Free trade’s false friends

Is globalism dead? was the title of one of my recent Mint columns (1 August). With the near scuppering by the Walloons of the putative Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA), it is, perhaps, too soon to remove the question mark and give a definitive answer.

Consider the magnitude of the deal that almost came unstuck. The region of Wallonia in Belgium has a population of some 3.7 million as against 500 million in the EU as a whole. CETA is expected to create new economic activity to the tune of €6 billion per year for the EU. There is, thus, ample scope for compensating potential losers in Wallonia and for the EU to reap the benefits of strengthened trade ties with Canada.

It appears that, at the eleventh hour, the magnitude of the economic cost of scuttling the deal weighed on the Belgians, who persuaded the recalcitrant Walloons to sign on.

What are the lessons?

Focusing on the compensation issue, as trade economists have been wont to do, misses the main point. It would appear that anti-CETA sentiment amongst the Walloons was motivated more by distrust of the supranational elite institution of the EU itself, which had negotiated this trade agreement on behalf of its citizens from on high, creating the distinct impression of an elite-driven exercise.

As economist James Dean and I argued recently in Canada’s Globe and Mail (By ignoring free trade’s excesses, we lost those on the margins, 27 August), supporters of freer trade—which include us— have, for the most part, been poor advocates for the cause. By sweeping under the carpet the distributional consequences of trade agreements, over-zealous partisans weaken the intellectual bona fides of the case for freer trade.

Yet, this is nothing new. The father of international trade theory, David Ricardo, made the case for the repeal of the Corn Laws in 19th century Great Britain by deploying a stripped-down model with only one factor of production—labour—so that what was good for the economy was good for workers and vice-versa. Ricardo was fully aware that the freeing of trade could have politically difficult distributional impacts—in the case of the Corn Laws, hurting landowners and enriching capitalists—but chose to make his case for free trade rhetorically by putting these considerations aside. In oligarchic Britain of the time, in which capitalists and landowners reigned supreme and workers were disenfranchised, such a strategy could work. It is a problematic strategy today, as proponents of CETA within the EU have discovered.

Another failure of advocates for CETA, both in the EU and in Canada, has been to pretend that it is primarily a trade deal. It is not. This is the same chicanery deployed by cheerleaders for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The reality is that such agreements are mostly about everything but international trade. Trade barriers are already rather low after successive rounds of multilateral trade negotiations, so the extra bite in this new breed of agreements comes from pacts to protect investors’ rights, to harmonize regulatory standards (or move toward harmonization), to guarantee intellectual property protection and so forth.

These “beyond the border” issues have nothing directly to do with reducing trade barriers, and represent a form of “deeper” economic integration than conventional international trade in goods and services.

Guess what? Not everyone wants such deeper integration, as it implies constraints on domestic sovereignty of a type embedded in the conceptualization of the Westphalian nation-state. By smuggling them into agreements which supposedly are about reducing trade barriers, their advocates do a disservice to the whole globalization project itself.

It is a topsy-turvy world indeed in which staunch free traders, such as this author, and staunch anti-globalizers, such as the Walloons who opposed CETA, stand on one side, and a global technocratic elite attempting to promulgate one very particular brand of globalization, stand on the other.

The roots of this seeming paradox hark back to the early 1990s, the period during which the North American Free Trade Agreement (NAFTA) was being negotiated. This was a time at which a politically ascendant strand of intellectual opinion in Anglo-American economics held that conventional trade liberalization was largely a spent force and needed to be supplemented by different facets of deeper integration, whether of investment rules, regulatory standards, intellectual property regimes, and so forth. Without these, it was thought, the globalization enterprise would grind to a halt.

This was intellectually erroneous then and is erroneous now. For a utopia of free trade is entirely compatible with every individual economy maintaining its own domestically optimal institutional arrangements. The possible loss to multinational enterprises looking to minimize transactions costs would, ipso facto, be smaller than the gains from giving space to national sovereignty.

Unfortunately, advocates for global corporate interests (as distinct from genuine supporters of free trade) have opportunistically seized the mantle of free trade, and academic economists have largely remained on the sidelines. That is our fault, and the result is what we see.

Every fortnight, In The Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. Read Vivek’s Mint columns at www.livemint.com/vivekdehejia.