Do free trade agreements promote sneaky protectionism? A classical liberal perspective

With the standstill of the Doha Development Round of the World Trade Organization (WTO), bilateral and multilateral regional trade agreements (RTAs) have become an increasing popular instrument to foster international economic cooperation and integration. Since June 2016, all WTO members belonged at least to one RTA and as of January 2019, there were 291 RTAs in force [WTO, 2019]. The common view held by many economists is to regard these arrangements favorably as a step closer to free trade by reducing trade obstacles. At the same time, criticism of free trade agreements is widespread. Commonly articulated from critics of globalization, it is referred to the alleged downsides of free trade, such as the destruction of jobs, lowering wages, and the erosion of consumer protection, health, social, and environmental standards. Not much attention has been paid in the debate to possible protectionist traits of these agreements. Rather than promoting genuine free trade RTAs can be viewed as instruments to protect as much as possible special interests in the countries involved and advocate merely a regulated trade with still a considerable portion of protectionism.

Indications for this view is the ever-growing negotiation time as well as length, scope, and complexity of the agreements. For example, while the first bilateral trade agreement, the United States concluded in the postwar period with Israel in 1985 was quite short with less than 8,000 words in length and 22 articles and three annexes, the US–Singapore Free Trade Agreement of 2004 was already nearly 10 times as long, taking up 70,000 words with 20 chapters each with many articles, more than a dozen annexes, and multiple side letters [Rodrik, 2018a, p. 75]. The scope of the Comprehensive Economic and Trade Agreement (CETA) between Canada and European Union (EU) of 2017 is even broader with 30 chapters occupying altogether 1589 pages.

The neglect of the protectionist potential of RTAs in the public and academic debate has recently been made the subject of discussion by Harvard economist Dani Rodrik [2018a] He [p. 74] holds the label “free” trade agreement misleading and questions the tendency to view recent trade agreements “as an example of efficiency-enhancing policies.” As they focus increasingly less on tariffs and quotas, but more and on domestic rules and regulations they may foster a kind of protectionism that is subtle and less obvious, because it is hidden in the many regulations on various standards which amount to a form of preferential treatment of certain industries. This is what this paper calls “sneaky” protectionism. Hence, rather than rein in special interests to advance free trade, today’s trade agreements may “serve to empower special interests that may produce welfare-reducing, or purely redistributive outcomes under the guise of free trade” [Rodrik, 2018a, p. 74]. Rodrik [2018a] therefore calls to take a closer and more nuanced look on whether recent trade agreements really promote, on balance, greater economic liberalization or whether they further instead a sneaky protectionism, and he suggests examining the politics behind them. This article deals with this void.

Its aim is to examine to what extent recently signed mega-RTAs really have the potential to promote free trade or rather stifle it through baked-in protectionism. This requires an analytical framework that provides a benchmark model against which actual trade agreements can be assessed. This benchmark must specify what a real free trade agreement would have too like given political economy restraints. For this, the paper builds on prior work by the Cato Institute [Ikenson, 2018; Ikenson et al., 2018]. Theoretically, the benchmark model draws on insights from classical liberalism complemented by findings from the Austrian school of economics and public choice theory. The classical liberal perspective is chosen because this strand of economic thought laid the foundation of modern trade theory and demonstrated the mutual benefits of free trade. Austrian economics, which itself is rooted in classical liberalism [Butler, 2010], highlight the importance of competition as a discovery procedure which is fostered by free trade. The discovery concerns not only consumer wants and the best and cheapest way to meet them but also what institutional arrangements are appropriate to solve various issues, such as public health, social, and environmental problems. Precisely, these topics cover an increasingly part of today’s RTAs. Public choice theory explains why politicians cannot be expected to immunize themselves from pressures from the various interests of the societies they govern.

Methodologically, the paper applies a simple multiple case study approach following Yin [2003]. This method is appropriate when for a relatively new issue comprehensive quantitative data are missing and the focus is on how questions [Eisenhardt, 1989; Yin, 2003]. As the chosen agreements have only relatively recently been signed and have not yet fully been implemented, hard data are not readily available. And the study concentrates on how the agreements regulate trade. Multiple cases enable to draw comparisons, that is, to explore differences within and between cases and replicate findings across cases [Yin, 2003; Baxter and Jack, 2008].

