April 1, 2013 Leave a comment
Free trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.
The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:
The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.
The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.
However, as ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.
This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.
There are reasons for optimism in trade policy circles, but the battle is only just beginning.
Posted By: Ben Copper
Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs
Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user Reinhard_Schuldt