In this year’s State of the Union address, President Obama announced big plans for two major trade agreements, which could have significant ramifications for the future of free trade. Keeping in mind that increaresing free trade has been a bipartisan goal for decades, the prospects of actually implementing this piece of Obama’s agenda are promising. While these agreements could entail additional economic growth and jobs for the American economy, they more importantly have the potential to allow the United States to assume global leadership in determining the rules of the game for transatlantic and transpacific trade in the 21st century.
The immediate incentive for these agreements is to spur growth and create jobs. Robert Lawrence, Albert L. Williams Professor of International Trade and Investment at the Kennedy School, told the HPR that after exhausting options such as fiscal and monetary policy in dealing with current weak economic conditions, “one logical place you come to is exports.” And in order to stimulate exports, Lawrence asserts, “One channel that we ought to be thinking about is trade agreements.”
The Transatlantic Free Trade Area
On the Atlantic side, Obama is pursuing a Transatlantic Free Trade Area (TAFTA) between the United States and the European Union. The easiest part of the negotiations will likely be lowering U.S.-EU tariffs from their already low levels of three to five percent down to zero. According to a study by the European Centre for International Political Economy, a transatlantic zero-tariff agreement would add between 0.99 and 1.33 percent to U.S. GDP.
Some economists are not as optimistic about the deal’s effect on growth. Professor Lawrence Summers, former secretary of the Treasury and former director of the White House National Economic Council, told the HPR, “I do not think it is realistic to expect that trade agreements will be a major source of extra demand for the U.S. economy,” since “the likelihood is that exchange rate adjustments will offset much of what we would gain.” Summers noted that trade agreements are about promoting “economic efficiency” and not primarily tools for “utilizing underutilized resources or bringing the economy back to potential.”
From a European perspective, Edoardo Campanella, an economic adviser to the Italian Senate and formerly an economist at the World Trade Organization, told the HPR, “In economic terms its impact will be extremely limited, since tariffs between the two sides of the Atlantic are already low.” Campanella said that the “symbolic impact would be huge,” however, as strengthened U.S.-EU ties would encourage nations like the UK to recommit themselves to the EU.
The Trans-Pacific Partnership
The Obama administration has also launched negotiations for a Trans-Pacific Partnership (TPP) to facilitate free trade between the Americas and East and Southeast Asia. 11 nations are currently part of the negotiations, including Australia, Canada, Chile, and Singapore. According to Joshua Meltzer, a fellow in Global Economy and Development at the Brookings Institution, the TPP could cover forty percent of global GDP if Japan’s desire to join the negotiations is fulfilled. In an interview with the HPR, Meltzer stressed that the TPP deals with more than just tariff barriers to trade, but with “behind the border measures, the types of regulations that can have an impact on trade.”
These measures range from “motor vehicle standards and fuel efficiency standards to food, safety, and health requirements.” Importantly, Meltzer emphasized, “it’s not about lowering standards.” The goal of modern free trade agreements is to maintain enough regulation to preserve the quality and safety of goods and services, while concurrently lessening the burden of differing standards and regulations on trade. Setting these rules of trade has become the role of regional agreements in the last few years, but that role is unusual.
What About the World Trade Organization?
Normally it is the WTO’s role to create the rules and norms of the international trading system. The problem is that the WTO’s current round of trade negotiations, the Doha Development Round, is at an impasse. Originally begun in 2001, the Doha Round has failed to produce consensus largely because developed and developing nations cannot agree on issues such as agriculture, industrial tariffs, regulatory barriers, and services. Summers believes nations are “waiting for a breakthrough vision in the trade area.” As a result, countries have begun turning to regional agreements to advance their trade agendas.
Reaching deeper integration in the WTO is extremely difficult considering the extensive diversity of the world’s economies. Reconciling the differences between nations such as the United States and Laos makes it quite difficult to create international rules. “The standards that we can all agree upon and are appropriate are extremely different,” Lawrence says, which leaves the WTO with two options.
One solution would be to use the WTO as a medium to create minimal agreements and allow countries to independently negotiate more significant deals. However, Lawrence argues that such a plan is “not healthy.” The second solution would be to negotiate plurilateral agreements in the WTO – “a more variable geometry” – in which only some countries agree to certain measures rather than every WTO member needing to comply with every agreement. This strategy could possibly salvage the Doha Round.
The Geopolitics of Trade
Until the WTO adopts such a strategy of “variable geometry,” agreements like the TPP and TAFTA will shape the rules of the game. For the United States, these agreements are currently a more viable medium for leadership than the WTO. Indeed, the American trade agenda is increasingly becoming a tool of geostrategic planning.
As the United States aims to capitalize on what could prove to be the apex of its geopolitical strength, the next few years could become the period when the rules of twenty-first century trade are set. A large part of the motivation behind the TPP and TAFTA is that the United States has sensed a threat from the growing power of emerging markets. Lawrence claims, “We’d like to establish global norms and global standards while we still are large enough to set them.”
This point expresses the fundamental reason why the passing of these agreements would be so historic and consequential. Every great power seeks to determine global frameworks, rules, and institutions to some extent. The United States is no different, and as the clock ticks on its international dominance, now is the time to define the global trading system for the 21st century.
Bear in mind that while the United States negotiates the TPP, China is working on Asian integration initiatives of its own. One noteworthy example is a deal including China, Japan, South Korea, and the Association of Southeast Asian Nations (ASEAN). China’s actions in trade serve as a unique challenge to American interests and thus leadership on trade is more important than ever. However, Summers says the United States must be careful in aiming to “build a trading system around China,” which he argues would be “a problematic strategy.” Rather than isolating China, we should aim to create an efficient trading framework welcome to China so that the Chinese can join later on.
As negotiations in the WTO remain stalled, regional agreements will continue to define the global trading system. While plurilateral agreements could revitalize the WTO, time will tell if such a strategy will come into fruition. For the time being, the TPP and TAFTA can serve U.S. interests well. TAFTA and the TPP would induce much needed economic growth and job creation by opening new markets to American exports. Most importantly, these agreements serve as crucial opportunities for the United States to shape the global trade landscape for years to come. The future of free trade lies in American hands, and now is the time to seize that opportunity.
Photo Credit: Wikimedia Commons