Thursday, June 18, 2015

Peak free-trade and the undesirable quest for policy harmonization

In the context of the debate surrounding the TPP, Larry Summers has a brilliant oped where he makes this candid observation (all the four points raised are deeply insightful),
The era of agreements that achieve freer trade in the classical sense is over. The world’s remaining tariff and quota barriers are small, and often result from deeply held cultural values, such as Japan’s attachment to rice farming. What we call trade agreements are in fact deals on the protection of investment and on achieving regulatory harmonisation and establishment of standards in areas such as intellectual property. There may be substantial potential gains from such agreements, but their merits must be considered case by case. No reflexive presumption in favour of free trade should be used to justify further agreements.
Market endorsement of the diminished importance of such trade deals today comes from the fact that the equity markets reacted indifferently to the failure of President Obama to get fast-track trade promotion authority from the Congress last week.

Both the TPP and Trans-Atlantic Trade and Investment Partnership (TTIP) have important non-trade concerns. The TPP is expected to impose tighter intellectual property rules on members, while the TTIP would reduce non-tariff barriers and both have a provision for "an Investor-State Dispute Settlement mechanism which would establish a separate judicial track, outside a country's own legal system, that would allow firms to sue governments for apparent violations under trade treaties". Dani Rodrik has rightly described both TPP and TTIP as more about corporate capture than liberalism. 

All this goes back to the rising momentum in favor of policy harmonization on issues as varied as labor markets, taxation, investment protection, intellectual property rights, environmental standards etc. Add to this calls for provisions in trade agreements to prevent alleged currency manipulation, and the slippery slope becomes evident. In all these cases, there are very compelling political economy and economic efficiency arguments that would militate against such harmonization.

Such harmonization, by limiting the legitimate sphere of action of national governments not only circumscribes genuine national interest but also undermines democracy itself. By the same yardstick, in light of the risks generated by the massive flood of cross-border capital flows engendered by it, emerging economies should have had a veto on the US quantitative easing policy on grounds of global monetary policy harmonization. In areas like exchange rate valuations, there are not even reliable measures of alleged manipulation.

There is no single standard on any of these issues which can be universally applied to all the countries of the world, independent of their stage of development. In fact, most often, such policy stances are likely to conflict with each other. Instead of selectively pursuing harmonization where is suits you, nation states must adapt, as they have always done, to such situations. Democratic pluralism should underpin international institutional architecture as much as it does domestic ones. 

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