Saturday, 27 May 2017

Free trade agreements, or international commerce agreements

Last week in ECON100, we covered the gains from trade. One of the points I made was the misnaming of free trade agreements, which these days are mostly not about free trade. This was a point made recently by Bill Rosenberg (economist for the Council of Trade Unions) in the New Zealand Herald:
But these agreements are no longer mainly about trade. It is misleading to talk about them as Free Trade Agreements. I'll call them international commerce agreements, and it is misleading to label public concerns as protectionism.
These agreements are now mainly about services, regulation (including so-called non-tariff measures), foreign investment, intellectual property, government procurement, commercialisation of public agencies, and other matters that are "behind the border" and cut deeply into people's daily lives. That is why people protest at restrictions on the ability of future Governments to make and change rules in the public interest, to adapt to new circumstances and repair poor policy of the past.
I like Rosenberg's characterisation of these agreements as 'international commerce agreements', and might start using that terminology interchangeably with 'free trade agreements' in my classes. Not everyone gets this, as this response to Rosenberg from Mike Hosking demonstrated.

It's hard to argue against free trade in itself (though such arguments continue to be made - see my earlier post on this), especially if genuine attempts are made to compensate the losers from free trade (such as those who lose jobs in industries in which we have a comparative disadvantage). There are certainly enough gains for the winners from free trade to compensate the losers, and have some extra left over. However, whether an international commerce agreement (or free trade agreement, if you prefer) has a net positive effect depends on how you evaluate the costs (or benefits) to the economy from all of the other non-free-trade-related clauses in the agreement. And that cost-benefit evaluation is enormously tricky - the more elements you include, the harder the evaluation is going to be.

The economic evaluation of the Trans-Pacific Partnership agreement was conducted by my colleague Anna Strutt and others (you can read the full report here). That economic evaluation estimated gains for New Zealand of $624 billion by 2030 from tariff liberalisation alone, and $4.16 billion if liberalisation of non-tariff trade barriers and customs delays were included. But note that this is trade-related gains only, and doesn't consider all of the other parts of the agreement, such as intellectual property, changes to Pharmac, etc. And now that the US is not included, you can expect the trade-related gains to be somewhat less.

Overall, I'll remain pro-free-trade, but agnostic on free trade agreements.


  1. I prefer the term preferential trading agreements which Bhagwati and Viner use

    1. Thanks Jim. That term still privileges the role of trade. With a few notable exceptions (e.g. 778% import tariff on rice in Japan), tariffs are fairly minor these days, so these agreements are much more likely to shake up inter-country finance, investment, etc. rather than trade. I'll grant that the non-tariff barriers are fairly significant though, as the Strutt et al. TPP report shows.

    2. Thanks, you do have a point there.

      I made many similar arguments in an op-ed in the New Zealand Herald a few months ago.

      Alan Sykes has written some good staff on the ups and downs of the law and economics of regulatory harmonisation. The better stuff is in the late 1990s when I first read it.

      In Australia, mutual recognition seem to be a useful way of getting around silly barriers to into straight trade. In the EU, regulatory harmonisation as a prison