Reflections On The Evolution Of Trade Policy

Forbes has published an article by Fred Smith detailing the effects of renegotiation and its effects on the North American economy as well as the continents labor agreements. 

The Trump administration’s renegotiation of the North American Free Trade Agreement (NAFTA) could launch a trade war with our major trading partners, Mexico and Canada.

But it also provides the opportunity to revisit the NAFTA agreement and refocus it on the economic gains of trade, rather than an array of non-trade related labor and environmental issues that were added, for the first time, in NAFTA. Returning trade treaties to their core purposes presents a valuable opportunity.

Prior to NAFTA, trade agreements were negotiated under the trade-specific goals of the General Agreement on Tariffs and Trade (GATT), which governed world trade in the decades following World War II. The world was eager to avoid the type of trade wars that had exacerbated the Great Depression, such as the Smoot-Hawley Tariff in the United States, and sought to move away from that era’s protectionist policies.

GATT proved highly successful in providing the rules for global trade negotiations for decades. Trade negotiations are never easy, but GATT greatly facilitated them. It clarified that trade was wealth enhancing, encouraging win/win outcomes to benefit all participating nations.

GATT recognized that some sectorial trade might adversely impact powerful domestic interest groups, such as producers and unions, and created suitable provisions to address those concerns. Nations enacted worker assistance, adjustment aid, and special protections. Still, under GATT, the rules focused on trade, not on other international policy disputes.

NAFTA changed all that by adopting two side agreements, one on labor and one on environmental policy. Labor and environmental groups had become increasingly powerful in American politics. They recognized that trade was becoming an important global economic integrative factor, and sought to piggy-back their global agendas into the process. Most U.S. free trade advocates, having little expertise in these non-trade areas, endorsed NAFTA with its side-agreements, seeing little threat in expanding the treaty policy agenda and hoping it would make passage easier.

Some, including my organization, the Competitive Enterprise Institute, opposed the move, arguing that adding non-trade items to the agreement might lead to global harmonization efforts and reduce the gains from trade.

Moreover, unlike the relative transparency of trade gains, analyzing the higher costs of trade related labor or environmental regulations—on both the U.S. and its trading partners—is more difficult. While each nation can calculate the gains and disruptions associated with changes in trade policy, they can less readily calculate how new environmental or labor regulations affect their domestic economies.

Less powerful nations may be pressured to accept costly environmental rules to gain access to American markets, even though those rules may be far less appropriate for developing nations. America’s massive weight in world trade thus provides U.S. special interest groups and regulators with a vehicle for regulatory imperialism. That in turn can lead to new forms of protectionism. And we’ve seen where that can lead, Smoot-Hawley and all.

GATT’s success owed much to two key provisions, which were intended to ensure that trade issues occurred only at the borders and involved only the nature of the traded items.

The first provision was the Process and Procedures Methods (PPM) rule, which essentially isolated a nation’s regulatory regime from trade disputes. It restricted trade policy questions to the good itself. Questions such as the working conditions under which the good was produced and the degree of environmental impact of that process (to the extent it did not affect the characteristics of the final product) were off the table.

The second provision was the Sanitary and Phytosanitary rule, which required that any health claim against a tradeable item must be justified on scientific grounds. This provision became especially relevant as environmental health claims—such as arguments against genetically modified foods and chemical additives—became more salient. The overall intent was to ensure that trade rules focused on the safety and quality of the products involved, not on harmonizing the economic policies of the trading nations.

Together, these rules helped check protectionist efforts to substitute technical barriers to trade as tariffs were reduced. And all this worked pretty well. Trade increased massively from 1950 through the creation of the World Trading Organization (WTO), GATT’s successor, in 1994.

GATT had worked, but many in the U.S. and other developed countries sought to couple trade deals with other international agreements covering a wide variety of issues, including environmental, labor, human rights, and many others.

Under GATT, trade deals had allowed little opportunity for labor and environmental interest groups to promote their agendas. They could promote their policy goals through other international treaty arrangements focused on specific topics, such as the United Nations Environment Program and the International Labor Organization. But given the economic significance of trade, these groups decided to use trade as the engine to pull their agendas forward.

Is it any surprise that this broadening of the ambit of trade policy into non-trade areas has become controversial? That shift has expanded the ambit of the WTO to include domestic regulatory policies unrelated to trade.

Some of the anti-trade backlash stems from this source. Note that had the Paris Climate Agreement come into effect, high-energy U.S. products might have been subject to environmental tariffs.

Freer trade yields significant economic benefits; labor and environmental rules may or may not. But the latter may be pursued in other international institutions. Shouldn’t trade agreements focus on trade alone?

The article was originally posted at Forbes.