Tuesday, 18 September 2018

Brexit delusions repackaged for the USA are no more likely to succeed

An alliance of American and British free market think tanks yesterday launched their flagship template for a free trade agreement between the US and the UK. It styles itself as a "free trader's" ideal. From the get-go it erects a straw man.
Real free traders may consider the notion of an ideal free trade agreement oxymoronic. After all, real free traders are most concerned about eliminating domestic barriers to trade, whereas trade agreement negotiators consider those same barriers to be assets. Free traders seek the removal of domestic barriers, regardless of whether other governments promise to do the same; we understand that the primary benefits of trade are the imports we obtain, not the exports we give up. 
This is quite typical of the think tank breed. Everyone who works in the discipline of producing free trade agreements is not a "real free trader" by their definition - and conventional wisdom must be casually swept aside to make room for their inspired radicalism. Here we see the belief that "real free traders" do all they can to unilaterally remove barriers as a matter of course and this of itself is a universal good with automatic results.

The process of trade, however, is very much the process of coordinating commitments to reducing barriers to trade. These barriers can be of varying nature where domestic governance systems may cause bureaucratic costs and delays where the only way to eliminate that barrier is either to eliminate the governance system entirely (which assumes these systems do not exist for a reason) or to work with trade partners to enhance the compatibility of systems, preferably working to common standards be they data conventions or product standards or even just the standardisation of forms and processes.

Naturally this means if there are radical systemic changes to be made to trade governance systems, it usually falls upon the junior partner to align with that of the larger party. In this instance the USA has the leverage as the regulatory superpower. It won't lift a finger if it doesn't have to - especially if it does not see us as an equal - which it doesn't. This is the regulatory gravity effect. Trade 101.

Like all "real free traders" any stab at a trade policy means bending the definition of free trade to meet their own dogma. Here is where we see some of the Minfordesque unilateralism creeping in.
Free trade is a condition characterized by the absence of trade barriers. Establishing the most important conditions for free trade - the elimination of domestic barriers - requires no formal agreements between or among governments. It is misguided to believe that the economic freedom of people living in one sovereign nation should depend on the consent of a foreign government. But the benefits that accrue to producers, workers, consumers, and taxpayers when their own government eliminates or reduces its own trade barriers - regardless of whether a foreign government agrees to do the same for its citizens are ample and well-documented.
The assumption here is that two nations each taking their own domestic measures can eliminate trade barriers without reference to what each other is doing. This is a conceptual fallacy we have seen before from one of the reports authors.

As it happens, for the last twenty years the entire edifice of non-tariff related activity in the realm of intergovernmental trade talks has been around the establishment of common standards because that above all reduces barriers and, in fact, differentials in regulatory approaches are the chief barrier to further trade liberalisation between the EU and the US.

It is interesting, through, that the report sets up the straw man concept of unilateral removal of trade barriers. It sets the stage nicely for the recurrent "mutual recognition" hobby horse that appears no less than twenty nine times in the report - which tells us that the lead contributor on regulatory affairs is one Shanker "snake oil" Singham of the Institute for Economic Affairs.

Mutual recognition appears to be an obsession of the Tory "fwee twade" set because it presents itself as the magic bullet for frictionless trade while retaining regulatory sovereignty. It is embedded in the script.

There is, of course, a reason why the EU finds it difficult to forge a comprehensive trade agreement with the US. The regulatory cultures are fundamentally different, which reflects in the way regulation is written and enforced. Mutual recognition simply would not work and the Americans would regard it as a huge back door into their regulatory system, with profound sovereignty implications.

Basically, it means surrendering the right to set domestic product standards. The US would have to accept whatever the UK decided was appropriate and the chances of Congress agreeing that are precisely nil. If they they won't do it for the EU then they won't do it for us either.

More to the point the US is doing exactly what the EU does in its own backyard. It uses trade agreements to export its own standards and make its own regulatory demands - much like we see in the TPP agreement. There is no reason to expect it will make an exception for the UK.

Here we see a particular Tory delusion that imagines there is a special relationship with the USA. There are occasionally warm diplomatic words toward the UK, particularly from the ambassadorial branch since we tag along with US military adventures, but when it comes to trade, America has always operated an America First policy and Donald Trump will be no different even in respect of the UK.

The report has a similar approach to the Tory approach to Brexit in that complex problems can be eliminated at the stroke of a pen by clever rhetorical devices. They sound superficially plausible and even credible to the uninitiated but I suspect I am not the only trade geek reading this report and rolling their eyes.

