Is protectionism making a comeback? (Part 2)
Regulatory barriers to trade
The increase in regulatory barriers to trade started following the financial crisis and the conclusion from the crude analysis of the Fraser Index data is borne out by studies from the WTO, the IMF and others. A typical non-tariff barrier to trade might be a regulation requiring products or services sold in a particular market to follow certain standards. A topical example, much discussed in the UK, is that the EU prohibits the import of chicken that has been washed with a very weak chlorinated water solution, thus effectively prohibiting chicken imports from the US.
The number of newly implemented regulatory barriers to trade rose after the financial crisis, though they have been on the rise since the early 2000s.
The existence of both regulatory barriers to trade and, more generally, much higher levels of regulation in areas such as banking and finance leads to the phenomenon of the modern-day, monster free-trade agreement. Modern free-trade agreements attempt to harmonise or mutually recognise regulations across different jurisdictions.
NAFTA, for example, is 309 pages long and here is a taste of it:
“For purposes of calculating the regional value content under the net cost method set out in Article 402(3) for a good that is a motor vehicle provided for in heading 87.01, tariff item 8702.10.aa or 8702.90.aa (vehicles for the transport of 16 or more persons), subheading 8704.10, 8704.22, 8704.23, 8704.32 or 8704.90, or heading 87.05 or 87.06, or for a component identified in Annex 403.2 for use as original equipment in the production of the motor vehicle, the value of non-originating materials used by the producer in the production of the good shall be the sum of…”
In NAFTA, there are provisions relating to how regulation will be harmonised or how mutual recognition of regulation will work and so on which are enormously complicated.
The Trans-Pacific Trade Partnership is, according to Donald Trump, 5,600 pages long, though I have not been able to find a source that allows you to download the whole treaty in one document to check that.
In developing these modern, comprehensive trade agreements there is a trade-off. They do tend to cut tariffs. The Trans-Pacific Trade Partnership would have cut 18,000 tariffs. They can also prohibit certain types of protectionist regulation. Unifying regulation in trade agreements can also reduce costs. However, this can lead to regulatory frameworks that are incredibly complex, difficult to reform and prone to capture by corporate special interests – especially large companies that employ lobbyists. They reduce consumer choice and can much more deeply entrench the regulatory state. Such trade treaties attract opposition from anti-business as well as pro-free-trade lobbies.
The thirty-year view
Whether 2010 to 2019, and especially the last two years, will turn out to be a blip or a new trend towards greater protectionism, we do not know. However, there is a trend towards much freer trade if we take a 30-year view. The average applied tariff has fallen from 6.8 per cent of imports in Australia in 1995 to 0.9 per cent today; in Brazil it has fallen from 32 per cent in 1989 to 8.6 per cent today; in China from 32 per cent in 1992 to 3.8 per cent today; in Nigeria from 91.2 per cent in 1995 to 11.2 per cent today; and in India from 27 per cent in 1992 to 5.8 per cent today. There has been a huge reduction in tariffs over the last 30 years including in countries that have effectively previously blocked meaningful trading relationships through protectionism.
Free trade is coming under pressure from two angles. The first is the growing protectionism sentiment and protectionist actions from the US. The second is the growth of regulatory barriers to trade. Free trade agreements can help reduce the latter. However, in practice, they may make regulation and trade agreements more and more complex.
One of the many great insights of Adam Smith (and perhaps more particularly of Fredric Bastiat) is that we prosper by co-operating with each other through trade. If we lose sight of that it is easy to see how protectionist attitudes in the economic arena will lead to hostilities in the cultural and political arena. We will see other peoples as our competitors rather than potential co-operators. Protectionism by one party then begets the same by the aggrieved party. Thereby economic, cultural and political tensions can escalate in concert. This could happen if we are not careful. That is certainly one of many explanations for the growth in tensions before the First World War.
The second concern relates to the way in which regulation intertwines with trade agreements. There have been huge reductions in explicit barriers to trade. But, we cannot separate free trade from a belief in economic liberalism and small government in general. It seems that we are trying to achieve free trade abroad whilst having heavily regulated economies at home. The result is the monster free trade agreement that is criticised by protectionists, free-traders and anti-business lobbies alike. Unless Brexit ushers in a period of economic liberalism at home and abroad (and there is little sign of that), there is every possibility that the EU single market will be replaced by dozens of complex trade agreements.