17 May 2015

TTIP: small upside, big downside


One of the best things about the debate between believers in the free market over the Transatlantic Trade and Investment Partnership (TTIP), the so-called US-EU free trade area, is that it cuts to the heart of a larger question: how do we advance freedom in practice? A lot of opponents of TTIP on the left (and some on the right) reject it either because they hate free trade and the free market, or because they are old-fashioned protectionists. That’s not true of any of the participants in this debate. We’re all free marketeers: we just disagree on how to get there.

In this debate, I previously advanced ConservativeHome’s “Heresy of the Week”: that TTIP is likely to be bad for economic freedom. Diego Zuluaga of the IEA, on the other hand, concludes that TTIP “will likely be a modest step towards freer commerce” – though just as he shares many of my concerns, I agree with many of the points he makes. In the genial spirit of his essay, let me set out where we agree, and then turn to the points of disagreement.

First of all, we agree that the impact of TTIP is likely to be quite modest. Negotiators are focusing their efforts to promote regulatory compatibility on nine sectors: cars, drugs, medical devices, cosmetics, IT, chemicals, and engineering. This means that the impact of the deal will likely be on the lower end of the already modest estimates. These are all high-value sectors, to be sure, but a comprehensive TTIP, like the one the Centre for Economic Policy Research modelled in 2013, would go even further.

Second, we agree that mutual recognition is better than harmonization. Indeed, with several colleagues, I wrote a paper for The Heritage Foundation last year making precisely the point that TTIP, if it goes ahead, should be based on mutual recognition. (I also wrote an equally long paper knocking down the geopolitical arguments for TTIP, which in my view are entirely spurious: its economic advantages are at least arguable.) Finally, I agree with Zuluaga that, if one core problem with TTIP is that it is likely to be gamed by big business, this is “only an extension of their influence on domestic policy-making on both sides of the pond.”

Here, unfortunately, is where we part company. Whereas Zuluaga sees reasons for optimism about how, after the deal is cut, the process will work in practice, I am pessimistic. Zuluaga argues that, given the fact that the U.S. and the EU have different policies in many areas, “it would seem more likely for standards to either be mutually recognized, or not made equivalent at all.” In some policy areas, and certainly in the short run, that will undoubtedly be true. But it is what happens over time that matters.

The EU’s proposal is for TTIP to create “a joint regulatory cooperation body.” While regulations exist in the here and now, regulation is a process: it is not static. Over time, such a body would tend to harmonise regulations. There would certainly be some mutual recognition, but as the years passed and new regulations replaced old ones, the volume of harmonised regulation would grow. Moreover, cooperation at the bilateral U.S.-EU level would also entail, in practice, cooperation in international regulatory bodies to spread the harmonised regulations around the world, a fact that is openly celebrated by TTIP’s advocates.

This is not a new concern. In fact, it is what has happened in the EU itself, as Zuluaga emphasizes: harmonisation has defeated mutual recognition. I find it hard to accept that TTIP will be a vehicle for mutual recognition and increased economic freedom when one of the sides negotiating it is committed to harmonisation and less economic freedom. As Matthew Sinclair at Europe Economics has recently pointed out, EU financial regulation is systematically becoming less amenable to U.S. and UK interests. If the EU were genuinely interested in mutual recognition, it would not have gone down the road that Zuluaga and Sinclair rightly condemn.

In this world, what reasonable basis is there for believing that a “joint regulatory cooperation body” will not prefer harmonisation to recognition, and will not seek to slowly bring new regulatory areas into its orbit? The only time the EU goes the other way is when – as with the European Commission’s new proposals on GMO food and feed – it can use national-level rule-making to limit consumer choice in Europe and give U.S. exporters the shaft.

It could be argued, of course, that the U.S. and the UK will somehow make the agreement work for freedom in spite of the EU’s best efforts. But will that charge for freedom be led by the Conservative Party, which has “a plan for every stage of your life”?  How about Barack “you didn’t build that” Obama? Or Hillary “topple the rich” Clinton? Or the Republican Party, which can’t even summon the willpower to get rid of that turgid little piece of corporate welfare known as the Export-Import Bank? Are the businesses that are frantically lobbying for TTIP scrabbling with eagerness to embrace the icy blast of increased competition? Or do they understand their own interests all too well?

You see the point. TTIP will create a process. Where that process goes depends on the ideas of those in charge of it, and the interests of those who have the money and the attention necessary to lobby it. As is entirely proper, business will press its own interests, but that is not the same thing as promoting competition. The history of Margaret Thatcher’s Single European Act – which free marketeers should study before they start cheering for the idea that pulling down barriers between markets is necessarily good for economic freedom and competition – by itself puts paid to any hopes we might misguidedly entertain for the EU.

Nor can we rely on the UK or the US. As Ryan Bourne has pointed out, the UK is witnessing “a depressing resurgence of misguided giveaways, interventions, and price controls.” Iain Murray sees the UK as on the verge of the death of liberalism, and I’ve argued something similar, if not quite as gloomy. And while the situation in the U.S. is not as bad, it’s bad enough: Ambassador Froman, the U.S. Trade Representative, has stated that “we do not see TTIP as a mechanism for lowering protections or for deregulation.”

In short, while TTIP has a modest upside, it has a large but unknowable potential down side. Worse, while the upside is visible, the down side will, as Bastiat warned, be largely unseen. There is no reason to believe that TTIP will decrease the rent-seeking opportunities of business: indeed, by widening the ambit of regulation to cross the Atlantic, it will tend to increase those opportunities. And while in the short run it will increase competition between existing firms by reducing barriers to market access, in the long run, competition comes from the entry of new firms into the marketplace, and regulatory cooperation cannot be good for that, because regulations are inherently a barrier to entry, and wider regulations will be an even wider barrier.

I’ll close with two final reflections. First, if you believe that the UK would be better off out of EU, then TTIP should raise serious concerns – because, as Zuluaga points out, it encourages “moderately Eurosceptic politicians” to view EU membership as a good idea. There is some evidence that one of the goals of TTIP is precisely to incentivize (or force) the UK to stay in, on the grounds that leaving would lose it the purported benefits of TTIP

Second, while we look back with pride on the accomplishments of the free trade agenda in the West since 1945, we misunderstand how they came about. GATT did not work because it created a process for reducing tariffs and quotas. It worked because there was a political consensus, strongly backed by U.S. as the world’s leading economic power, that protection had helped deepen the Great Depression, and contributed to the rise of the Nazis and thus to World War II. That consensus on the value of free trade was what made the process effective.

What is missing today is, as Bourne argues, a similarly broad consensus on the value of economic freedom. In a world where the consensus in both the EU and the U.S. inclines towards more regulation, that is what we can expect bureaucratic processes in the trading realm to promote. By one estimate, the cost of federal regulation in the U.S. is about $2 trillion annually – that’s 300 times as large as the purported benefits of an ambitious TTIP over the next 15 years. That is why today, free trade can’t begin at the negotiating table. It needs to begin at home.

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