Three cases were chosen according to actuality and contrasting composition of the participating economies involved: the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) of 2018, also known as Trans-Pacific Partnership (TPP)-11, involves almost an equal number of developing and developed countries with huge developing gaps of the first to the latter, the 2018 renegotiated North American trade agreement USCMA is between two developed nations and one emerging market country and the 2017 Canada–EU agreement CETA between two highly industrialized market economies. The three cases are based on information obtained from primary legal sources, comments to the legal texts, media reports, and web sources. They were evaluated through the lens of the following considerations: (1) To what extent and how quickly can the agreements remove trade barriers? (2) To what extent is there scope to have gone further to liberalize trade? (3) Do specific provisions belong in trade agreements, and (4) Do they contain innovative regulations in the positive or negative sense for RTAs?

Of course, this methodological approach has its limitation. Many regulatory provisions require evaluations of qualitative terms to understand whether they are net liberalizing or net protectionist. As Rodrik [2018a] has pointed out “unlike in the case of tariffs and quotas, there is no natural benchmark that allows us to judge whether a regulatory standard is excessive or protectionist.” In addition, given that the agreements are not yet fully implemented quantitative data on the actual effects are missing. Therefore, such appraisals are by nature a subjective endeavor reflecting value judgments, special interests, or institutional biases. Provisions in a trade agreement that might be judged positively or negatively by classical liberal economists might be viewed differently by people from pro-business, pro-labor, or pro-environment organizations. For that reason, the study is to be understood as a first tentative step in evaluating relatively recent RTAs to trigger further research and discussion. It assesses the RTAs through a particular analytical lens that is grounded in theoretical insights that demonstrated why prosperity crucially depends on free voluntary exchange both within and across political borders embedded in a framework that respects private property, freedom to contract, and the rule of law.

Against this background, the article contributes to existing research in two ways. First, it adds to the debate on RTAs by focusing on their protectionist potential as suggested by Rodrik [2018a]. For this, it proposes a framework for analyzing RTAs in the form of an ideal-type reference model for free trade agreements and applies it to case studies of the three recently concluded mega-RTAs. While there are studies on the individual agreements separately,

See for example, Peterson Institute for International Economics [2016a and 2016b] on TPP, Ciuriak et al. [2017] on CPTPP or Whiting, T.K. and Beaumont-Smith, G. [2019] on USMCA.

Second and related to that, the study contributes to reframe the discussion on the theoretical foundations and justification of free trade in a period in which economic nationalism is on the rise and trust in the benefits of economic globalization is waning not only among political actors, which is symbolized by Donald Trump’s election as US president, but also among high-ranked economist, such as, for example, Stiglitz [2017] or Rodrik [2011, 2018b]. The paper highlights the classical liberal understanding of free trade as freedom to import rather than freedom to export and it points to the difference between the classical liberal perspective of free trade and the perception that the playing field must be level for trade to be truly free as voiced, for example, by the EU Commission (2017a, p. 13) or business circles [e.g., US Chamber of Commerce, 2017; Confederation of Swedish Enterprise, 2018].

The remainder of the paper is organized as follows. First, section 2 explains the essential traits of an ideal free trade agreement from a classical liberal perspective. Then, section 3 examines tentatively three cases of recent free trade agreements, to what extent they come close to this benchmark models, namely the CPTPP, also known as TPP-11, the renegotiated North American trade agreement USCMA and the Canada–EU agreement CETA. Section 4 concludes.

Classical liberal scholars like Adam Smith, David Ricardo, John Stuart Mill, and Frédéric Bastiat were leading to challenge the mercantilist view of international trade as a means to accumulate gold or silver by running a trade surplus with other countries. They demonstrated using sound economic theory that the division of labor according to comparative advantage made possible by the voluntary exchange process on the marketplace is a major driver of efficiency and prosperity, both within and between nations. And this is always beneficial for both sides; otherwise, they would not trade. Thereby, wealth is not created by governments, but by the mutual cooperation of free individuals “because economic freedom allows people to adjust spontaneously to each other’s needs and cooperate for their mutual benefit” [Butler, 2015, p. 74]. Instead, they were aware that the government is no benevolent dictator but consists of self-interest human beings who have the same failings as the rest of the population. Therefore, and because of the incentive structure of the political process, it tends to be unreliable, inefficient, and easily captured by producer interests. As Bastiat [1848] put it, governments make “the great fiction through which everybody endeavors to live at the expense of everybody else.” Therefore, governments should themselves be bound by the rule of law. This means that rules should be general (without exceptions), universal (applying to everyone without exception with nobody being above the law), and stable (not changing so often so that people can rely on what they are about) [Hayek, 1973, p. 73; Butler, 2015].