It would take considerably more of my time to dismantle the entire report which is scarcely worth it since the publication of these reports are usually only for the greater glory of their authors, launched to a fanfare of media coverage on a slow news day with accompanying favourable poll and then a day later it is completely forgotten. We will, though, see a regular repetition of themes filtering into the debate over time, one of which will be a redefining of the concept of a free trade deal. It's easier to shift the goalposts when you re-programme the language. Take a look...
At the outset, it should be made clear that free trade and FTAs are not the same thing. Free trade is about the freedom of people to transact as they wish, when they wish, with whom they wish, and without politicians and bureaucrats as gatekeepers. Free trade is about removing impediments that benefit some at the expense of others so that each of us individually has the fullest battery of choices to decide how best to use our own resources. FTAs are really more about managed trade, which often includes labyrinthine rules intended to distribute particular benefits to specific interests. In some respects, FTAs give free trade a bad name. However, despite their flaws, FTAs have helped reduce domestic impediments to trade, expand our economic freedoms, and lock in positive reforms. Over the years, FTAs have delivered freer trade.
They are, of course, right in that free trade agreements are not free trade and were it not for the ill defined language of the WTO we would still be calling them by their proper name... Preferential Trade Agreements. Far from being free trade, they very much are managed trade - and for good reason. Here we get an insight into the mindset of "real free traders".

They say "Free trade is about the freedom of people to transact as they wish, when they wish, with whom they wish, and without politicians and bureaucrats as gatekeepers". That is the end point. That is where we want to get to - but here we have to ask how we get there? And that is why we have "politicians and bureaucrats" - not as gatekeepers, but as facilitators who, through coordinated activity, can eliminate the many non-tariff impediments to trade. Describing them as bureaucrats implies they are parasitic rather than central to the process.

But then trade and commerce is not devoid of politics. What drives trade, as much as anything, is the desire to create a level playing field. A typical example being a global drive on labour standards in international waters to ensure that our own fishing vessels are not undercut by foreign operators using filipinos on slave wages.

Typically labour provisions without surveillance systems are very often of little observable value and generally only a figleaf, but in some sectors like fishing, such standards are enforceable and there is the political will to do so. These are the sorts of complications that turn "free trade" into managed trade.

In addition to this we add layer upon layer of complexity as we try to monitor, define and tax trade in services while protecting intellectual property rights on goods and digital content. The free trader imperative for simplifying trade is wishful thinking. Modern trade beyond the shipment of tins of tuna is inherently long-winded, complicated and time-consuming. There is no simplifying it much though we may wish we could. 

Moreover, as "real free traders" fixate on cutting tariffs and deregulation, very often the focus is on improving the profitability of already maximised value chains by eliminating fraud, counterfeiting and food adulteration by improving regulation. The core element of any transaction is trust and complex FTAs go a long way to establishing systems that buyers can place their trust in. That is the inherent value of regulatory systems. Eliminating those such overheads can do more than a substantial cut in tariffs, many of which are already negligible.

Where things get interesting though, is that for every value chains distortion a preferential agreement eliminates, it can always create more. Modern trade agreements have measures against preference erosion which can mean an FTA is actually entrenching inefficient value chains. This is why FTAs are often described as termites in the trading system, undermining multilateral efforts. In fact, it is hard to support the authors claim that they seek to be radical when they are still thinking along the lines of comprehensive bilateral FTAs.

Here we need to look at the successes in recent years in achieving incremental progress on a multilateral basis. Global regulations from the IMO and UNECE have created platforms we can build on which can over time eliminate the regulatory differentials between large blocs and countries ensuring that we are not forced to choose which regulatory superpower we have to bend to. The more granular such systems are the more likely they are to succeed, but even individually can add billions to global trade. The holy grail would be a global medicines approval system.

What this report is, though, is a series of well worn and timid free trader canards marinated in free market dogma seeking to bend reality to obsolete ideology - particularly "free trade" with none of the external obligations that go with modern trade. I would expect nothing else from this particular nexus of think tanks since they are all interchangeable in ideas and personnel.

As it happens, I sincerely doubt we are ever likely to see a comprehensive FTA even though the political will may be there. It has to be ratified on both sides right about the time when fondness for the hard right fantasies of the IEA et al are rapidly going out of fashion. Such a deal is never going to be a substitute for the single market nor will a deal based on "mutual recognition" delusions ever come to fruition. First and foremost it will depend on the regulatory commitments made to the EU and it would be impossible to scope such a deal until we know what the EU relationship looks like.

Provided the UK does not make a monumental mess of the Brexit process there is every reason to believe it will remain a fairly wealthy country, but if it chooses FTAs over multilateralism we must get used to being only a mid ranking power and not a priority for many of the larger economies. Being that the case we are better off waiting for the EU to conclude a deal with the USA and find ways to plug into that. We must look at trade tools available to us beyond FTAs taking as read that our room for manoeuvre on regulations and tariffs will be slender should we wish to maintain our current trade volumes with the EU.

That is not to say the UK is without assets and opportunities, only that we have to develop our regulatory diplomacy abilities making use of international mixed alliances in standards forums and international organisations. Instead of a regulatory race to the bottom we should seek to raise standards for all and use an integrated trade and aid policy. We are not without allies and we can lead sectoral alliances which can rival the EU dominance. We cannot, though, bet the farm on an erratic and self-interested player like the USA and it would certainly be unwise to put our faith in the ideas of scripture driven think tanks who refuse to see the complications in the world as we find it.

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