When is a trade- agreement not about trade? When it is about economic integration

During my Senate staff career, I had the good fortune to be involved in the beginning and the end of the Uruguay Round (i.e., the authorizing legislation in 1988 and the implementing legislation in 1994). That experience convinced me that trade agreements were no longer about trade; they are about economic harmonization. Earlier fast track legislation and trade agreements were 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.

But these non-trade issues are still usually discussed as part of larger trade negotiations, such as the various free trade agreements (FTAs) with individual countries.

Now we see an example of a trade negotiation that is purely about economic harmonization. As the New York Times article “U.S. and Europe Angle for New Deal to Resolve Climate Spat” points out, “Unlike a traditional free-trade agreement, which entails reducing barriers to trade between partners, this agreement would not involve lowering tariffs on either side.” Not only are tariffs not involved, the agreement does not seek to address any non-tariff barriers (NTB). Nor, it appears, does it require the European Union to change any of its trade laws and regulations. It is strictly about the participation of European companies in a U.S. technology program.

Of course, this isn’t the only example of a negotiation/agreement on economic harmonization. For example, a major international agreement on the taxation of multinational companies was negotiated under the auspices of the OECD (an agreement has recently come under fire from the newly GOP-controlled House Ways and Means Committee).

There is an interesting twist to the story. Under the provisions of the Inflation Reduction Act (IRA), tax credits for electric vehicles are only available to those vehicles using batteries using critical mineral from the U.S. or nations that have a free trade agreement with the U.S. And since there is no US-EU free trade agreement, EU companies are not eligible for the tax break. To deal with this issue, the US and EU are negotiating a “free trade agreement” covering just this one point. Which has raised the question as to whether such an agreement is really a “free trade agreement” as meant in the Inflation Reduction Act.

Assuming that an agreement is reached (and it looks like it will), there could be consequences for future negotiation. Will negotiators latch on to this free trade agreement-like model for other issues rather than attempt to craft a full-blown agreement? Does the help move agreements forward or simply create an ad-hoc and potentially chaotic situation? There is a long-standing debate over whether bilateral free trade agreements lay the groundwork for larger multilateral agreements or remove the incentives for multilateral negotiations. That debate has just gotten more complicated with the injection of this micro-level FTA-lite option.

Personally, I think the more focused version of the process is the way the system will evolve. As I’ve discussed before, I think the large multilateral negotiation is a thing of the past. The shift from trade to economic harmonization changes the dynamics of the negotiation process. The old dynamics don’t work. It was based on the concept of reaching an agreement by linking everything in a big package. But 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 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 situation, 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?

It is not clear to me that trying to deal with such a complex set of trade-offs is useful. Instead, we may have to approach each of these economic integration/harmonization 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.

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