One of the least contested insight in the economics profession is David Ricardo’s [1817] principle of comparative advantage [Lemieux, 2018a; Rodrik, 2018a] which demonstrates that free trade is beneficial for a country even if it has an absolute productivity disadvantage in producing every good because it expands a nation’s consumption possibilities frontier when its residents specialize on producing whatever goods cost them less to produce relative to other things. They receive more goods at lower prices and better quality than they would otherwise have enjoyed, so their lives are materially improved. At the same time, having to compete with foreign competitors induces domestic producers to become more efficient and innovative [Lemieux, 2016].

As James Mill [1821] pointed out in contrast to the popular held mercantilist view these benefits from trade arise, in all cases, “from the commodity received, not from the commodity given. When one country exchanges … the whole of its advantage consists in the commodities imported. It benefits by importation, and by nothing else. …That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commodities. They are benefited, therefore, not by what they give away; that it would be absurd to say; but by what they receive.” Similarly, Jean-Baptiste Say [1855, Book I, Chapter XV] concluded “nothing can be bought from strangers, except with native products.” Even if a country exports more, it will either invest its trade surplus or import more in the long run because these are the only things that can be done with the foreign currency earned from exports [Lemieux, 2017a]. So, the benefit free trade confers to the people is not only the freedom to export, as its advocates typically accentuate, but equally important, the freedom to import. The more a country can import, the better off it is in terms of material prosperity.

From these insights follows that countries should open their economies completely to trade irrespective of what other countries may do. Hence, from a classical liberal perspective, countries should free trade unilaterally and not just on a reciprocal basis [Krugman, 1997; Lemieux, 2017a,b; Rodrik, 2018a;] because unilateral free trade provides most of the benefits of multilateral free trade. This is what Richard Cobden (1804–1865), an English manufacturer and politician, has advocated and successfully achieved with the abolition of the British Corn Laws in 1846 that unilaterally repealed protectionist tariffs.

Cobden [1919] argued as follows: “We came to the conclusion that the less we attempted to persuade foreigners to adopt our trade principles, the better; for we discovered so much suspicion of the motives of England, that it was lending an argument to the protectionists abroad to incite the popular feeling against free traders, by enabling them to say, “See what these men are wanting to do; they are partisans of England and they are seeking to prostitute our industries at the feet of that perfidious nation…” To take away this pretense, we avowed our total indifference whether other nations became free traders or not; but we should abolish Protection for our own selves and leave other countries to take whatever course they liked best (quoted in Bhagwati [2002a p. 2]).

Furthermore, the benefits from trade do not disappear when foreign governments intervene in their economies more than one’s own through various regulatory standards, taxes, and subsidies [Lemieux, 2017b]. This is actually what the level playing field argument fails to see. As Krugman [1997] contended although government regulations and taxes are part of the comparative advantage landscape and change relative prices, they do not extinguish comparative advantage and negate the benefits from trade. Therefore, the demand for reciprocity and creating a level playing field is actually self-damaging. When, for example, a trading partner subsidizes its exports, it unlevels the playing field, however, in favor of the importing countries and against its own citizens. The consumers of the importing country gain from lower prices for imports and their real incomes rise. Resources released in importing competing industries can then be invested to produce goods and services here that were previously too costly to produce.

Hence, one’s own government’s trade policy should not depend on the restrictions that foreign countries impose on their own citizens. As Joan Robinson [1947] put it, this would be as if a country throws rocks in its harbors simply because other countries have rocky coasts. Murray Rothbard [1970/2018] highlighted that exchange and the division of labor is not based on equality and harmonization but rather on differences and inequality; otherwise, “there would be no scope at all for a division of labor if every person were uniform and interchangeable.” Based on these insights, there is no convincing economic argument at all for the need of trade agreements as stated by Vilfredo Pareto in 1901 [similarly Rothbard, 1995].

