As we see it:
- US President Trump attacks trade agreements as vehemently as do many groups on the left. Something is either very right or very wrong with the picture.
- The situation would be funny if it weren’t so serious. When disagreements are fundamental but similar rhetoric infuses the debate, issues are clouded. Erstwhile opponents turn into seemingly allies.
- The question of whether such agreements actually deliver benefit or evils is lost to view.
- This Bulletin will be most useful if it clarifies what is actually written in some of these agreements, and the assumptions that underlie their provisions. Our goal is to unpack some of the rhetoric.
Fierce Trade Winds:
- The UK is at a crisis point with Brexit, and must decide whether to simply cut ties with the EU, or to fall back on the WTO, or to try for a more or less of an EFTA-style trade deal (see bellow) with the EU, or negotiate something unique with the EU.
- Three African trade organizations have come together to create an African free trade zone (AFTZ) Not all African countries are involved but there is talk of further integration, perhaps even a single market. AFTZ adds to the very many bi- and multi- lateral free trade agreements already in existence throughout all regions of the world, many including poorer countries.
- Back home, NAFTA renegotiations are in full swing.
- The US withdrew from TPP, and is threatening to withdraw from NAFTA, and indeed almost all trade agreements other than those it signs with individual countries. This includes the WTO.
- Meanwhile Canada and the EU have reached an agreement, (CETA) although CETA has another round of approvals in the EU. This time from Canada, the provinces were at the table.
- Just last week, a “core understanding” has been reached about a new free trade agreement with all the TPP countries excepting the USA, Canada has not signed yet, citing autos and culture as two sticking points. Sooner or later, a TPP agreement including Canada is very likely.
Getting back to basics:
- All countries trade with each other. Trading relationships have existed more or less forever. Those who are engaged in the trading can be companies, state-owned companies, states themselves or even individuals. In and of itself, trade is not the prerogative of wealthy and/or capitalist countries.
- All countries have negotiated trade agreements: Country X says: “We will not collect money from you at the border when you export your goods or services to us. Most times but not always, these agreements are reciprocal. Again, trade agreements are not in themselves a prerogative of wealthy and/or capitalist countries.
- A tariff (customs/duty) is simply the money paid to the government at the border when goods are being imported.
- “Rules of origin” determine whether or not a product qualifies for free trade (no tariffs).
Trade control measures:
Trade control measures are actions that governments take to control imports in support of domestic industry and jobs. They might include any or all of the following (not an exhaustive list):
- Set tariffs on different products
- Own or subsidize industries and thus set prices and control supply (oil).
- Adjust the value of the currency such that their own goods are cheaper (China??).
- Impose domestic taxes on particular goods or services (e.g. cigarettes).
- Set limits on what government itself can buy and from whom (e.g.procurement policies).
- Promote domestic industries (“buy American”).
- Set standards that other countries cannot meet (for good reasons and bad) (e.g. a carrot sprayed with a particular pesticide residue cannot be imported, or goods must be of a certain shape or size to met the standard).
- Insist that companies or people providing services be licensed. (and thus be subject to domestic licensing regulations)
- Demand that a percentage of the components of any product (“rules of origin”) that is manufactured must be produced domestically.(e.g. cars)
- Impose quotas, saying how much can be produced or imported of particular products (dairy).
- Allow royalties to exceed those charged in other countries.(Canada’s “stumpage” fees for lumber???)
- Manage (and limit) the supply of goods or services. (dairy and wheat supply management boards).
What trade agreements do?
- Trade agreements prohibit or limit governments using some or all of these trade control measures.
What now exists:
- The WTO involves the majority of countries in the world. It has as its goal “trade liberalization”, that is, the eventual removal or at least reduction of trade control measures including tariffs between and among its member countries, but it allows for tariffs. The WTO is not a free trade agreement.
- The WTO is best seen as a standards organization: The WTO develops “rules of the game” for the trade policies of its member countries. Its most important standard says that WTO members must not discriminate between member countries when they impose tariffs, i.e. not to have higher tariffs for bananas from Brazil than from Honduras.
- WTO standards also include prohibition or limitations on its member countries imposing some but not all of the trade control measures listed above.
- Not all goods and services are included under the WTO agreement. (and in some cases there are separate standards bodies, for example to deal with intellectual property).
- The WTO has a dispute resolution procedure, but it does not have a court nor does it have any means of itself enforcing its decisions. Instead, countries that receive a favorable decision from a WTO dispute resolution panel are allowed to impose tariffs on the specific good or service that caused the dispute or allowed to continue with their current trade control measures.
- The WTO allows its participating members to create and participate in free trade agreements.
- Needless to say, wealthier industrialized countries have had the major hand in the WTO. As for poorer countries, the last round of WTO negotiations took up this issue but as yet there is no agreement.
- Because the WTO began as a trade organization, it did not considered health, safety and environmental concerns as legitimately part of its deliberations. Under pressure, however, the WTO has added some provisions and is negotiating others to take account of these concerns but only insofar as they affect trade in goods or services. There are food safety protocols now, for example.
