February 9, 2017

The Chimera of Two-Way Trade Deals

Nita Ghei

Director of Policy Editing
Summary

While the TPP was far from perfect, overall it enhanced freedom to trade. There is little reason to believe that bilateral treaties, if they emerge, will be superior to the TPP. In the interim, neither American consumers and businesses, nor our those of our trading partners will benefit at all.

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The administration's announcement of withdrawal from the Trans Pacific Partnership trade agreement was immediately accompanied by an avowal of a commitment to bilateral trade agreements with individual countries. Japan, for one, seems to be open to such negotiations.

There is little reason to hope that such deals will be completed successfully and, if completed, little hope that they will achieve much in terms of gains to consumers and businesses in either country. They will quite likely be harmful.

The accepted view among economists is that if a country has no market power — that is, if it cannot influence the world price of a good — it's better off unilaterally dropping tariffs and other barriers to international trade.

Multilateral liberalization, such as that achieved through the successive rounds of the General Agreement on Tariffs and Taxes (GATT), generally reduces barriers to trade. From the start of the first round of GATT in 1947 to the establishment of the World Trade Organization in 1995, the steady increase in freedom to trade has helped increase prosperity in many of the poorest countries of the world, as well as benefiting poorer Americans.

Much of the success of the GATT was dependent on the Most Favored Nation (MFN) clause (Article I), which requires each nation to treat all trading partners alike and not discriminate in their tariff policy between trading partners.

Article XXIV makes it possible for regional trading blocs, like the European Union, or the North American Free Trade Agreement to exist without violating treaty obligations. When, however, members form a customs union or a free trade area (other than developing countries), the exchange of preferences cannot be partial, but cover "substantially all the trade" in the products by the nations participating in that agreement. A bilateral treaty between the United States and any other country, such as Japan, cannot be limited and be compliant with GATT obligations.

Even putting aside the issue of compliance with existing international obligations, there is no reason to believe the process will be smooth.

Most of the trade barriers that could be removed with relative ease have been removed. Once tariffs come to less than 10%, it is extremely politically difficult to lower them further. The issues of subsidies and lobbying by interest groups become more important as the number of nations falls.

Multilateral negotiations, by sheer weight of numbers, can reduce the power of narrow interest groups and lobbying. This power is enhanced by the MFN and national treatment clauses in the GATT, which provide assurances that all trading partners will be treated alike, and imports will be accorded the same treatment as domestic goods.

In the case of bilateral treaties, businesses who stand to lose from import substitution will be energized to lobby for special protection, which attenuates whatever possible gains from trade the arrangement might deliver.

Agricultural subsidies, for example, can kill the deal.

They were part of the now stalled negotiations of the Doha Round. A small minority of farmers from Belgium's Wallonia region almost derailed the Canada-EU Trade Agreement — an agreement that was seven years in the making. Even as the Japanese government is indicating willingness to negotiate a bilateral treaty with the United States in lieu of the TPP, there are indications that Japanese agricultural subsidies and barriers to trade will be difficult to overcome.

There is no reason to believe, based on the example of Canada and the EU, and rumblings in Japan within the same day, that negotiations will proceed smoothly and swiftly. The TPP was negotiated for many years. A scenario where negotiations are conducted for a similar duration, except separately for each country, is certainly plausible. And each of these treaties will be more vulnerable to lobbying, and therefore the benefit to Americans will be lowered correspondingly.

Further, bilateral treaties are more prone to "trade diversion" in that U.S. imports from the trading partners increase due to lower tariff barriers, diverting trade from another partner where the good is being produced more efficiently.

Multilateral agreements like the GATT, on the other hand, are "trade creating," and the total volume of trade and output increases as businesses in all the nations in the agreement concentrate on producing what they can do best, and openness encourages innovation and growth.

While the TPP was far from perfect, overall it enhanced freedom to trade. There is little reason to believe that bilateral treaties, if they emerge, will be superior to the TPP. In the interim, neither American consumers and businesses, nor our those of our trading partners will benefit at all.