Not even the “optimal tariff” argument provides a satisfying justification. According to this theory, large countries may use tariffs to manipulate their terms of trade at the expense of their trade partners. However, in a complex ever-changing world, there is an insurmountable knowledge problem to determine the optimal tariff rate where the gains in tax revenues outweigh the societal loss due to the allocative inefficiencies caused by the artificial increase in the domestic prices. Even if it could, the price increase nevertheless hurts consumers and given the reality of the political process, it cannot be expected that the tax revenues will be used to compensate consumers. Therefore, as already Francis Y. Edgeworth [1908, p. 555], one of the intellectual fathers of the optimal tariff argument, pointed out, “the direct use of the theory is likely to be small. But it is to be feared that its abuse will be considerable. It affords to unscrupulous advocates of vulgar protection a particularly specious pretext for introducing the thin edge of the fiscal wedge. Let us admire the skill of the analyst but label the subject of his investigation POISON.”

According to Krugman [1997] and Rodrik [2018a], the optimal tariff argument plays almost no role in real-world disputes over trade policy.

Only political economy considerations may justify trade agreements. Given the incentives of the political system and the widespread distrust in free markets, unilateral free trade or a simple contract declaring with a single phrase that trade shall be free trade among the parties are for the time being politically not feasible. Therefore, trade agreements could be seen as a second-best solution and precaution to tie the hands of the government [Irwin, 2015; Lemieux, 2017a]. They prevent national governments from giving in to the pressures of domestic import competing interests to the detriment of consumers if international agreements need to be revoked [Rodrik, 2018a]. Moreover, it is argued that reciprocity forces governments to keep their commitments because it is easier for a government to cancel unilateral moves than to break an agreed system of rule-based trade [Bhagwati, 2002a; Lemieux, 2017a]. However, if and to what extent trade agreements are able to restrain governments depends on its precise arrangements. As Rothbard [1995] and Peter Klein [2017] argue, as national governments are more inclined to strengthen rather than to give up power trade agreements might just as likely be used as a vehicle to increase government control over the economy through the cartelization of regulations, that is, upward harmonization of product safety, labor, social and environment standards, taxes, and subsidies.

Nevertheless, free trade agreements are the reality. Therefore, from a classical liberal perspective to be useful, they must further free trade and the liberty of economic subjects more than they restrict them through regulatory harmonization and built-in escape clauses and remedy measures. The basics of an ideal-typical classical liberal benchmark model for trade agreements have been developed by Cato Institute scholars around Daniel J. Ikenson. It should contain the following essentials [Ikenson, 2018; Ikenson et al., 2018]:

Complete elimination of tariffs and non-tariff barriers on all goods and services;

Differences in regulation often reflect divergent consumer preferences, different assessments of risks, dissimilar regulatory styles, or simply different influences of interest groups. So, there is no objective answer on what the optimal standards for all could be. Therefore, the principle of mutual recognition is an obvious solution. It has been adopted in addition to basic harmonization in the EU following the Cassis-de-Dijon decisions of the European Court of Justice in the EU Commission White Paper of 1985 and the Single European Act (SEA) of 1986. Such an approach has two advantages from a classical liberal perspective. First, it preserves national sovereignty to legislate and regulate in ways that do not discriminate against imported goods, services, and capital. Second, it strengthens competition as a disempowering instrument [Böhm, 1961, p. 22] and discovery procedure [Hayek, 1978]. This curbs the power of politicians and bureaucrats who tend to increase their power by establishing tax and regulatory cartels via international agreements. Such regulatory or institutional competition enables people to choose not only through voice but also through exit. In addition, the option to vote by feet promotes institutional competition as a discovery procedure to find out those regulation that meet the preferences of the population. This not only holds for product standards but also for provisions on labor and environmental regulations. As many scholars agree [e.g., Krugman, 1997; Irwin, 2015; Lemieux, 2017a,b; Ikenson, 2018], these provisions are actually no genuine trade matter, as they do not per se limit trade, unless they are used as pretext to impose trade barriers on foreign competitors that produce under different standards.

The same holds for intellectual property rights rules such as the length of copyright terms [see e.g., Bhagwati et al., 2014]. In fact, their need is far from unanimously acknowledged in economic theory. The standard argument in favor of intellectual property rights protection is to encourage innovation by providing a temporary monopoly for the inventor; otherwise, there would be not enough innovations. Shaffer [2013], for example, argues that intellectual property rights law contradicts the fundamental liberal principle of the primacy of voluntary action over government coercion. People may make contracts that limit the sale or transmission of ideas or books, but these bind only those who make them. Intellectual property laws, by contrast, are imposed by a coercive state and apply to everyone, whether people accept them or not. Even, if one does not share this liberal legal principle, it is difficult to prove empirically that without these laws there would be fewer productive innovations. As Shaffer points out, most of the great creators and inventors of the past worked without patents and copyrights. In a similar manner argue Boldrin and Levine [2008]. They show that intellectual monopoly is not a cause of innovation, but rather an unwelcome consequence of it as the example to the software industry shows. Virtually, none of the innovations in this industry took place with the protection of intellectual monopoly. In addition, they question the widely held view among politicians and interest groups that imitating is economically harmful. Instead, Boldrin and Levine [2008, p. 145f.] argue that people learn through imitating others. In doing so, they usually not only produce at a lower cost but also make further improvements. So rather than inspiring innovation, there is much reason to believe that intellectual property rights prevent innovation because the patent owner can stop other people from making a better product that is based on the patent owner’s one.

