9 April 2015

TTIP benefits crony capitalists, not free enterprise


The Transatlantic Trade and Investment Partnership (TTIP) is often described as a free trade agreement between the U.S. and the European Union. If that were true, it would deserve the support of everyone who believes that economic freedom is vital for growth, and offers our best defense against the power of vested interests. But TTIP is both far more and far less than a free trade agreement. Indeed, it’s testimony to the fact that, between the U.S. and the EU, the free trade agenda, as we have conceived of it since 1945, is dead.

Let’s start with a definition: a free trade agreement is one that definitely reduces the ability of government to control trade. In the past, this control often came in the form of tariffs and quotas. But all government controls have the same effect: they increase the price of imports, either by taxing them directly, or by reducing the number of suppliers or the quantity of goods they are allowed to supply. So the basic standard that TTIP – or any trade agreement – has to meet if it is to promote free trade is simple: it must lower the cost of imports by clearly make it easier for everyone who wants to participate in the market to do so without government restraint.

The usual way to make the case for a free trade agreement is to model the gains that will supposedly result from it. In the case of TTIP, the results of this exercise are disappointing. The Centre for Economic Policy Research (CEPR) estimated in 2013 that, if an extremely ambitious TTIP had been signed immediately, U.S. GDP would grow about one-third of a percentage point by 2027. By the same date, the EU’s GDP would be about half a percentage point larger. In both cases, GDP gains would be worth about €100 billion. That sounds like a lot, but compared to an EU economy worth about €14.3 trillion, and a US economy that is smaller but growing more rapidly, it is not much.

The reason for this is simple: trade between the U.S. and the EU is already mostly free. Now, it’s true that all gains are worth having, and that all advances in economic freedom are valuable. But TTIP is simply not like the post-1945 GATT, which was negotiated in a world where tariffs were relatively high and quota discrimination was widely practiced. Defenders of TTIP like to argue that the gains from it could be “pretty substantial” and that it will have a “big effect.” Here’s that effect in personal terms: if you make £40,000 today, TTIP is like me promising you a raise in 2029 to £40,200. That is not a big effect.

If that was all there was to it, we could dismiss TTIP as a lot of overblown noise about a modestly significant potential agreement. We could agree that TTIP is not going to rescue the Euro, restart the EU’s economic growth, save NATO, or do any of the other miraculous things that have been claimed for it, for the simple reason that, no matter how hard you squeeze, there is just not enough juice in the orange. But that is not all there is to it. As everyone who has examined TTIP recognizes, most of the gains – in the case of the EU, about three-quarters of them – come from reducing what are known as non-tariff barriers to trade.

There is no universally accepted definition of non-tariff barriers, but they are “generally defined as policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both.” A TTIP that simply eliminated the remaining tariffs and quotas between the U.S. and the EU would be easier to negotiate and would be worth something. Indeed, a survey by the Atlantic Council and the Bertelsmann Foundation found that tariff elimination was both the most important and easiest issue in the talks. But the basic question that believers in economic freedom must answer is whether, and how, we want to reduce non-tariff barriers to trade. And in the case of TTIP, that comes down substantially to making sure the U.S. and the EU have the same rules for goods, which should reduce costs for manufacturers, and ultimately consumers.

This is where I disagree with previous CapX contributors like the Adam Smith Institute’s Sam Bowman, who likes TTIP’s emphasis on regulatory harmonization, viewing it as the logical next step in the advance of free trade. But three concerns make me doubt that. First, the basic fact is that the EU is a very highly regulated region, as is the U.S. The idea that any agreement between the EU and the U.S. will result in a less intrusive regulatory regime is implausible at best. And if TTIP simply evens out differences in regulations between the U.S. and the EU, it will not reduce the ability of governments to control trade: it will only level it out. The widespread opposition of the left to TTIP on the grounds that it will gut the welfare state is as ironic as it is misguided: TTIP is explicitly about empowering governments to write rules that regulate the market.

The second problem is that having one transatlantic regulatory regime would vastly reduce regulatory competition between the world’s most advanced industrial democracies. Believers in the free market should value that kind of competition as much as they value other kinds. Bowman argues that the learning mechanism involved in regulatory competition is so fuzzy that, in practice, it doesn’t work. That is a strange argument to make in a world that has seen the rise of privatization, the invention of pollution pricing, and the near-abandonment of tariffs, all of which are changes that have spread widely through precisely the kind of discovery process that Bowman dismisses. Of course, regulatory competition, like all competition, is imperfect, but the answer to those imperfections is not to argue that competition is valueless: it is to do what we can to improve and increase competition. TTIP would reduce it.

The third problem is by far the most significant. I have no doubt that regulatory harmonization through TTIP would reduce costs for today’s firms, and that this would, to an extent, be good for consumers. But corporatism is not free trade. Our goal should never to be to help companies: it should be to make the market freer. Contrary to the conventional wisdom of the left, the firms of today often like regulation, because it makes life harder for the firms of tomorrow. Most firms, after all, have a short lifespan: if they can prolong it by using the power of government to exclude competitors, they will. There is a term for this kind of thing: crony capitalism.

In practice, regulatory harmonization will be a free-for-all of industry, interest, and ideological groups lobbying the European Commission and Washington, DC, to secure favorable rules. As Ezra Klein recently pointed out, modern trade deals “can only really be navigated by politically sophisticated, highly-motivated actors . . . [which] leads to deals jam-packed with individual provisions that look a lot like giveaways.” In other words, TTIP would be good for the firms of today, but would likely do long-term harm by making it harder for competing firms that have not yet been founded, based on ideas that do not even exist today, to enter the market. Advocates of TTIP are making the fundamental mistake of valuing the gains they can see, while ignoring the losses that they cannot see. But it is those losses that matter, because what a capitalist economy needs above all is creative destruction, and rules tend to inhibit that destruction.

Let’s go back to the start. The governmental activities that restrict competition today are not tariffs or quotas. They are regulatory regimes. The free trade agenda as we have conceived of it since 1945 has largely been accomplished. In the North Atlantic region at least, the war is over and the free market has won. Today, the problem we need to face is not restrictive rules imposed on trade by other nations: it’s the restrictive rules we’ve imposed on ourselves.

The answer to that is not to encourage the U.S. and EU to do a deal: that simply takes the problem of regulation and moves it to a higher level where, thanks partly to our vested interests and partly to the fact that the regulatory regime will now be embodied in a treaty, it will be all the more inhibiting and intractable. The answer is to recognize that we have met the enemy of economic freedom and he is us.

There is something atavistic about the support for TTIP by friends of the free market. It is as if, having done the impossible and brought free trade to the West, we feel a compulsive need to keep on reliving that victory, and to support anything that marches under the banner of free trade. The logic appears to be that the solutions of 1945 are naturally relevant to the problems of today, and that, since free trade played a vital role in advancing the economic miracle and promoting the political unity of the West after the war, it is a sovereign remedy for our contemporary ills.

But this is nonsense. TTIP would certainly make the EU feel better about itself: it would put the Union on the same tier as the Asia/Pacific region, with which the U.S. is negotiating the Trans-Pacific Partnership. Indeed, TTIP is in part an effort to compensate the EU diplomatically for the U.S.’s so-called pivot to Asia. What TTIP will not do is increase competition over the long run, revitalize our economies, or – as many claim — allow us to dictate the future of world trade to China. TTIP promises a lot, but at bottom, it is about creating a process for the U.S. and the EU to make rules together. That is not about freeing the market: it is about controlling it.

Theodore Bromund is Senior Research Fellow at the Margaret Thatcher Center for Freedom