Efraim Chalamish's Economic Development and Security Blog

Global Trade – Not What You Think

As Congress approved three Free Trade Agreements (also known as Trade Pacts) with South Korea, Panama, and Colombia, I get the impression that there are two leading narratives. The first, this approval is driven mainly by internal political forces, the need to build coalitions around ‘currency wars’ legislation and the Jobs Act. The second, the size of the economies and their significance put in question the true economic impact of these agreements. However, these narratives seem simplistic as they ignore important developments in international economic relations.

There is no doubt; it is too little too late. It has been more than five years since these trade agreements have been negotiated by the previous U.S. administration, and most trade and investment regulatory and economic challenges have already been resolved in other ways. The political gridlock on the hill has prevented any progress in trade negotiations in recent years.

Yet, these agreements present important economic and political issues that should be understood and highlighted in the broader context of politics and commerce. First, in times where the perception of U.S. economic power is declining in many parts of the world and economic policy tools are limited, signing economic treaties, such as Free Trade Agreements, can project dramatic support for the bilateral strategic relations between the U.S. and the respective country despite the relative narrow scope of the agreement. All three countries, South Korea, Panama, and Colombia are playing an instrumental role in mediating between U.S. interests and conflicting regional forces in their respective regions.

Second, these agreements reflect the new balance between multilateral and bilateral economic policy. While the Doha Round does not go anywhere despite global economic imbalances and rising protectionism, the U.S. administration prefers to pursue bilateral and regional strategies as an alternative. The new trade agreements may trigger another wave of bilateral economic treaties globally, which can lead to a ‘race to the bottom’ in international economic policies. This approach has its own price tag. As Prof. Bhagwati already pointed out, a Spaghetti Bowl of thousands of bilateral treaties, create multiple trade distortions and slow down critical multilateral negotiations.

Third, while trade unions, employers, and the media focus on trade in goods and services, all three agreements include investment-related provisions, similar to the NAFTA agreement between the U.S., Canada, and Mexico. These provisions protect foreign investors and allow them to bring direct claims against host governments in order to protect their rights. Similar arrangements in recent years have led to a serious debate about the costs associated with regulatory expropriation and the chilling effect on labor and environmental standards in the U.S. and other developed democracies. Millions of dollars are at stake. Bailing out a U.S. bank during another financial crisis, while leaving a Korean subsidiary at the hands of its parent company in Korea, can be a violation of the National Treatment principle that requires a similar economic treatment to local and foreign investors, and can lead to a direct claim against the U.S. government.

Fourth, bilateral trade agreements have several side effects. Studies show that they send a positive signal to the market and encourage economic activity between jurisdictions. In a recent meeting I attended in New York the Panamanian President clearly followed this path and made the interesting connection between foreign investment in the expansion of the Panama Canal and the benefits of a future Trade Agreement.

The effect of economic treaties, as I have shown quantitatively and qualitatively in the past, is questionable. Trade, investment, and double-taxation treaties do not necessarily yield the economic benefits that the signatory parties are hoping for. But, this is not a reason to ignore them. Their consequences can be major. Indeed, the more important task is to get economic agreements with the BRIC countries. Unfortunately, negotiations on these potential treaties do not move rapidly for obvious reasons. The new trade agreements can revive these negotiations. It can also remind the government and all of us that internal economic and political debate cannot ignore international economic forces.

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