A final requirement of an ideal liberal free trade arrangement is that in order to be effective, its rules must be implemented. This necessitates a binding and enforceable dispute settlement mechanism to make sure governments keep their promises. According to Ikenson et al. [2018], the standard mechanism with recourse to a third-party adjudicator for a ruling and then self-enforcement through authorized suspension of the trade agreement obligations has proved its effectiveness.

In the following, three free trade agreements will be analyzed through the lens of the classical liberal ideal benchmark model: (1) the TPP-11, which is considered as a blueprint for other agreements and “ongoing and upcoming negotiations at the multilateral level” [Helble, 2017, p. 1], the renegotiated North American trade agreement USCMA as the first outcome of the new trade doctrine of US President Donald Trump’s America first policy, and (3) the CETA Agreement between the EU and Canada. It is the EU’s first economic agreement with a highly industrialized Western economy and reflects the EU’s value-oriented and ‘race-to-the top’ oriented trade philosophy [EU Commission, 2017a p. 13]. Following Yin’s [2003] recommendations, first each single case is examined separately and then compared in a cross-case analysis for pattern matching and exploring similarities and differences.

The article provided a classical liberal analytical framework for a tentative assessment of recent mega-RTAs. Seen in this light RTAs and free trade are different things. The comparative study of three recent mega-RTAs confirms this. They fall short of the classical liberal ideal of totally free trade. Instead, the agreements have a high content of managed trade riddled with loopholes suitable to foster sneaky protectionism and entrench special interests.

Figuring out which special interests in detail and to what extent they were involved, and which holds the upper hand in shaping these trade agreements would be an important direction for further research to improve the understanding of the nature of RTAs. To what extent are they a mechanism through which protectionist interests can be neutralized or rather be empowered? As Rodrik [2018a] pointed out, it is most common to assume the protectionist interests in the import-competing industries, which the government, assisted by lobbies interested in expanding exports and market access abroad may counter through trade agreements. However, it is just as likely that protectionism is forwarded by rent-seeking interests on the export or pro-trade side that use trade agreements to cement or increase preferential treatment, for example, through tighter intellectual property rights rulings. An in-depth analysis of the political economy processes behind these agreements to detect the most powerful and dominant players not only goes beyond the scope of this paper. It also meets insurmountable data problems, given the lack of transparency of the negotiation process. Accordingly, there are only sporadic profound studies of how interest groups shape trade agreements [e.g., Rönnbäck, 2015].

Given the baked-in protectionism and the political economy constraints of RTAs the obvious normative conclusion from a classical liberal perspective would be to abandon regional trade partnerships and to undertake unilateral moves towards liberalization to reap the benefits of free trade. As Sally [2008] and Bhagwati [2002a and 2002b] show unilateralism is not at all so exceptional. Almost 70% of overall trade liberalization since the 1980s has been unilateral [Bhagwati, 2002b; Sally, 2008, 151]. Bhagwati [2002b] points out that there is actually no better credibility of a government’s commitment to free trade than to “go alone” and reduce their trade barriers without expecting reciprocal concessions from other countries. Trading partners may then be more likely to reciprocate if they see genuine free trade commitment rather than when they know protectionism is preferred.

However, steps toward this direction would require that government leaders and citizens understand and share the economics behind real trade as outlined in Section 2. Yet, such knowledge is in short supply. Therefore, RTAs will remain the reality. In this situation, a fruitful way for economists in the classical liberal tradition to advance the case for real free trade might be to defend those liberalizations contained in trade agreements, while uncompromisingly criticizing the ways in which given trade agreements provide protection for special interests and stimulates rent-seeking. Seen in this light, despite their flaws, CPTPP and CETA seem to be a step forward toward lowering protectionism while for USMCA it is not obvious that it is liberalizes more than NAFTA.