Global trade arrangements are constantly evolving.
Historically this evolution has been focused on the reduction and removal of tariffs especially on goods in order to achieve “free trade”. Such agreements were set up between countries and also at global level through the GATT - the General Agreement on Tariffs and Trade.
In that world – the world of so-called “first generation free trade agreements” – membership of the EU was seen as projecting UK influence so that it could “punch above its weight” and together with other EU members, square up to the USA, China and other blocs when forging trade agreements amongst themselves.
However those first generation agreements were found to be limited in their effectiveness because while they reduced tariffs, non-tariff barriers (NTBs) were thrown up in their place - standards and procedures within a country or bloc that have the effect of raising the bar to outsiders trying to trade with it. The financial cost of these NTBs is often equivalent to or greater than the original tariffs.
In recent years, the first generation agreement has thus given way to the second generation agreement. These are more comprehensive and address a range of issues, not least those NTBs but also cover services, investment and public procurement.
TTIP - the transatlantic trade and investment partnership - is one example of a second generation agreement. But while the intentions and theoretical outcomes of such agreements are good, they are fraught with difficulty, not just of coming to agreement in the first place but then ensuring that the benefits claimed are actually realised.
There are also challenges in describing these agreements as “free trade”. What they are actually doing is attempting to create a managed common regulatory space which, granted, will facilitate trade for those that meet and work within those regulatory standards but it doesn’t allow a free-for-all - “I’ll sell you mine if you sell me yours”. Quite the opposite. It’s why some voices on the libertarian Right oppose such agreements. But while they have a point, we have to live in the real world and approach as it is.
A more pertinent criticism is not that such agreements fail a theoretical free trade test but that they fail in practice - taking far too long to conclude (if ever), become highly politicised because of their size, and still don’t deliver the expected benefits.
EU bloc agreements
Second generation agreements are by their very nature, large and complex instruments because the nature of them requires an equalisation of terms for competition ensuring neither one side or the other is to be unfairly disadvantaged. Negotiation of this is a huge task, potentially concerning hundreds of individual commercial sectors, with thousands of individual products and millions of words of pre-existing regulations and specifications.
The TTIP package has been under formal negotiation since 2013, but its origins date back much further to the 1990s and the immediate post cold war environment. Angela Merkel revived the idea in 2006, partly as a reaction to the stalling of the global Doha round of the World Trade Organisation (largely over the EU and US approach to agricultural subsidies, seen as a form of protectionism and damaging to emerging economies).
Despite now having undertaken twelve rounds of negotiations, the TTIP agreement is not complete, has many more issues to tackle and may now not happen at all due to intractable issues. And that’s despite the EU and US already having well-established trade and commercial links. In fact, there is even a body set up specifically to engage in direct economic co-operation between the US and EU - the Transatlantic Economic Council - whose goal is to advance co-operation in sectors in which both parties have an interest.
If even partners such as the EU and USA, with historically strong levels of co-operation and similar levels of development, take years to reach partial agreement, then it also highlights how much more difficult such deals would be to negotiate with less integrated countries or trade blocs.
The difficulties are not just about the inherent complexity but also that these large deals by their nature become very political, often in both their intent and outcome. TTIP has already caused consternation on both sides of the Atlantic. Amongst the public, concern is expressed over the secrecy element of such deals, despite this being a standard feature of such trade agreements until they are finalised. The feeling that it is somehow anti-democratic is heightened in this particular case by a degree of anti-American feeling in European capitals. The British element is marked by heightened suspicion that TTIP might lead to the large US healthcare companies becoming involved in the British National Health Service, utilising the Public Procurement freedoms that TTIP is expected to bring. Some of this fear is also centred on the issue of Investor State Dispute Settlement (or ‘ISDS’), which is regarded as an improvement on the WTO dispute resolution system but also has the feature of not being an open and public forum of law, such as would be the case if the dispute were one between the domestic company and the state.
If TTIP could be completed and then ratified by both the EU member parliaments and the United States Congress and Senate, it could lead to a great deal of positive trading outcomes for the signatories, not least the opportunity to harmonise a myriad of rules and regulation which would then cover around 60% of global trade. These rules could then almost certainly be adopted by other nations wishing to enlarge their access to such a large marketplace. But the chances of it being completed are not high and now the American electoral cycle is in play, those chances are further diminishing.
In another example, the EU has been engaged in trade talks with the ‘Mercosur’ group of countries for much longer and still without any conclusion. For 17 years, the South American group of countries has been talking to the EU, with ‘breakthroughs’ reported from time to time that then come to nothing. As is also the case with TTIP, a key sticking point in these talks surrounds the protection of European agriculture and, as always, it is French agriculture that presents the largest obstacle. The concerns centre on the big agricultural exports – especially beef - that are very important to South American countries.
Spain is particularly keen to push forward the EU-Mercosur agreement as it would harmonise trade with those Spanish-speaking nations in South America but the EU has limited diplomatic run time and a full plate, so Spain will have to wait its turn.
