The Fallacy At The Heart Of The New E.U.-U.S. Trade Talks

The public sees trade as a zero sum game between Us and Them

By Dan Ikenson,

Has the intellectual debate about free trade been won? The close-to-consensus answer among several scholars discussing that question at Cato last week is “yes.” The better answer is “wrong question.” After all, how much does it really matter that free traders have won the intellectual debate when, in practice, trade policy is distinctly anti-intellectual and free trade is the rare exception, not the rule, around the world?

Consider the just-launched Transatlantic Trade and Investment Partnership negotiations. If the free trade consensus were meaningful outside the ivory tower, these negotiations would not take place. At the heart of the talks rests the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by “negotiators” on the other side of the table. But if free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on consumers and businesses. It really is that simple. 

But the TTIP is shaping up to be the mother of all negotiations: an interminable feast of mercantilist horse-trading, self-serving press conferences, and ever-premature, congratulatory pronouncements all intended to aggrandize negotiators and politicians who thirst to be seen doing something to restore economic hope without having to shake their respective vested interests from their protected perches. It’s all quite nauseating, really, but at least it serves to remind us that free trade is the rare exception, and when all else fails…

Granted, U.S. tariffs are relatively low on average, most quotas have gone away, and most other countries have reduced barriers to trade over the past half century, which has contributed in no small part to improvements in per capita income and quality of life around the world. Why that cause and effect hasn’t reinforced the theory enough to drive a stake through the heart of protectionism is the better question.

In the United States, instead of free trade, we have protectionism in its many guises, including: “Buy American” rules for government procurement; heavily protected services industries; apparently inextinguishable farm subsidies; sugar quotas; green-energy subsidies; industrial policy; the Export-Import bank; antidumping duties; regulatory protectionism masquerading as public health and safety regulations, and; the protectionism euphemistically embedded in so-called free trade agreements in the forms of rules of origin, local content requirements, intellectual property and investment protections, enforceable labor and environmental standards, and special carve-outs that immunize products – even industries – from international competition. In fact, the entire enterprise of trade negotiations is a paean to protectionism, conducted with the utmost care to avoid unsettling, without recompense, the special privileges of the status quo.

How has an intellectual consensus for free trade coexisted with these numerous and metastasizing affronts to it? Protectionism slipped the noose, that’s how.

Thanks to – among many others – Adam Smith, David Ricardo, Jacob Viner, Milton Friedman, Jagdish Bhagwati, and even the pundit once known as economist Paul Krugman, protectionism fell into disrepute. Gone are the days when routine requests for tariffs and other trade barriers were honored by Congress on the strength of the argument that it would be good for domestic industry’s bottom line, and thus members’ reelection prospects. Seeking protection became unsavory – a bald-faced effort to plunder.

So protectionism needed a makeover, which it found by drawing sustenance from the argument that it is a legitimate response to “unfair” or otherwise “objectionable” practices abroad. The popular appeal of concepts like fairness and level playing fields made protectionism less unpalatable, which opened the door to ever-expanding definitions of “unfair” and “contingent protectionism.” Today, protectionism is omnipresent and the well of rationalizations intended to de-stigmatize it is seemingly bottomless.

The presumption of foreign cheating and unfairness, reinforced by the fallacy that the United States is the world’s most open economy, undergirds a perverse sense of entitlement to protectionism among Americans – as though that protection somehow benefits them instead of the U.S. companies that are now more free to raise prices and limit offerings at their individual expenses. At the heart of this mess is the utterly mistaken view that trade is a contest between “Us” and “Them,” between our producers and their producers. More than anything else, this particular misconception explains the divide between economists and the general public over the question of free trade. The public sees trade as a zero sum game between Us and Them, where exports are Team USA’s points, imports are the foreign team’s points, and trade restrictions are not taxes, but a strong defense.

By entrenching this kind of thinking, trade negotiations, such as the TTIP, do a disservice to the truth. Too many Americans are inclined to don their rally caps in support of Team USA’s performance in the Great Trade Negotiations of 2013, as though it were their own personal interests – and not the interests of U.S. industries that would swiftly deny them better choices and better prices – that U.S. negotiators have at heart and in mind. Perhaps, the next time these fans find themselves on a delayed flight, sandwiched between sweaty passengers in the stuffy cabin of an aged aircraft on a crowded tarmac because of some checklist oversight of an airline employee, they might consider how Team USA’s negotiators in the TTIP adamantly oppose competition from foreign carriers between U.S cities because that’s what the domestic carriers and their unions want. Free trade – not the Chamber of Commerce’s or the AFL-CIO’s or the official U.S. negotiating agenda – is what Americans should support.

Still, the trade policy industrial complex is in general conformity over the crusty premise that reciprocity-based trade negotiations are the right way to liberalize trade. Despite the enormous benefits and the fundamental fairness of allowing people their freedom to transact how and with whom they please, we have conceded without compelling reason to a system of managed trade that aims, in theory, to balance the pro-export advocacy of business interests and the anti-import proclivities of labor and other anti-corporate NGOs, and in the process made politicians and bureaucrats the gatekeepers. Left hanging out to dry in this formulation are U.S. consumers, import-consuming industries, the better mousetraps and better opportunities that would emerge and the dignity of having real freedom to engage in commerce with　whomever we choose on terms not influenced by political interference.

Whether there is an intellectual consensus for free trade seems to be of secondary importance. Unless and until free traders do a better job of marketing the truth, we will be stuck with the trade policy that we have, which is hard to distinguish from corporate welfare and crony capitalism.　Business associations, unions and other interests line up at policymakers’ doors seeking “permission to” or “exclusion from,”　which reinforces the terrible idea that politicians should guard the henhouse, deciding who benefits, who loses, and at what costs.

This aggrandizement of politics makes us poorer. Instead of committing resources to productive endeavors like production and R&D, too many companies are compelled to divert resources to their government affairs offices because the return on lobbying turns out to be more profitable. And, in the process, Washington grows more glorious still.