Trade deals between governments rank right up there with Papal conclaves and US Supreme Court post hearing deliberations for their lack of transparency. It is also the one item that most often subject to popular objections, become political footballs, and then, mysteriously, signed and ratified by governments after the requisite posturing.
Will TPP / T-TIPP go the same route?
The history of election rhetoric vs. what politicians actually do in office is illustrative: Bill Clinton, under attack from Ross Perot on NAFTA, pushed for the ratification of a treaty negotiated under G HW Bush with minor side agreements on labor and environmental issues.
Newt Gingrich, within days of becoming Speaker of the House, despite opposing NAFTA as House Minority Leader, abruptly reverse course and passed NAFTA.
This track record suggests that both Hillary Clinton and Donald Trump’s present views opposing TPP need to be taken with a grain of salt.
The power of the priesthood of free trade, to date, endured.
Economics Theory vs. Reality
Every student of economics undergo the indoctrination that “Free Trade Good, Protectionism Bad”, very much like “Four Legs Good, Two Legs Bad!”.
But what is free trade in reality?
If it is really free trade, the agreement can be summarized as, “All trade barriers are henceforth, eliminated between Party A and B”.
Instead of this, “free trade” agreements like NAFTA or TPP are encyclopedia length documents that contain tens of thousands of pages of verbiage, annexes, interpretations, regulations, etc. together with their own tribunals.
The complexity of these agreements means that it is virtually impossible for any one person to truly grasp the significance of the document or its cost vs. benefits.
Moreover, without detailed clause by clause, firm-by-firm analysis of the details over time, it is nearly impossible to make anything beyond a general statement based on macro-economic data as to whether a deal is “good” or “bad” or who “won” or “lost”. Macro-economic analysis of “gains” from trade do little for a 50 year old person laid off as the plant they worked at moves to Mexico.
Details are where it matters.
There is always a trade negotiator in the shipping container pile.
Economies are not fixed, but living, breathing organisms that evolve and rapidly change.
Things that appear to be of great value to negotiators of one era like US access to Canadian oil & gas during the 1970s and 80s for the Canada-US Free Trade Agreement and NAFTA, are now regarded as non-issues in the era of plentiful domestic shale oil and gas.
Likewise, the great concession given to Canada for access to US market for manufactured goods like autos since the 1960s is nearly irrelevant today as Canada’s industrial heartland Ontario deindustrialized themselves.
Free Trade and Property Rights
Free trade agreements have gradually expanded in scope, beginning with physical commodities early days of the GATT, expanding to freedom of movement of labor and capital (investment), intellectual property, electronic commerce, environment, labor standards. It is a continually evolving, living set of institutions.
What is constant is that the United States have played a leading role from the post-war era in promoting free trade. Central to US policy is to simultaneously establish, define, and creating new property rights, first domestically, and then through the use of its market power, imposing new property institutions abroad via trade agreements.
Thus, property rights that are created and ultimately well-established like copyright protection for semiconductor designs — an extension of copyright law into a novel territory, became de rigor in NAFTA, and ultimately around the world.
The same process is occurring with non-tangible property rights like motion pictures, digital rights management, software, business processes, free trade in data, etc. that forms a key part of the TPP and its companion T-IPP.
With this long history of success as a key instrument of US power abroad, it is not surprising that the “free trade” community is one of the most powerful and secretive of the priesthoods.
In peacetime, commercial interests are the dominant force of the foreign policy establishment.
Trump’s Trade Rhetoric
Donald J. Trump’s initial rhetoric focused on the apparently large trade deficits the US runs with many trading partners. That is regarded in the free trade community as a non-issue as the “losses” is more than made up in the gains from the places where the US is most competitive — exports of higher value added services and intangibles.
This is an area that few outside of the specialist community (the Priesthood) really understand.
It is best illustrated by examples.
When Boeing or Lockheed-Martin exports an aircraft, that is a well-defined item that registers “correctly” on the statistics. Less well accounted for is that such an export comes with it a stream of exports for future services that include maintenance, repair, upgrades, refurbishment that can last for decades. These “tied” services exports are often strong monopolies for the vendor and highly profitable. Third party firms can do some of the business, but it is extremely hard to compete with the OEM who has many proprietary knowhow, equipment, logistics, etc.