Thus far, the EU has only ever succeeded in one bloc-to-bloc agreement (EU-Caricom) and for all the fanfare, and years of negotiation, it has been largely a damp squib, produced few results and – because of its asymmetrical nature – has given the EU an advantage in primary imports and a place to dump surpluses. The EU is also using the lack of implementation of global sustainable development accords in the Caribbean as an excuse to not deliver what was promised prior to the financial crash.
To a large extent, the agreement exists in name only.
In this regard, the same could happen with TTIP or the EU-Mercosur deal. One or other may eventually be sealed with much celebration and fanfare, but in reality will not deliver.
And yet it is said that without the EU, Britain would be isolated and that to get the best deals and to execute any fundamental changes to the status quo, there is a need to cluster together, pool resources and form alliances to leverage collective strength in negotiations.
That’s fine if your national agenda is also their agenda – where the EU’s one-size-fits-all mentality matches a one-agenda-fits-all reality. But that reality doesn’t exist. Instead Britain is shackled to the intransigence of France and others, and progress is frequently stalled. Therefore what the EU might gain in size, it loses by being only as liberal and as open as its most protectionist member state. Inertia cancels out size.
Non-EU trade deals
Big trade agreements outside the EU also have a history of not meeting expectations.
For example, Australia agreed a Free Trade Agreement with the USA in 2004 (‘AUSFTA’), which entered into force twelve months later. But it was not all it appeared. Australia's policy in the preceding years had been to liberalise trading relations with many of its regional Pacific partners. The gains from this policy were then largely undone by the implementation of AUSFTA, as sourcing of foreign direct investment was distorted away from those partners and towards the US. This was repeated in the sourcing of raw materials and products due to the preferential treatment rules of AUSFTA, with cheaper produce from previous regional suppliers now spurned in favour of US companies.
Australia did not press her own interests sufficiently hard in the negotiations, which led her to accept a number of terms and obligations that had significant impacts, such as the loss of Intellectual Property to the USA and the ability to limit costs on generic drugs in Australia.
Indeed, from Australia’s perspective, it’s not at all clear if the deal was actually worth it.
Of the second generation trade agreements that have had their text agreed, the largest is the TPP (Trans Pacific Partnership). This involves twelve nations, including the USA, Canada, Mexico, New Zealand and Australia and it is designed to be a trailblazer for the eventual goal of a full Asia Pacific free trade area - an idea that has been around for at least 5 decades.
All direct participants signed the agreement on a final text on February 4th 2016 and it has now moved to ratification stage where politics necessarily gets involved. It will not be a simple process, as the deal requires a great deal of movement over particular sectors. Once again, the especially sensitive area will be farming and agriculture. Pushback is already significant in some of the signatory countries, with Australian commentators suggesting that once again the Investor State Dispute Settlement process might cause political problems. A possible flashpoint in this would be the Australian rules on the plain packaging of cigarettes, where a challenge is mooted due to a loss of profit by the manufacturers of what is an entirely legal product.
Furthermore, Australiamight now be wary about losing any further significant political control after its less than favourable experience with AUSFTA. But that alone would not prevent ratification by a secondary method that has been designed into the TPP. It is of course preferred that ratification will be completed by all nations but the secondary route is now seen as a more likely outcome, where if at least six signatories with a minimum of 85% of the GDP of the original area have ratified within two years then the agreement can be put into operation. The USA and Japan between them have 80% of the total GDP of the area. If they both ratify it is inevitable that it will pass. But neither has enough without the other, even if all the other nations ratify - both Japan and the USA will have to ratify the TPP for it to come into force. Both Democratic Party candidates in the upcoming US election have made statements against ratification (despite the Obama administration's hope that it would be ratified before the US Presidential election), and Donald Trump on the Republican side is not entirely enthusiastic either.
The non-tariff barrier - lack of harmonisation of regulations from one jurisdiction to another – therefore remains the main obstacle to trade.
Quite often though, international regulatory agreement over a single sector, product or procedure can have pronounced effects on trade and competition. One such example of this is the standardisation of shipping containers by the International Maritime Organisation.
For the purposes of shipping, at one stage most goods were transported 'loose' - they were handled by the longshoremen from the lorry to the hold of the vessel. As the inefficiency of this was obvious, companies devised containers which could be loaded onto shipping but could also be utilised in road and rail transport. But the big leap forward was the international agreement to standardise these containers so that they could be leased and moved uniformly across most of the developed world using standard road and rail transport. The International Standards Organisation (ISO) publishes the standards for these containers in a number of different documents giving details for the size and construction of containers, the fittings, and the different types of special types such as tanks and thermal boxes that can now be fitted to the same standard transport.
This was an intergovernmental agreement of what is now known as the IMO, but was then (in 1968) called the Intergovernmental Maritime Consultative Organisation (ICMO). It now has 171 member states and three associates. Many of these states are land locked, but they still participate fully in the agreement.
It is obvious what benefits such a standardisation brings to trade - and this is one single sector agreement, with over 80% of the world's shipping containers now being of the ISO standard type.
This is not a lone example of how addressing sectoral issues individually can be immensely helpful in removing NTBs.
