From trade to economic harmonization

In last night’s State of the Union address, President Obama called for the start of negotiations on a Trans Atlantic Partnership — essentially a free trade agreement with the European Union. Interestingly, just hours before, the two top Senator’s with jurisdiction over trade matters sent the top trade negotiator a letter warning how difficult those talks would be. As reported in today’s Washington Post, the letter from Senate Finance Committee Chairman Max Baucus (D-MT)and ranking member Orrin Hatch (R-UT) outline the many difficult issues that the agreement would have to tackle, ranging from pharmaceutical testing to genetically modified foods to intellectual property protection. I could throw in a few they didn’t mention such as aerospace subsidies, tax havens and data privacy.
This list of issues illustrates a major point: trade talks aren’t about trade anymore, at least not the way we used to think about trade. These partnership agreements are about economic harmonization — having the same economic rules and regulations. There is lies the difficulty. Do the US and the EU really want the same regulations? Whose regulations are better?
As I’ve pointed out before, trade entered a new era in 1994 with the inclusion of TRIMS (Trade Related Investment Measures), TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) and GATS (General Agreement on Trade in Services) in the Uruguay Round. These moved trade negotiations past tariffs and at-the-border issue to internal economic and regulatory policies.
The problem with the shift to economic harmonization is that the old dynamics of negotiations don’t work. During my Senate staff career, I was involved in the beginning and the end of the Uruguay Round. When we finally passed the implementing legislation, I mused out loud that I thought this would be the last global round of trade negotiations. None of my colleagues agreed – and some of the old hands seemed taken aback at such heresy. They argued that you can only get an agreement by linking everything in a big package. (In diplomacy – this is known as “linkage.”)
Almost two decades later, I still think I am right. Linkage doesn’t work the way it used to. In previous negotiations, the focus was on tariff reduction. I’ll reduce my tariffs on steel if you reduce your tariffs on autos. This allowed for a win-win (from economists point of view) situation that pushed for lower and lower tariffs. Everyone agreed that the end point was lower tariffs. The question was how to get there.
In the new talks, it is unclear how the trade-offs work, and in what direction the dynamics points. I’ll lower my tariffs on steel if you increase your copyright protection to 100 years? I’ll allow you to subsidize your aircraft industry if you don’t ban my genetically-modified beef? I’ll decrease my agricultural subsidies if you reduce regulations on investment banking?
We don’t have any agreement on what the end point should be. We have a general idea – “open economies” – but we differ dramatically on what that means and on the specifics.
Thus my unease with large multi-issue, multilateral negotiations such at the Trans Atlantic Partnership. I’m not sure we understand the trade-offs any more. And I’m not sure what we really want to accomplish in any one specific area [less regulation on the financial sector or more regulation?]. Rather, as I’ve argued before, we may have to approach each of these economic regulatory issues separately – possibly in separate forums, such as the OECD and the G20. Yes, this being a negotiation, there will be linkage. But the complex web of links will not become so great as to bring the entire structure down. And it will allow all parties to clearly focus on a specific issue not the trade-offs — leading, one would hope to a better outcome.