Today’s Free Trade: Not Free and Not Trade

This Thursday, the US Senate Finance Committee will hold a hearing on “Lessons from the past” in implementing free trade deals. There’s a lot to learn from the past, and much of that will tell us about where we’re going with free trade – in particular whether it is actually free any more, or just managed.

It used to be common to call a trade deal “free” – from NAFTA to the Central American/Dominican Republic free trade agreement. Then in 2012, a batch of “trade promotion agreements” with various countries, including Panama, came along. Now, with the Trans-Pacific Partnership (TPP), not only the word “free,” but even the word “trade” is missing from its title. The reason: Free trade deals aren’t mainly about free trade any more, and haven’t been for some time.

The TPP, for instance, includes long chapters on “harmonizing” environmental and labor standards as much as is acceptable to all parties. This has led the AFL-CIO to oppose the deal, believing it will harm American labor standards. Meanwhile, conservatives have warned that the Partnership will result in a back-door ratification of the Paris climate agreement.

While these objections can be debated, one thing is certain: The TPP is a step on a road to trade bureaucracies controlling what policies are permissible in these areas. NAFTA included some similar provisions, leading my colleague Fran Smith to comment at the time that, “NAFTA threatens to undermine national sovereignty by internationalizing domestic environmental policies.” The TPP goes much further by raising these provisions’ routine enforcement procedures to the level required for actual trade disputes.

This undermines the very principle of free trade, which is based on comparative advantage. Harmonization of standards reduces the advantage of one nation over another, and thus penalizes all parties to an agreement. For poorer nations, this means their people will find it harder to rise out of poverty, while the poor in richer nations also suffer, as their expenses increase. Conceivably, all the gains from TPP’s tariff-lowering provisions could be wiped out by this increased cost.

Furthermore, the TPP contains one particularly worrying innovation. Most recent trade deals have an “investor-state dispute settlement” (ISDS) procedure. This allows a company (the investor) that has been badly treated by a state with which its home country has a trade deal to sue for compensation. This would be used to dissuade governments from disrupting trade for political reasons. The Canadian firm that had invested in the Keystone XL Pipeline, for instance, is using a NAFTA provision to sue the United States over the Obama administration’s arbitrary decision to halt the project.

The TPP includes just such a procedure, but deliberately excludes one industry –tobacco. This is extraordinary. The industry will have no recourse if, say, a government closes down its factories on a whim. The only reason the tobacco industry has been carved out of the general agreements is that it is politically vulnerable. The carve-out has been hailed as a win for “public health” lobbyists. But it is much more than that. It sets a precedent that could pave the way for activists to go after other unpopular industries. As trade policy analyst Simon Lester noted:

Having declared tobacco to be a particularly harmful product, deserving of a special exclusion, what other products might also fall into this category? 40 years ago it might have been butter. How about today? Should we carve out trans fats? Sugar? Bacon?
Some free market economists, such as Pierre Lemieux, have argued that even with these problems, free marketers should still support the TPP because its defeat could mean the end for any trade deals at all.

Yet there is a risk the other way. If the TPP further reinforces the idea of managed trade over free trade, then future deals might look more like tools for setting up transnational bureaucracies than for freeing international commerce.

Originally posted at CapX.