Saving the Political Consensus in Favor of Free Trade

Abstract

2016 is the year that the political consensus in favor of liberalized international trade collapsed. Across the world, voters’ belief that international trade agreements lead to economic inequality threatens to derail ratification of the next generation of trade agreements and undo the substantial gains made under existing arrangements. The United States elected Donald Trump president on a platform of rolling back or renegotiating trade agreements. President Trump has moved to fulfill that promise immediately upon taking office by “unsigning” the Trans-Pacific Partnership (TPP), the most recent major effort to liberalize global trading rules, and initiating efforts to renegotiate the North American Free Trade Agreement (NAFTA). The United Kingdom voted to pull out of the European Union, one of the world’s largest and most important free trade zones. Europe’s top trade negotiator has declared European trade policy “close to death” after Germany and France held up ratification of a free trade agreement with Canada.

In the face of this onslaught, trade’s defenders have run out of ideas. They point out that trade makes nations wealthier; that trade plays a minor role in creating economic inequality when compared with technological innovation; and that domestic policies unconnected to trade rules can more efficiently address economic inequality, and can do so without the need for international obligations that might be construed as limiting national sovereignty in matters of social policy. These views are right as a matter of economics. But politicians make trade rules, not economists. Right or wrong, voters’ belief that liberalizing trade leads to economic inequality creates a political constraint on trade liberalization.

This Essay proposes a way to save the political consensus in favor of free trade. In order to preserve and extend the international trade regime and the extraordinary gains it has produced since the end of World War II, the next generation of preferential trade agreements should include international obligations binding on developed countries to address domestic economic inequality. In other words, trade agreements must include obligations to redistribute the gains from trade within countries. This approach differs dramatically from that taken in existing trade agreements. Since the North America Free Trade Agreement (NAFTA), trade agreements have tried to protect those who stand to lose from free trade – principally labor interests – by including labor provisions in trade agreements. However, these provisions are outward-looking. They seek to raise labor and environmental standards in developing countries (e.g., Mexico) in order to limit the loss of jobs in developed countries (e.g., the United States). Critics of trade agreements have bought into this orientation. They argue, for example, for removing investor-state dispute settlement (ISDS) from trade agreements. But removing ISDS does little to help those suffering economically in developed countries, and it hurts developed countries’ businesses’ when they operate overseas. The removal of ISDS thus would be a major concession to critics of trade agreements, and yet not one that advances the core objective of ensuring that trade agreements improve economic equality.

To be sure, governments do have domestic programs to help those negatively impacted by liberalized trade rules. Trade adjustment assistance (TAA) programs offer financial assistance to those who lose their jobs due to international trade. But recent studies in the United States suggest that TAA is ineffective. Moreover, unlike trade agreements, which are in force indefinitely, TAA expires every few years unless Congress reauthorizes it – a fight each time.

To put it bluntly, these approaches have failed. They have failed to staunch the loss of jobs and they have failed to persuade voters in developed countries that international trade is not a primary cause of economic inequality. An “Economic Development” chapter in future preferential trade agreements would commit developed countries to addressing their own economic inequality problems at home. An Economic Development chapter would create international obligations for member states to establish fiscal programs, such as education and infrastructure spending, designed to boost economic opportunity for those left behind by growing inequality. These spending obligations would be indexed, so that they would rise and fall with the economic losses attributable to trade agreements. If such losses do not occur or taper off, nations’ spending commitments would naturally sunset.These obligations would be enforced through reporting and monitoring requirements, similar to human rights treaties, and dispute settlement provisions that could lead to a loss of market access, the norm in trade agreements.

Tying measures designed to address economic inequality directly into trade agreements would create political coalitions in favor of continuing efforts to liberalize trade. Those who do not benefit from trade agreements could still support them as a way to obtain greater domestic benefits. President Trump, for instance, has made infrastructure spending a major domestic priority and might be willing to support trade agreements in exchange. And those who benefit most from the liberalized trade rules could support redistribution as the price of further globalization. Trade agreements would create a commitment device allowing those who gain from trade to commit in advance to provide those who do not with a share of the spoils.

Keywords: Trade Agreements, Inequality, Trans Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, World Trade Organization, Trade Adjustment Assistance

JEL Classification: K33, N40, N70