If the UK ends up with “no deal” on trade with the EU (that is, with WTO rules only it will face tariffs; it will have to negotiate separate trade agreements with each country and/or bloc of countries. It will have to live with the WTO’ s restrictions on trade control measures and with the WTO’ s dispute resolution process.
Free Trade Agreements:
- There are free trade agreements in all regions of the world. All allow their participating countries to trade among themselves without paying or by limiting tariffs to each other. All these free trade agreement prohibit or limit some or all of the other trade control measures.
- Some free trade agreements have a dispute resolution process, but most do not. Very few have the equivalent of a court or means of enforcing decisions.
- All free trade agreements only extend to the goods and services that have been included in the agreement, and recall that some simply lower tariffs. Given that there are strong lobby groups from domestic industries (different ones in each country), negotiations are intense and often very take a long time, especially over what will and will not be included.
- In theory, a free trade agreement can contain provisions supporting health, safety, labour and environmental standards as well as cultural protections, but the majority of free trade agreements do not.
The EU makes provision for exempting some products from its free trade. It does so by limiting harmonization, that is for example, saying that particular products can be labeled uniquely.
NAFTA is a free trade agreement with a dispute resolution process. It has some exemptions. The current conflict is also over current rules of origin (a trade control measure) especially with Mexico but also Canada regarding Canada’ s supply management system and softwood lumber.
EFTA is a free trade agreement currently involving three European countries.
EFTA members also belong to an association (EEA) Belonging to EEA guarantees free trade with EU countries, while leaving its members free to set other laws, policies and regulations independently of the EU.
CETA is a free trade agreement between Canada and the EU. It contains exemptions for some goods and services, but removes 98% of tariffs. CETA imposes a transparent process for foreign investor protection, increases patent protection for drugs, but it also includes a strong “right to regulate provision.
The TPP is evolving into a free trade agreement with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand and Singapore. The proposed TPP would include labour standards and has been promoted in part as a counter to the cheap labour policies in China. Canada has not signed on yet, in part because no agreement has been reached about autos or cultural protection.
- If free trade agreements deal with trade relations amongst their members, they leave each member country free to impose tariffs on imports from countries that are not members.
- By contrast, a customs agreement binds its members to impose the same tariff on any good or service imported from a non-member country. As such, it binds countries together in terms of having a joint export strategy (and therefore not being in competition with each other) vis a vis particular countries or blocs.
- Countries can be members of free trade agreements, of customs unions or of both.
- Many economists argue that customs unions as more important/useful than tradeagreements in promoting economic growth.
The EU is a customs union.
EFTA and the EEA (and AFTZ and others) are not customs unions.
Turkey is in a customs union with the EU but not a free trade agreement.
NAFTA is not a customs union and neither is CETA or the proposed TPP.
- Countries that are part of a common/single market share much more than trade policies. They allow free movement not only of goods and services but also people.
- A common/single market has over-arching governance bodies, law making capacity, and a court to handle disputes with mechanisms for enforcement of its decisions.
- Each country retains a significant measure of national sovereignty but always within the standards or requirements set out by the common market members acting through their supra-national governance bodies.
The EU is the only common/single market.
Fierce Trade Winds redux:
- Trade policy is in bad odour these days.
- Governments routinely use trade control measure to protect jobs and strengthen their domestic economies with support from both the left and the right, and also from domestic industry lobby groups.
- Many of these same governments say that trade control measures interfere with competition and innovation, make exports more difficult and make things more expensive. The imposition of trade control measures in the great depression (the 1930s) is said to have deepened the depression.
- In the trade debates is the question of foreign investors’ property rights. Should these be protected if foreign investors see them as unfair? Should foreign investors have a right to compensation and/or access to the courts to get this compensation? Take note, there are many ways that foreign investor interests are already protected outside of the free trade agreements. Most are these are neither public nor transparent. Some (but not all) free trade agreements make provision for a more public and/or transparent process of resolving investor disputes.
- Agriculture, fisheries and financial services are always contentious. In most agreements are decisions about how these sectors will still be protected even under a free trade agreement.
- Patents and intellectual property are always contentious. Away in most agreements are decisions that affect the availability of generic drugs.
- In the debates is the question of how far governments can and should go (once they have signed on) to protect values other than trade, that is, for health and safety, labour standards and the environment etc. Governments’ “right to regulate” is enshrined in most free trade agreements. In practice, worries about infringing the right to regulate right are legitimate. (For example, what will happen to the EU ban on GMOs or the French ban on fracking?)
- In all free trade agreements (and indeed in the policies of international organizations including the UN) is a push for “harmonization”. Harmonization involves making the same or compatible standards between and among countries. Harmonization facilitates trade but undermines those who cannot afford to meet the standard, e.g. poorer farmers or small producers of local goods and services.
- In the debates are questions about who gets to decide. Is it the government that signs the agreements? Do the sub-governments (states, provinces etc.) retain their right to regulate or even have a voice in the agreement?
- In the debates is the fact that increasingly, business models are changing such that trade control measures may become less important from a (domestic) corporate point of view. We will take up the impact of this change in a Muckrakers Bulletin in January.
No wonder people who disagree appear to be in agreement (and vice versa)