The transatlantic trade talks and economic policy research: Time to re-tool

Simon J Evenett, Robert M. Stern 21 March 2013

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“And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs”.

With these 38 words, in his State of the Union speech on 13 February 2013, President Obama launched the mother of all bilateral trade negotiations. It seems trade reform is expected to deliver where macroeconomic policy has failed.

What is a social scientist supposed to make of this development? How should this negotiation be viewed through the lens of the political economy of trade reform? And, what can analysts learn from this negotiation? Let’s face it. Many trade economists are vexed about trade diversion, but has the real world moved on? Are regional trade negotiations what they used to be?

For as long as anyone can remember, there have been proposals to liberalise trade across the Atlantic (Baldwin and Francois 1989). They have all amounted to nothing. No doubt chastened by this experience – plus the legacy of a number of contentious WTO dispute-settlement cases and the entrenched positions shown on matters such as agriculture – US and EU officials have moved cautiously. Expectations have been downplayed, but not too much as to call into question the launching of the negotiations. What, though, of the substance?

In a recent report (HLWG 2013) senior officials on both sides of the Atlantic recommended to their political leaders that the Partnership:

  • Eliminate tariffs on bilateral trade in non-agricultural goods;
  • Bind the highest level of investment reforms and service-sector market access offered by both parties in regional trade agreements signed with third parties;
  • Open public-procurement markets at all levels of government;
  • Take steps to reduce the costs of complying with different regulations across the Atlantic plus initiatives to ensure greater compatibility of future regulations;
  • Develop shared approaches to global matters of shared interest including on intellectual property, environmental and labour policies, trade facilitation, competition policy, state-owned enterprises, raw materials, measures to promote local firms at the expense of imports, and transparency.

How big a deal?

Would such an initiative transform transatlantic commerce, divert trade that much, and undermine the WTO?

  • Outside of agriculture – where barriers remain high and vested interests remain entrenched – the potential for trade diversion is slight; almost 70% of exports from the EU enter the US on tariff lines where there are zero tariffs. Even the comparable percentage for agricultural products exceeds 47%;
  • On the other side of the Atlantic, the percentages of US imports of manufactures and agriculture products that pay zero tariffs are 66% and 47%, respectively.

For sure, there are tariff peaks whose elimination could generate trade diversion – but those peaks are few and the High Level Working Group report contains enough wiggle room that there is no guarantee these tariff peaks will be chopped down to size. After all, at a time of high unemployment, few elected officials will be prepared to swallow job losses in the few remaining protected sectors. Disciples of Jacob Viner that are worried about trade diversion can sleep easier at night.

The fact that so much transatlantic trade is in products where tariffs are already zero goes a long way to explain why the computable general equilibrium estimates of the benefits from transatlantic trade initiatives are miniscule – even by the standards of the literature. The only way recent studies have pumped up the estimated gains of a transatlantic trade deal has been to make speculative assumptions about the impact of reform on productivity growth. This is not to say that productivity gains may not be realised, but it may be a stretch that will leave consumers of policy research none the wiser.

Investment and services

With respect to reforms of investment policies and service sectors, notice the restrained negotiating ambition in the High Level Working Group report. The goal here looks very much like a tidying-up exercise – catching up with the reforms implemented in other regional trade agreements. For sure, binding can matter. However, investment and service-sector reforms in previous regional trade agreements were often implemented on a non-discriminatory basis (Most Favoured Nations to the cognoscenti). This wasn’t conscience policy; it was practicality. For example, why have a set of telecoms rules for Regional Trade Agreements partners and another for other nations? It’s just more paperwork. Moreover, even if the US and EU wanted to discriminate, it is hard in today’s world to define precisely where a firm is from. Or more to the point, financial and legal wizards can find ways to get around most common definitions of corporate nationality. Indeed, there is no indication that the commercial operations in the EU and US owned by third parties would be prevented from benefiting from any Partnership deal.

The point of all this is that any EU-US deal is not likely to discriminate in favour of ‘purely’ US or EU enterprises when it comes to services and investment. This lack of discrimination means that the diversion of cross-border commerce was less than it would have been otherwise.

As to public procurement, the reported shares of contracts awarded to foreign firms are pretty low. This is important for two reasons. There is very little third-party trade to divert in the first place. Second, even if any ambitious agreement to open public purchasing were negotiated, economists have known for over 40 years that the logic governing the effects of such reform on imports is different from tariff reforms (Baldwin and Richardson 1972, Evenett and Hoekman 2005). Indeed, these longstanding insights suggest that the market-access gains from procurement reforms are fewer than one might suggest.