Look at most portable electrical goods. You can take them anywhere in the world, walk into a general store and find a battery that fits it. This is the real effect of global standardisation, entered into at an intergovernmental level where agreement is over a particular narrow issue, but has wider effects. Your mobile phone (unless it is an Apple model), will be easy to charge anywhere in the world, simply by buying a generic charger. Computing, telecommunications, industrial power cabling, a list of car parts, they all comply tostandards set and agreed to by an international body. Compliance is not always mandatory but the sense of such a standard is self explanatory. As more countries become party to an agreement, then the force of it becomes global and the others must participate to benefit from it - exactly the case with GSM (originally the Groupe Spécial Mobile based in France) in devising global standards for mobile phones. That was first applied as a European standard, then adopted more widely, becoming the global standard with the EU now taking its lead from the global level. As we now travel globally, the mobile handsets we purchase domestically will connect to telecommunications systems all over the world. This was not always the case, especially between Europe and the Americas, but now we hardly give it much thought.
In these examples we see the breaking down of NTBs (also sometimes called “Technical Barriers to Trade” or “TBTs”) through the standardisation of products so that they can be exported, imported, repaired and serviced anywhere in the world. The World Trade Organisation recognises the importance of this and to press the agenda it has enacted the Agreement on Technical Barriers to Trade. The TBT agreement is a landmark in the development of trade.
Where a country has a specific technical regulation which is binding on those who wish to trade in a product, then WTO member states must use the international standard as the basis for their regulations where that standard has been recognised by the international body.
What this means in practice is that many of the TBTs which large international trade deals have been seen as the remedy, can be broken down by sectoral advances under the WTO TBT agreement. These are smaller and can be achieved more quickly than the big trade deals of the past.
This is the eventual road to obsolescence for second generation agreements and indeed to the need for trade blocs.
The agile alternative
It is now quite likely that the TTIP will not be completed. The whole thing smacks of “a grand design” and such things tend to get loaded down by their own grandness. The rushed AUS/US agreement shows the danger of negotiating in haste. The more parties there are to an agreement, the more the opportunities for domestic political concerns to come to the fore, and for the signatories to want a 'small victory' to take home to their electorate. Size itself becomes an Achilles heel and if the deal gets signed it all, it can end up with trade merely being reshuffled rather than opened up.
What’s worse is that bilateral agreements such as this may also undermine multilateral agreements like those directly under the auspices of the WTO.
Indeed Pascal Lamy, until September 2013 the director general of the WTO, described TPP as probably the "last of the big old style trade agreements".
It might be that the more liberal and agile approach is that we should seek to make incremental steps at a global level – “the evolution not revolution” theme - thereby allowing the widest possible access to emerging markets and developing nations. While big trade deals such as the TPP, TTIP or NAFTA all exclude external nations by creating fenced-off trade areas, the agreements on particular sectors remove barriers for all willing participants. That is arguably a more liberal and agile approach.
One recent liberalising move by the WTO is the agreement on Trade Facilitation. In essence, this is a global agreement to streamline customs clearance and goods movement by the harmonisation of documents and procedures across the world.
What is interesting in this space is that the push for such standards often comes not from governments but from commercial shipping companies and exporters themselves, as they seek to bring down the duration and costs of journeys and to make processes safer as insurance can be a big overhead. Another driver of trade facilitation has been the commercial need for just-in-time delivery. If the processes around customs clearance can be improved and made more predictable, business can plan around them and construct supply chains accordingly.
In this regard, industry is light years ahead of the legislative process and has no real difficulty implementing law in that bodies like the EU effectively codify that which is already in place or in the process of completion.
And so we see a new potential direction for the liberal-minded: reducing barriers rather than redrawing them; using technology where possible as a facilitator; working towards the harmonisation of regulation at a global level, but sector by sector wherever the opportunity arises. And moreover, keeping politics out of the way.
Issues arising within a single sector are more solvable in isolation. World events, problems and emergencies often expose specific problems in a sector that need adjusting, just as air accident investigators find the weaknesses with flight procedure or aerospace equipment, improving safety one issue at a time. Opening up grand scale negotiations often acts as an opportunity to seal in protections, just as African farmers suggest is the case with the Common Agricultural Policy in the European Union.
The WTO’s TBT agreement drives this multilateral process of harmonisation forward by adding a degree of compulsion, requiring the member nations to devise their domestic regulations based on those forged at global level. This encourages them to provide their own local expertise and that of their producers and market participants, because the final agreement will require them to adopt the outcome. The development of GSM communications is a perfect example of this in action, driven by the need of market actors to expand access by harmonisation, facilitated in succeeding by the WTO framework. A real success story.
The agile approach is therefore that nations should avoid protectionism and look to facilitate trade as much as possible. The 'Geographical Free Trade Bloc' agreement – itself an advance on what went before – may be coming to an end. Indeed, it is the global harmonisation of technical trade rules and specifications, sector by sector, that is making the fastest running in achieving liberal trade objectives.
As trade rules, regulations and technical specifications begin to harmonise, then the drive will be to continue the process and raise as much regulation as possible to the global level.
In years to come, we may look back at this period of history and see that the WTO TBT agreement was a step-change in creating a truly global trading system. And one which also made agreements like TPP, TTIP and perhaps even the EU/EEA Single Market itself obsolete.