policy

Recently, we wrote a piece noting the turmoil over trade policy, suggesting that trade policy had gone astray—diluting the voluntary exchange element of trade with an array of progressive-style global regulatory pushes. This is a position that CEI has taken since the North American Free Trade Agreement (NAFTA) was still being negotiated in 1992, and that led us to oppose that agreement for including environmental and labor “side agreements.” Given the current administration’s desire to rethink trade negotiations underway, we suggested that one desirable reform would be to strip away such non-trade features and focus on the pros and cons of trade economics.

Dan Griswold, a trade economist at the Mercatus Center, took us to task for that suggestion. He argues our opposition to the non-trade provisions now embedded in trade agreements amounts to making the perfect the enemy of the good. In fact, while CEI opposed NAFTA because of the labor and environmental side agreements, in our piece we say explicitly that “NAFTA offered substantial benefits from lowered trade barriers.” Our argument was that if the U.S. plans to revisit two decades of trade policy as the administration has indicated, policy makers ought to direct their attention to re-centering trade policy on trade by rejecting the inclusion of non-trade provisions in future agreements.

Trade policy in its modern guise emerged in the post-World War II period, when the United States was the dominant economic force in the world. GATT—the General Agreement on Tariffs and Trade—was created in 1947 to rethink the protectionism of the 1930s. And GATT was extremely successful, leading to rapid reductions in the more “honest” tariff form of protectionism.

GATT negotiations, it should be noted, did attract protectionists (especially in agricultural products; farm interests are powerful in most nations) but also gained some support from importing economic interests. And since trade was about trade—and nothing else—other interest groups (both economic and ideological) generally ignored the process. Under GATT, trade expanded and the world seemed moving toward open global markets. The last great success was the Uruguay Round in 1994.

But GATT’s success led bureaucrats and “free traders” to seek a more powerful global trading agency and, thus, a supposedly much stronger World Trade Organization (WTO) was created in 1995 as part of the Uruguay Round. GATT hadn’t, after all, eliminated all tariff protectionism. Agriculture remained subject to import duties and new growing sectors of the world economy such as services and intellectual property weren’t considered.

Moreover, GATT had focused mostly on tariff reductions, the “honest” and visible form of protectionism. But as “free trade” gained legitimacy, protectionists moved to restrict trade by the increasing use of non-tariff barriers (NTBs). NTBs sought to extend to one’s trading partners domestic regulations—to “level the playing field.”

Nations, of course, had long sought to “protect” the health and safety of their citizenry with rules of this sort. The WTO’s Sanitary and Phytosanitary Measures Agreement targets barriers to trade disguised as health and safety regulations and sets scientific and other constraints on policies related to food safety and plant and animal health. Another important difference between the GATT and the WTO is that the WTO created a binding dispute settlement mechanism to enforce trade agreements.

Note that the trading rules recognized that nations had very different economic and social conditions and sought to have trade rules apply only to the product, not to the process or production methods (PPM) used to produce it. That PPM concept meant that the internal processes and production methods used to produce tradeable goods would be the decision of the nation—trade would deal only with the product itself. Moreover, science-based standards would determine whether a good met the criteria. Protectionists were denied the right to simply use biases or unsubstantiated claims.

But protectionists realized that NTBs were a useful tool and pushed for their expansion on a wide array of non-economic bases such as environment, labor, and human rights. All worthwhile causes to be sure, but including them in trade negotiations encouraged a wide array of non-economic groups (both economic and ideological) to become involved in WTO negotiations. Trade, these groups argued, must take their issues into account.

The reality that trade expansion increases wealth and that, as wealth increases, nations move to address these causes was largely ignored. Economic protectionists care less about wealth creation or better social conditions than in protecting themselves from competition. Issue ideologues do seek such improvements, but they’ve long been convinced these are better achieved by coercive political rules than “trickle down” approaches. Thus, an unholy alliance of economic and ideological protectionists formed to block more open trade.

Environmental, labor, and rights groups were useful allies in these fights, but demanded something in return. That led to the side agreements included in NAFTA and subsequent trade agreements. Many free traders thought that these were mere frills. After all, they did not affect the United States. They simply pressured our trading partners to adopt our wise policies.

CEI argued that holding trade hostage to such issues was regulatory imperialism, something forced on less-developed trading partners. Moreover, such provisions encouraged American firms to seek regulatory relief by “exporting” the restrictions, rather than opposing them domestically. Additionally, pro-regulators in the U.S. could and did argue that the acceptance of such rules by poor nations demonstrated the need for even stronger rules here.

The results of bringing everything into trade agreements has not been good. The WTO has disappointed many free traders. Since 2007, efforts to negotiate and gain approval for global trading deals has broken down. The result has been a retreat to bilateral and regional agreements instead, and the demise of the two most ambitious agreements—the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP).

So, like Dan Griswold, we agree that trade is a good thing and negotiations between parties to mutually (or even unilaterally) open their borders is also good. But, as noted above, we believe that the inclusion into these negotiations of other issues, however meritorious they might be, has slowed the growth of free trade.

And we do argue that the inclusion, or even the threat of inclusion, of these provisions into trade agreements has been harmful. Africa must deal with Europe, trading its agricultural products for tech and manufactured products. Yet, the European Union has imposed an agricultural biotechnology ban on Africa, denying that hungry continent access to the technological innovations that might have alleviated their plight. Colombia had to significantly change its domestic labor laws to meet requirements imposed by American negotiators.

Even when countries share the same values and goals, they do not necessarily adopt the same approaches to reach those goals. Individual countries are in the best position to determine what is needed to achieve their own goals and the trade-offs that are involved in exercising discretion. For the U.S. to insist that Colombia or any other country ensure compliance and enforcement of its domestic laws through detailed procedures specified by the U.S. violates the sovereignty of that nation.

Classical liberals should fight for economic liberty at home and abroad. As trade economist Jagdish Bhagwati has stressed for decades, we must critique trade policies that force poor countries to adopt U.S.-style regulations. By all means, address the thorny problems associated with more sophisticated forms of protectionism: strengthen the rules that constrain standard-setting to scientifically validated bounds and work to eliminate the residual areas where tariffs remain significant. But realize that government policies often interact in strategically structured ways to hide their actual impact on consumers and business.

TPP and TTIP—on net—might well have been beneficial, but they would have been even more so and been more likely to have survived had they not become Christmas trees for the myriad causes that dominate the modern global economy. Thus, our essay suggesting that one way back would be to strip away the non-trade features of future proposals.

Unfortunately, as labor and environmental provisions become more stringent with each new U.S. trade agreement, they increase the ability of special interests, such as unions, environmental groups, and protected industries, to restrict trade. It is time to end this practice of appeasement. As history has shown, it does not work. Big Labor will never endorse free trade in any form. Congress needs to approve free trade deals on the treaties’ own merits. “Free” trade ought to be free again.