So you thought trade agreements were really about win-win free trade?
As
trade agreements have evolved and gone beyond import tariffs and quotas into
regulatory rules and harmonization, they have become more difficult to fit into
received economic theory. Nevertheless, most economists continue to regard
trade agreements such as the Trans Pacific Partnership (TPP) favorably. The
default view seems to be that these arrangements get us closer to free trade by
reducing transaction costs associated with regulatory differences or explicit
protectionism. An alternative perspective is that trade agreements are the
result of rent-seeking, self-interested behavior on the part of politically
well-connected firms – international banks, pharmaceutical companies,
multinational firms. They may result in freer, mutually beneficial trade,
through exchange of market access. But they are as likely to produce purely
redistributive outcomes under the guise of “freer trade…..
The
consensus in favor of the general statement supporting free trade is not a
surprise. Economists disagree about a lot of things, but the superiority of
free trade over protection is not controversial. The principle of comparative
advantage and the case for the gains from trade are crown jewels of the
economics profession. So the nearly unanimous support for free trade in
principle is understandable. But the almost identical level of enthusiasm
expressed for the North American Free trade Agreement—that is, for a text that
runs into nearly 2,000 pages, negotiated by three governments under pressures
from lobbies and special interests, and shaped by a mix of political, economic,
and foreign policy objectives—is more curious. The economists must have been
aware that trade agreements, like free trade itself, create winners and losers.
But how did they weight the gains and losses to reach a judgement that US
citizens would be better off “on average”? Did it not matter who gained and
lost, whether they were rich or poor to begin with, or whether the gains and
losses would be diffuse or concentrated? What if the likely redistribution was
large compared to the efficiency gains? What did they assume about the likely
compensation for the losers, or did it not matter at all? And would their
evaluation be any different if they knew that recent research suggests NAFTA
produced minute net efficiency gains for the US economy while severely
depressing wages of those groups and communities most directly affected by
Mexican competition?
Perhaps
the experts viewed distributional questions as secondary in view of the overall
gains from trade. After all, opening up to trade is analogous to technological
progress. In both cases, the economic pie expands while some groups are left
behind. We did not ban automobiles or light bulbs because coachmen and candle
makers would lose their jobs. So why restrict trade? As the experts in this
survey contemplated whether US citizens would be better off “on average” as a
result of NAFTA, it seems plausible that they viewed questions about the
practical details or the distributional questions of NAFTA as secondary in view
of the overall gains from trade.
This
tendency to view trade agreements as an example of efficiency-enhancing
policies that may nevertheless leave some people behind would be more
justifiable if recent trade agreements were simply about eliminating
restrictions on trade such as import tariffs and quotas. In fact, the label
“free trade agreements” does not do a very good job of describing what recent
proposed agreements like the Trans-Pacific Partnership (TPP), the
Trans-Atlantic Trade and Investment Partnership (TTIP), and numerous other regional
and bilateral trade agreements actually do. Contemporary trade agreements go
much beyond traditional trade restrictions at the border. They cover regulatory
standards, health and safety rules, investment, banking and finance,
intellectual property, labor, the environment, and many other subjects besides.
They reach well beyond national borders and seek deep integration among nations
rather than shallow integration, to use Robert Lawrence’s (1996) helpful
distinction.
According to one tabulation, 76 percent of existing preferential
trade agreements covered at least some aspect of investment (such as free
capital mobility) by 2011; 61 percent covered intellectual property rights
protection; and 46 percent covered environmental regulations (Limão 2016)…..
Consider
first patents and copyrights (so-called “trade-related intellectual property
rights” or TRIPs). TRIPs entered the lexicon of trade during the Uruguay Round
of multilateral trade negotiations, which were completed in 1994. The US has
pushed for progressively tighter rules (called TRIPs-plus) in subsequent
regional and bilateral trade agreements. Typically TRIPs pit advanced countries
against developing countries, with the former demanding stronger and lengthier
monopoly restrictions for their firms in the latter’s markets. Freer trade is
supposed to be win-win, with both parties benefiting. But in TRIPs, the
advanced countries’ gains are largely the developing countries’ losses.
Consumers in the developing nations pay higher prices for pharmaceuticals and
other research-intensive products and the advanced countries’ firms reap higher
monopoly rents. One needs to assume an implausibly high elasticity of global
innovation to developing countries’ patents to compensate for what is in effect
a pure transfer of rents from poor to rich countries. That is why many ardent
proponents of free trade were opposed to the incorporation of TRIPs in the
Uruguay Round (e.g., Bhagwati et al. 2014). Nonetheless, TRIPs rules have not
been dropped, and in fact expand with each new FTA. Thanks to subsequent trade
agreements, intellectual property protection has become broader and stronger,
and much of the flexibility afforded to individual countries under the original
WTO agreement has been eliminated (Sell 2011).
Second,
consider restrictions on nations’ ability to manage cross-border capital flows.
