Why trade agreements are so difficult

Last week, the House Ways and Means Committee and Senate Finance Committee took up a new Trade Promotion Authority bill (aka TPA or “fast track”) in the face of hardening battle lines on the subject. The vote to approve the bill was generally party line with Democrats somewhat split and tea-party wing of the GOP raising some concerns (for example that TPP will undercut U.S. immigration law.
Technically the voting was on negotiating authority and trade enforcement measures (see the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 S. 995 and H.R.1890 and H.R.1907 Trade Facilitation and Trade Enforcement Act of 2015). But underlying the debate is the current negotiations over the Trans-Pacific Partnership (TPP) – a potential deal among 12 Asian-Pacific nations. The TPP includes the U.S. and Japan but does not include China. The push for rules for Congressional consideration of trade agreements (TPA/fast track) is seen as a preliminary step toward approval of TPP. It is argued that without these rules, which limit Congressional modifications to the deal, it will be impossible to finalize TPP.
Trade agreements such as TPP (and the rules for negotiating those agreements such as TPA) are highly controversial. Such agreements are also difficult to negotiate. TPP talks basically started in 2005. The broader Doha Round of multilateral trade talks at the World Trade Organization (WTO) started in 2001 and is essentially dead in the water.
Trade agreements have always been difficult and controversial. But the current environment is heightened. As globalization is seen as a factor in stagnating worker income, trade agreements are seen as the mechanism of globalization and therefore a cause for the anxiety. This anxiety is increased by one simple fact: trade agreements are no longer about trade; they are about economic harmonization.
Earlier fast track legislation and trade agreements were more narrow. For example, the Trade Expansion Act of 1962 which authorized Kennedy Round of trade negotiations under the General Agreement on Tariffs and Trade, and the Trade Act of 1974, which authorized the Tokyo Round, were mostly about tariffs. As I have noted 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.
One amendment to the TPA bill in the Senate Finance Committee serves to dramatically illustrate this point. Senator Bob Menendez (D-N.J.) added a section on human trafficking (see stories in the New York Times and the Washington Post). According to the stories, the amendment would deny fast track to any agreement with countries on the State Department’s list of top human traffickers.
A more public debate about economic harmonization has to do with the addition of currency issues in to trade agreements. In Can trade agreements stop currency manipulation? Kemal Derviş of Brookings argues that “trade negotiations are not the right forum for discussing the causes and consequences of current-account imbalances and reaching agreements on macroeconomic-policy coordination; that is what the IMF and the G-20 are for.” Fred Bergsten (Addressing Currency Manipulation Through Trade Agreements) agrees that the IMF would be the best forum to address currency manipulation. However, he argues that “it would be anomalous and unacceptable for such a “21st century trade agreement,” one that seeks to become the new template for global economic accords, to ignore an issue that clearly has greater impact on trade than any other, especially when the International Monetary Fund (IMF) and other institutions have failed to resolve it for so long.” Thus, he believes that adding a currency chapter to the TPP is both appropriate and necessary. In an op-ed in the New York Times earlier this year (“How to Stop Currency Manipulation“) Jared Bernstein echoed this approach. As he noted:

It’s important to recognize that deals like the Trans-Pacific Partnership are not necessarily about “free trade.” They are instead a set of rules; some, like lowering tariffs, lead to freer trade, while others, like expanding patent protections, are more protectionist. Rules governing currency tactics certainly fit the framework.

Moving beyond the correct forum for crafting the rules is the debate over the rules themselves. It is this economic harmonization that is at the core of the clash over TPP and TPA. Proponents argue for TPP saying the rules will benefit the U.S. and that if the U.S. doesn’t write the rules, China will (see “Pass Trade Promotion Authority and enable conclusion of the Trans-Pacific Partnership negotiations“). Opponents don’t like the rules that the U.S. Government seems to be writing (see “The Trans-Pacific Partnership is great for elites. Is it good for anyone else?”). In essence, the clash over TPA/TPP is a continuation of existing debates over domestic policy.
Here is where the issue of content meets the choice of forum. The shift from trade to economic harmonization changes the dynamics of the negotiation process. The old dynamics 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 three decades later, I still think I am right. Linkage doesn’t work the way it used to. In previous negotiations with a focus on tariff reduction, the dynamic was simple. 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. The internal clash over what the rules should be makes it hard to agree with other nations on best policy (i.e. which policy is correct and which is not) when we can’t agree within the nation.
Thus my unease with large multi-issue, multilateral negotiations such at the TPP. 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 i.e.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.
Having said that, the TPP is in process and likely to be finished soon. Given that, there may be a role for an agreement like TPP to serve as an enforcement mechanism for agreements negotiated elsewhere. The negotiating objectives in the TPP legislation already reference a number of other international agreements. The anti-human trafficking section added in the Senate Finance Committee to the TPP legislation is an example of an explicit attempt to use of TPP to enforce an international agreement.
Another explicit attempt to use TPP as an enforcement mechanism can be found in Rep. Sandy Levin’s alternative legislation (Right Track for the Trans-Pacific Partnership Act 2015 – see also the summary). In a critical difference, the Levin substitute explicitly directs the President to “establish strong and enforceable rules, consistent with or building upon Article IV of the Articles of Agreement of the International Monetary Fund.” Article IV requires members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” As noted earlier, the IMF has not proved to be an effective enforcement mechanism. A trade agreement could be. [Note: Rep. Levin is the Ranking Member of the House Ways and Means Committee. The Levin substitute was not allowed to be considered by House Ways and Means during the mark up. I suspect part of it may show up during the House and Senate floor debates.]
In summary, it is time to look beyond trade agreements as a mechanism for economic harmonization. But I doubt that will happen immediately. I assume that once the TPP is concluded attention will turn to the Transatlantic Trade and Investment Agreement (TTIP). And the debate will continue, just as the economic policy debate will continue domestically.


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