Beneath the Red Meat, a Terrible Idea on Trade

Republican delegates walked out of Quicken Loans Arena late Thursday night drenched bloody from the red meat offered by presidential nominee Donald J. Trump.  In accepting the Republican nomination, Generalissimo Trump (“The Butcher of Cleveland”) pledged to bring order to the chaos of our fallen republic. 

Analysis of the speech focused on Trump’s belligerent tone and reliance on fear; indeed, there wasn't much else to grab onto. Though Trump repeatedly promised to share his “plan of action for America,” he mostly provided goals and deliverables – I will fix this, I will end that, I will work with them, etc. At times he hinted at a policy while not stating any specific proposal, as when he alluded to his previous suggestion to establish conditions on the NATO defensive umbrella while neither ratifying his comments nor proposing anything different.

Trump did, however, make roughly a half-dozen actual policy proposals in the speech. I counted seven: replace Scalia with someone similar, require department heads to provide a list of “wasteful programs” to cut, ban Muslim immigration (“So you call it territories. OK? We're gonna do territories,” he assured Leslie Stahl on 60 Minutes last week, “call it whatever you want. We'll call it territories, OK?”), lift all restrictions on energy production, allow churches to enter politics without losing tax exempt status, build The Wall, and ensure the United States only enters into bilateral free trade agreements.

It’s this last one I want to talk about. Let's take this proposal seriously for the moment.

Trump presents his free trade idea as a common sense reform.  He makes deals – he literally wrote the book on it (not actually true) – and he’ll use that deal-making prowess to work for the American people. “No longer will we enter into these massive deals, with many countries, that are thousands of pages long – and which no one from our country even reads or understands,” says Trump. “Instead, I will make individual deals with individual countries.”

First, I’ll assume Trump is talking specifically about free trade deals here, because the United States is party to a massive number of other multilateral treaties and institutions that impact trade, such as the World Trade Organization, the International Monetary Fund, the General Agreement on Tariffs and Trade, the General Agreement on Trade in Services, the Universal Postal Union, the Hague Convention on Service Abroad, the Convention on Contracts for the International Sale of Goods, and so on. These treaties, among other things, limit tariffs and create international standards for things like mail delivery, commercial contract terms, service of process, and much more.  As a general matter, after World War II, these agreements are how the United States and its allies have spread their influence and institutions across global commerce. Removing them in one fell swoop would be a disaster.

If we focus on free trade deals specifically, then despite Trump’s rhetoric, the United States has generally entered into bilateral trade agreements with individual countries to complement multilateral institutions like the WTO, though recently has increasingly trended toward regional deals.

A first step in American trade relations is entry into a Trade and Investment Framework Agreement (TIFA).  A TIFA is a short, non-binding agreement that outlines general free trade goals and establishes a trade council where the signatories can meet to discuss trade issues. (An example of the 2005 TIFA between the U.S. and Iraq can be found here.) 

The United States has signed 44 bilateral TIFA agreements.  We’ve signed five regional TIFA agreements, with the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of West Africa States (ECOWAS), the West African Economic and Monetary Union (WAEMU), the Caribbean Community (CARICOM), the Gulf Cooperation Council (GCC), the central Asian states, and the Association of Southeast Asian Nations. Again, these agreements simply create a forum to discuss trade issues.

Beyond the TIFA, the next step is entering into a free trade agreement (FTA). The United States has entered into bilateral FTAs with 12 countries (Australia, Bahrain, Chile, Colombia, Israel, Jordan, Korea, Morocco, Oman, Panama, Peru and Singapore).  We’ve entered into two regional FTAs, the North American Free Trade Agreement (NAFTA) with Canada and Mexico, and the Central American Free Trade Agreement (CAFTA) with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.  We have also completed negotiations on the Trans Pacific Partnership (TPP) with twelve Pacific Rim states, and are currently negotiating the Transatlantic Trade and Investment Partnership (T-TIP) with the European Union.  The move towards regional deals began in the 1990s, as a way to create wider trade frameworks to replace slow negotiations at organizations like the WTO. So, when you think of Trump’s promise to eradicate the “massive deals, with many countries,” realize the United States has only entered into two of these deals, with two on the horizon.

Now, does Trump’s plan make any sense? Would America benefit from scrapping the TPP and renegotiating free trade agreements with all twelve signatories?  Not really.

First, none of the downsides that the public dislikes in free trade deals, such as opening up a cheaper labor pool to compete with American workers, would be solved by breaking regional treaties into bilateral agreements. Opening up foreign labor markets is a point of free trade deals, not something we give up because of a weak bargaining position. This would still occur in bilateral deals. If you believe the consequences of free trade outweigh the benefits, the solution is to not enter into free trade deals; breaking them into smaller pieces doesn’t address this.

Trump ignores this, acting as if FTAs are like a business deal, in which the United States and another country are negotiating to purchase goods or services from each other. I expect, in Trump’s mind, free trade deals are like sports trades – it’s easier for the Rangers and the Astros to make a mutual trade than it is for the Rangers to work out an interlocking trade among all five teams in the AL West. 

But that’s not really how this works. Free trade agreements establish a standard statutory framework within which businesses operate. They generally require that states not establish preferences for their own domestic businesses; institute financial, labor and environmental rules; and create dispute resolution and enforcement bodies. So it’s less like a five-team trade, more like sports teams convening to decide the rules of the game. 

Now imagine that instead of 30 MLB teams coming together to decide the rules, they each entered into 29 bilateral agreements determining the rules of each matchup. That's why we enter into regional agreements, to create consistency across broader market areas. In other words, scrapping multilateral deals to enter into many bilateral deals doesn’t simplify things at all – instead it makes things massively more complicated. To illustrate, this is the CAFTA agreement, signed between the U.S. and six other countries. This is our bilateral agreement with Korea. You will notice that the latter is hardly less complicated with the former – these agreements are designed around the same general framework. While multilateral agreements are more difficult to negotiate than bilateral deals, the primary thing complicating trade deals is that international trade is complicated. Scrapping the TPP to sign individual deals with the signatories wouldn’t save us from a “massive deal” with “thousands of pages” – we’d just end up with twelve massive deals, each with thousands of pages. While each of these bilateral agreements might be easier to negotiate than a 12-country regional agreement, you only have to do the latter once.

This is not simplification; Trump's approach would increase transaction costs for businesses operating abroad. If you’re a company trying to sell your products in Southeast Asia, would you rather have to account for a dozen trade frameworks, or one? Would you rather your attorneys have to be familiar with the rules and precedents of a dozen arbitration bodies, or one? Would you rather the ships transporting your goods have to comply with a dozen sets of environmental and shipping regulations, or one? And over time, as regulations and agency opinions accrete onto each of these agreements, they will continue to diverge from each other.

This is Trump's M.O., of course: treat a complex subject as if it's simple, and hope the audience avoids thinking about it too closely. But we should take Trump's words seriously, and at core, this is not a serious proposal.