Free Trade's Course Change

8 MINS READJan 24, 2017 | 01:32 GMT
Free Trade's Course Change
(RON SACHS - POOL/Getty Images)
Donald Trump's first day of business in the Oval Office included signing an executive order to end the United States' participation in the Trans-Pacific Partnership trade deal.
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

On his first business day in office, U.S. President Donald Trump used his pen to drive the final nail into the coffin of his predecessor's ambitions to build the mega-regional Trans-Pacific Partnership (TPP). Trump signed an executive order withdrawing the country from the TPP on Monday, effectively killing the deal — and fulfilling a campaign pledge. Several other TPP signees are seeking to salvage the now 11-member trade bloc, either in a weaker form or on a smaller scale. But without the backbone formed by the world's largest economy, its resurrection is unlikely unless another significant global economy steps in.

The TPP is one of many multilateral or mega-regional trade agreements that have faced stiff pressure, particularly in the developed world, where skeptics question the benefits of multiparty free trade agreements. But just because they have fallen into disfavor does not necessarily mean the end of global free trade deals. Indeed, while he has pulled the United States out of the TPP, called for the renegotiation of NAFTA and even questioned some U.S. commitments to the World Trade Organization, Trump has also noted that he is open to negotiating a free trade agreement with the United Kingdom, indicating that U.S. trade policy will, at least during his term, be conducted primarily bilaterally.

In one sense, trade policy and the process of negotiating global trade deals have come full circle. In 1860, France and the United Kingdom negotiated the first modern free trade agreement, the Cobden-Chevalier Treaty. European colonial powers had spent three centuries operating a mercantilist economic model on the assumption that trade was often a zero-sum game and that countries should place high tariffs on imports while doing everything to encourage moving exports to markets. The decline of this viewpoint, and the rising drive for regional trade, meant that the heavy protections on the European continent were ripe to be undone. The deal between the United Kingdom and France helped usher in a wave of negotiations in Europe, resulting in some 57 bilateral trade agreements in less than two decades, almost all of which were built entirely around the removal of tariffs and the concept of most favored nation.

While the flurry of trade deals did not continue at the same pace for the remainder of the century — protectionism returned to the Continent with a vengeance when an influx of cheap products flooded in from the New World, driving tariffs up again — the process of negotiating trade deals was, almost without exception, conducted bilaterally for the next 80 years. At the time, multilateral institutions were nearly nonexistent, and most trade was either in finished goods or commodities such as coal, cotton or spices. The world had yet to globalize, and the vast distances between Europe and other potential trading partners either in the Americas or in the Pacific limited the need for global trade agreements.

True globalization in the modern sense began during the first half of the 20th century. The world was left split between two poles after the end of World War II, and the West, led by the United States, saw free trade as the cornerstone of a successful and vibrant free market global economy. Trade negotiations became increasingly globalized, culminating with the General Agreement on Tariffs and Trade (GATT) in 1947. Successive rounds of negotiations afterward, primarily on tariffs, eventually grew to include 123 countries with the conclusion of the Uruguay Round of GATT negotiations in 1994. That round of talks also included the genesis of the World Trade Organization (WTO) and measures that went beyond the simple removal of tariffs to include the creation of a powerful mechanism to settle disputes and the institution of intellectual property requirements. But multilateralism became a victim of its own success.

The WTO morphed into an organization that not only presided over free trade and the reduction of tariffs and nontariff barriers but also established negotiations over aspects of regulation that were once the sole domain of national governments, such as environmental standards, patent rules and labor practices. In addition, the WTO's membership has grown to 164 countries, each of which has its own views on how globalization should manifest. It should be no surprise that as the process of decreasing barriers to global trade continued, at some point, those regulatory discussions would hit a roadblock. The breakdown of negotiations during the failed Doha Round of WTO talks — and the slow process of implementing agreements made during the Uruguay Round — gave many countries the incentive to forge stronger regional trade agreements to sit on top of the WTO framework. This led to the emergence of smaller regional trade agreements, often encompassing geopolitical goals along with their economic ones.

NAFTA and the TPP are perhaps the greatest embodiment of the regional trade trend. Along with its trade benefits, the United States viewed NAFTA, which was being negotiated as Mexico was liberalizing its economy, as a way to push for increased integration on the continent to support its hegemony in the Americas. Although Mexico initially was wary of NAFTA, it soon reaped the benefits of low trade barriers with its neighbor to the north. The deal has been the policy foundation of the past two decades of Mexican economic success. Certainly as NAFTA is revisited, the Mexican government has incentive to enter negotiations trying to maintain as much of that benefit as possible.

Similarly, the TPP was seen as the centerpiece of the U.S. "pivot" to Asia under Barack Obama's administration. It was a clear response to the rising Chinese economic influence in the Asia-Pacific region and a push by Washington to gain increased access to the dynamic markets of the Pacific Rim, particularly to those in emerging economies in Southeast Asia. But Washington's interest in the pact was clearly not just focused on its economic advantages but also as a way to cement its role in a region of rising significance. Conversely, some of its Asian participants regarded the deal as an aspect of U.S. commitment to the region. And even though the TPP is often described as an all-inclusive trade bloc — and not specifically an alliance in opposition to China — it certainly was an acknowledgement of the rising geopolitical competition and embodied the challenges confronting an emerging power on the regional or even global stage.

The demise of the TPP and Trump's ongoing push to renegotiate NAFTA have shown, however, that political fallout over aspects of the growth of free trade is leading to a freeze in the process, or at least creating a substantial impediment to it, as free trade has alienated segments of society that do not see a benefit from it. This sentiment is not unique to the United States, as the Brexit and the existential threat to the European Union — perhaps the most visible embodiment of the globalization movement and free trade process of the past 60 years — has shown. There is still a broad belief, however, particularly in the West, that free trade deals are needed.

But what has changed is that now the West is unlikely to take the lead in promoting free trade in a global, multilateral or mega-regional fashion. The leadership of Western countries was key to making progress in those deals. With their economic strength, they were able to entice developing countries to join the larger trade blocs by offering access to markets that would help foster growth in the smaller economies through exports. But now, discussions involving the United States and others will more often fall under bilateral frameworks in which the countries involved can more directly manage what is included and what is not.

The U.S. withdrawal from the TPP has forced major economic powers to adjust their strategies as they look to move onward with their free trade agendas. Japan and Australia have taken the lead in campaigning for Washington to reconsider its TPP decision — Japan ratified the TPP just hours before the U.S. presidential inauguration. While Tokyo and Canberra have a strong desire to counterbalance China and meet their respective economic growth strategies, both states will likely accelerate progress toward reaching bilateral free trade deals with the United States and other countries, while simultaneously — if reluctantly — pursuing membership in Chinese-led regional trade blocs. It remains to be seen who, if anyone, can replace the United States and Europe in the role of shepherding the world toward new, broad free trade agreements. In the interim, however, bilateral deals and smaller, more focused and less ambitious trade pacts will be par for the course.

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