It’s regulatory reform, not border barriers

All in all, then, the traditional market-access agenda in this negotiation – the very subject matter that many analysts have spent so much energy over the years developing tools to analyse – is unlikely to transform transatlantic trade. Nor, given the weaker language in the High Level Working Group report, are the expectations for reform of intellectual property rights, environmental and labour policies, and so on, significant. So the Partnership’s promise stands or falls on the benefits of regulatory reform.

What have researchers shown about the impact of reducing de facto or de jure cross-border discrimination in national regulatory regimes? To say the literature is a bit thin is an understatement, as we learned when we commissioned a series of sectoral experts to look into the matter (Evenett and Stern 2011). What did become clear is that the form and implementation of national regulatory regimes is an important determinant of incumbent firm strategies and investment decisions. Changes in regulations that promote competition threaten the rate of return on prior investments and will be resisted. Although the policy instruments are different from those in trade in goods, none of this should come as a surprise to students of political economy.

Moreover, to the extent that US firms have subsidiaries in the EU which have invested around host-country regulations, then these firms will not be keen on regulatory reforms in the EU that facilitate exports from rivals based in the US. And of course the same holds for EU firms with US affiliates. The presence of so much investment across the Atlantic – trumpeted with such fanfare by US and EU supporters of the Partnership – actually reduces corporate support for greater alignment of existing regulations.

Still, there is the prospect of making future regulations more compatible. Maybe this will work – but maybe not. It’s churlish to rule out that, in some sectors, it might be possible to align future regulations, generating commercial benefits on both sides of the Atlantic. But how can anyone be sure that the benefits will be substantial? This is a serious problem as opponents will almost certainly play up fears of losses. At its best – as John Rawls might have put it – this is tantamount to commercial policymaking behind the veil of ignorance. Less charitably, this is muddling through – with the risk that, in the rush to defend any accord, evidence-based policymaking becomes policy-based evidence making.

What to make of this negotiation?

Taking potshots at this initiative is easy – although not because of trade diversion, the sole focus of so many economic analysts of regional trade agreements.

  • Given the attempts to free up transatlantic trade over the past 20 years, history is on the side of the sceptics;
  • Indeed, the 3 March 2013 commentary in the Financial Times by the Chairman of the US Senate Finance Committee – the very body that would play a key role in the approval of any deal – suggests that a high bar has been set for this negotiation as well (Baucus 2013).

Conclusions

Yet no trade-policy analyst should be smug.

The gap between trade negotiators and professors continues to widen. More and more regional trade agreements include provisions for which there has been little rigorous analysis of the choices available and their consequences. Yet behind-the-border measures have been on trade negotiating tables since at least the 1970s. A critical negotiator might well ask how many more decades will it take before researchers invest in the tools and data necessary to effectively guide negotiations in the policy areas that companies say really count? Some trade analysts, such as Deardorff and Stern (1998), have analysed some of the pertinent issues, but so much more needs to be done. It is not just the credibility of trade negotiators on both sides of the Atlantic that is on the line – analysts must re-tool if they are to demonstrate they are as relevant to 21st-century trade policy deliberations as they were in the past.

References

Baldwin, Richard E & Francois, Joseph F (1999), Dynamic Issues in Commercial Policy Analysis, Cambridge Books, Cambridge University Press.

Baldwin, Robert E & J David Richardson (1972), “Government Policies, Other NTBs, and the International Monetary Crisis”, in HE English and Keith AJ Hay (eds.) Obstacles to Trade in the Pacific Area: Proceedings of the Fourth Trade and Development Conference, Carelton University, Ottawa.

Baucus, Senator Max (2013), “Transatlantic Trade Deal is a US Priority,” Financial Times, 3 March 2013.

Deardorff, Alan V and RM Stern (1998), Measurement of Nontariff Barriers, University of Michigan Press.

Evenett, Simon J & Hoekman, Bernard M (2005), "Government procurement: market access, transparency, and multilateral trade rules", European Journal of Political Economy, Elsevier,21(1), 163-183, March.

Evenett, Simon J & Robert M Stern (2011), Systemic Implications of Transatlantic Regulatory Cooperation and Competition, World Scientific.

HLWG [High Level Working Group] (2013), Final Report, 11 February.

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Topics:  International trade

Tags:  US, EU, trade, Transatlantic Trade and Investment Partnership

Professor of International Trade, University of St. Gallen, Co-Director of the CEPR Programme in International Trade and Regional Economics.

Professor of Economics and Public Policy (Emeritus), University of Michigan