A customer for a Dassault Mirage is largely “married” to Dassault for spares, maintenance, etc. who will charge whatever the traffic will bear. This is the dominant pattern for most high valued exports or infrastructure sold by the US abroad.
Any consideration of the raw numbers of trade deficits must begin by disaggregating the numbers and sorting out the lifecycle benefits. Sales of Boeing aircraft and its associated engines generate very long “tails”.
Thus, the loss of the sale of a single Boeing 777 jet ($300 million sticker price) that generates considerable post sale revenues is a much more devastating loss than the loss of the identical sum in a commodity like beef or oranges — where there are no follow-ons sales of high margin goods or services.
The US dominates the business of long lived capital assets.
The advent of software and services in the 1970s onwards morphed the picture. Suppose a company manufactured packaged (or pre-installed) software using a 1970s business model like Microsoft. The OEM may report the export as the sale of one copy of the data storage media (floppy disc back in those days) for an export price of $5 to a subsidiary based in a low tax jurisdiction like the British Virgin Islands. (BVI) The subsidiary based in BVI in turn, license and collect royalties from a subsidiary say, based in the Netherlands for copies of the software sold in the EU.
Only one physical copy of the software may actually be “imported” to EU valued at the price of the physical media.
Data, or software on the media, as distinct from the physical storage media, is exported and imported free of duties and taxes. Such a “sale” will not show up as an export from the United States to the EU, but an “intangible” from EU to BVI.
But the truth is it really is a profit generated by the US corporation. Just not accounted for well in trade statistics that are oriented towards counting the value of physical commodities.
Expanding the model to the export of services. Suppose a US firm operate a web based data or information service. The data and software is warehoused in the US, or “in the cloud”. The “smarts” of the business (e.g. Twitter or Facebook) is based in Silicon Valley, where the key functions like product definition, marketing, etc. is done.
Everything else that is non-core can in theory be outsourced: coding, customer service, etc. The service can be sold via a subsidiary in BVI (as with above example), who in turn operates subsidiaries in China, Japan, EU, etc.
The cost stream mostly accrues to the US operation where the highest value added work is done.
The revenue from abroad registers in the subsidiaries, who in turn transfers the profits to a subsidiary in a low or no tax jurisdiction via management fees, royalties, and license fees. The profits can be kept at the overseas subsidiary and not repatriated to the US where it will be taxed.
This whole activity would not be recognized as an “export” from the US.
But in fact, it really is even though nothing physical except bits and bytes of data need to be communicated — tax free.
Assessing Trump’s Rhetoric
Donald J. Trump’s initial rhetoric that focused on the trade deficit with countries like China did not focus on services and intangibles exports that are not well accounted for, and the incredibly valuable work that the USTR have done to install the institutional arrangements that make it possible to capture the benefits via trade negotiations that he is not, and would not be privy to until the day he takes office.
As noted earlier, more than one politician did an about face after being briefed.
While one can argue with the inherently secretive nature of elite deal making that lead to free trade deals, the USTR have done a reasonably good job subject to their institutional constraints and blunders made by their political masters.
But that still leaves questions: how good are the deals like NAFTA and TPP T-IPP? And, what about the losers from trade deals?
And could Donald Trump do better?
The biggest gains from trade deals in the post war era is in the opening of new markets in Europe and East Asia, the blunting of the European state subsidies to favored state firms like Airbus, and the installation of intellectual property regimes in the same markets by forcing acceptance of many institutional innovations that originated in the US abroad.
The extent to which the US dominated the world economy in the post war era that is part and parcel of this success is rarely recognized.
But that is not to say there are sizable numbers of “losers” who lost their job to free trade.
Economists, and trade negotiators, are rarely concerned with these losses as they argue that people who lost jobs are assumed to be able to find other, similarly or better jobs elsewhere. This was gospel in the economics profession that until recently was not challenged by reputable, mainstream, credible economists.
Donald Trump is asking the right questions even though what remains are the specifics.
Free trade deals generally worked pretty well up until the mid-late 2000s.
The changes post 2008 will be addressed in a subsequent article.
Danny Lam is an independent analyst based in Calgary.
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