Starting with its bilateral trade agreements with Singapore and Chile in 2003,
the US government has sought and obtained agreements that enforce open capital
accounts as a rule. These agreements make it difficult for signatories to
manage cross-border capital flows, including in short-term financial
instruments. In many recent US trade agreements such restrictions apply even in
times of macroeconomic and financial crisis. This has raised eyebrows even at the
International Monetary Fund (IMF, Siegel 2013). Paradoxically, capital account
liberalization has become a norm in trade agreements just as professional
opinion among economists was becoming more skeptical about the wisdom of free
capital flows. The frequency and severity of financial crises associated with
financial globalization have led many experts to believe that direct
restrictions on the capital account have a second-best role to complement
prudential regulation and, possibly, provide temporary breathing space during
moments of extreme financial stress. The IMF itself, once at the vanguard of
the push for capital-account liberalization, has officially revised its stance
on capital controls. It now acknowledges a useful role for them where more direct
remedies for underlying macroeconomic and financial imbalances are not
available. Yet investment and financial services provisions in many FTAs run
blithely against this new consensus among economists. A third area where trade
agreements include provisions of questionable merit is socalled “investor-state
dispute settlement procedures” (ISDS). These provisions have been imported into
trade agreements from bilateral investment treaties (BIT). They are an anomaly
in that they enable foreign investors, and they alone, to sue host governments
in special arbitration tribunals and to seek monetary damages for regulatory,
tax, and other policy changes that reduce their profits. Foreign investors (and
their governments) see ISDS as protection against expropriation, but in
practice arbitration tribunals interpret the protections provided more broadly
than under, say, domestic US law (Johnson et al., 2015). Developing countries
traditionally have signed on to ISDS in the expectation that it would
compensate for their weak legal regimes and help attract direct foreign
investment. But ISDS also suffers from its own problems: it operates outside
accepted legal regimes, gives arbitrators too much power, does not follow or
set precedents, and allows no appeal. Whatever the merits of ISDS for
developing nations, it is more difficult to justify its inclusion in trade
agreements among advanced countries with well-functioning legal systems (e.g.
the prospective Transatlantic Trade and Investment Partnership (TTIP) between
the U.S. and European countries).
Read
the full paper here.
So you thought globalisation was a good idea?
Globalization
has led to a rise in global income inequality, not a reduction
Inequality
between individuals across the world is the result of two competing forces:
inequality between countries and inequality within countries. For example,
strong growth in China and India contributed to significant global income
growth, and therefore, decreased inequality between countries. However,
inequality within these countries rose sharply. The top 1% income share rose
from 7% to 22% in India, and 6% to 14% in China between 1980 and 2016.
Until
recently, it has been impossible to know which of these two forces dominates
globally, because of lack of data on inequality trends within countries, which
many governments do not release publicly or uniformly. The World Inequality
Report 2018 addresses this issue, relying on systematic, comparable, and
transparent inequality statistics from high-income and emerging countries.
The
conclusion is striking. Between 1980 and 2016, inequality between the world’s
citizens increased, despite strong growth in emerging markets. Indeed, the
share of global income accrued by the richest 1%, grew from 16% in 1980 to 20%
by 2016. Meanwhile the income share of the poorest 50% hovered around 9%. The
top 1% — individuals earning more than $13,500 per month — globally captured
twice as much income growth as the bottom 50% of the world population over this
period.
Income
doesn’t trickle down
The
second belief contests that high growth at the top is necessary to achieve some
growth at the bottom of the distribution, in other words that rising inequality
is necessary to elevate standards of living among the poorest. However, this
idea is at odds with the data. When we compare Europe with the U.S., or China
with India, it is clear that countries that experienced a higher rise in
inequality were not better at lifting the incomes of their poorest citizens.
Indeed, the U.S. is the extreme counterargument to the myth of trickle down:
while incomes grew by more than 600% for the top 0.001% of Americans since
1980, the bottom half of the population was actually shut off from economic
growth, with a close to zero rise in their yearly income. In Europe, growth
among the top 0.001% was five times lower than in the U.S., but the poorest
half of the population fared much better, experiencing a 26% growth in their
average incomes. Despite having a consistently higher growth rate since 1980,
the rise of inequality in China was much more moderate than in India. As a
result, China was able to lift the incomes of the poorest half of the
population at a rate that was four times faster than in India, enabling greater
poverty reduction.
The
trickle-down myth may have been debunked, but its ideas are still rooted in a
number of current policies. For example, the idea that high income growth for
rich individuals is a precondition to create jobs and growth at the bottom
continues to be used to justify tax reductions for the richest, as seen in
recent tax reform in the U.S. and France. A closer look at the data demands we
rethink the rationale and legitimacy of such policies.
Policy
– not trade or technology – is most responsible for inequality
It
is often said that rising inequality is inevitable — that it is a natural
consequence of trade openness and digitalization that governments are powerless
to counter. But the numbers presented above clearly demonstrate the diversity
of inequality trajectories experienced by broadly comparable regions over the
past decades. The U.S. and Europe, for instance, had similar population size
and average income in 1980 — as well as analogous inequality levels. Both
regions have also faced similar exposure to international markets and new
technologies since, but their inequality trajectories have radically diverged.
In the U.S., the bottom 50% income share decreased from 20% to 10% today,
whereas in Europe it decreased from 24% to 22%.
Rather
than openness to trade or digitalization, it is policy choices and
institutional changes that explain divergences in inequality. After the
neoliberal policy shift of the early 1980s, Europe resisted the impulse to turn
its market economy into a market society more than the US — evidenced by
differences on key policy areas concerning inequality. The progressivity of the
tax code — how much more the rich pay as a percentage — was seriously
undermined in the U.S., but much less so in continental Europe. The U.S. had
the highest minimum wage of the world in the 1960s, but it has since decreased
by 30%, whereas in France, the minimum wage has risen 300%.
Access to higher
education is costly and highly unequal in the U.S., whereas it is free in
several European countries. Indeed, when Bavarian policymakers tried to
introduce small university fees in the late 2000s, a referendum invalidated the
decision. Health systems also provide universal access to good-quality
healthcare in most European countries, while millions of Americans do not have
access to healthcare plans.
