Why trade deals are complicated

Dalibor Rohac - Los Angeles Times

The new administration has introduced Washington to a new mantra on trade. Complicated multilateral trade deals, such as the Trans-Pacific Partnership or NAFTA, are a thing of the past. “No longer will we enter into these massive deals, with many countries, that are thousands of pages long — and which no one from our country even reads or understands,” President Trump promised on the campaign trail.

A free-trade agreement, or FTA, does not have to be thousands of pages long, the new conventional wisdom goes. From now on, the United States will seek simple bilateral agreements. Dump the Trans-Atlantic Trade and Investment Partnership, known as TTIP, and its opaque investment courts and rules of origin. Instead, let’s fast-track a U.S.-Britain FTA, ready to enter into force as soon as Britain leaves the European Union.

As laudable as the idea of a U.S.-Britain FTA may be, the new narrative is naive at best. At worst, it could bring genuine trade liberalization to a standstill.

Trade agreements are not long and intricate primarily because trade negotiators are incompetent or captured by special interests; the true source of complexity is that modern economies are governed by complex rules. In other words, they’re complicated because regulation is complicated.

The idealized one-page trade agreement that scraps tariffs, quotas and other explicit forms of discrimination is no longer sufficient to reduce costs. We’re not in the 19th century anymore; tariffs are at historic lows and quotas are practically nonexistent. Open-trade barriers directed at specific countries typically run against World Trade Organization rules.

Meaningful liberalization, then, has to focus on smoothing over the differences in regulatory regimes. Value chains extend through numerous countries and often involve shipping intermediate products across borders. As a result, there are countless environmental, safety and sanitary rules enforced by different conformity assessment bodies.

In a case cited by the Alliance of Automobile Manufacturers, for instance, a U.S. company that sought to export a popular model of light truck to Europe had to create 100 unique parts, spending an additional $42 million on design and development, and perform rigorous tests of 33 different vehicle systems — “without any performance differences in terms of safety or emissions.”

Car manufacturers and large corporations with armies of lawyers can muddle through the morass; smaller businesses and start-ups less so.

Given this state of affairs, those who say that FTAs should be short and simple are effectively saying that they do not wish to deal with the real issue.

Although trade agreements sometimes involve a harmonization of rules, that’s just one form of international regulatory cooperation used to bring down trade barriers.

More frequently, governments commit to open-ended partnerships on regulatory policy, agree to take into account existing international standards set by transnational organizations, or recognize each other’s regulatory requirements as equivalent.

For some free-market advocates, mutual recognition is the preferred tool of trade liberalization. Taken to the extreme, it could lead to FTAs written on a single page. However, governments use mutual recognition only when they are confident that the regulatory practices in question are closely aligned.

It is no coincidence that the most successful example of mutual recognition, the Trans-Tasman Mutual Recognition Arrangement, involves Australia and New Zealand — two countries with a shared political history and common legal heritage. By contrast, the United States and the EU have a number of mutual recognition agreements that are not actually enforced due to underlying divergences in regulations on both sides of the Atlantic.

None of this is to deny that a U.S.-Britain FTA is a good idea. Those eager to make progress, though, will soon find that the two economies are separated not only by an ocean, but by differences in regulation as large as those the E.U. and the U.S. attempted to bridge during TTIP negotiations. That reality will not miraculously change after Brexit, and no matter Trump’s fervent desires, a successful FTA is bound to be complicated and politically controversial.

Those who imagine otherwise are living in a fantasy — and are in for a rude awakening.

Dalibor Rohac

Los Angeles Times

Dalibor Rohac is a research fellow at the American Enterprise Institute. He wrote this for the Los Angeles Times.

Dalibor Rohac is a research fellow at the American Enterprise Institute. He wrote this for the Los Angeles Times.