As G-8 Meets, Free Trade Is in Retreat

Obama with euro zone leaders at the G8 Summit in 2012 Photograph by Pete Souza/The White House

At the start of his second term in January, President Barack Obama announced a massive platform of new policy proposals. Since then, many of his ideas—on gun control, a solution to America’s debt crisis, and other issues—have been abandoned, leaving the president’s supporters on the left almost apoplectic. Yet even as he has backed off from fights on other issues, Obama and his administration have continued to push for many new trade deals, such as the Trans-Pacific Partnership (TPP), which encompasses much of Asia, the fastest-growing region in the world. The White House also has proposed the Transatlantic Trade and Investment Partnership (TTIP), a free trade deal with Europe.

As Obama and other leaders of the world’s richest nations prepare to convene at the G-8 summit in Northern Ireland, a closer look at the U.S.’s trade agenda reveals that the administration’s rhetoric is more smoke and mirrors than serious policy. Even if the TPP or the Europe deal were viable initiatives, they will almost surely never pass Congress, which took five years to approve free trade deals with such minnows as Panama and Colombia. On a broader scale, global trade and economic integration are in crisis. Banks are retreating from international deals. The World Trade Organization’s Doha Round is dead. Leading nations like France, China, and Brazil are throwing up new types of protectionism, and a new era of deglobalization—the opposite of global economic integration—has arrived.

In Asia, the U.S.’s push for a regional trade deal is as much about geopolitical strategy as economics. The White House has increasingly focused American military and diplomatic energy on East Asia as part of a strategy called the “pivot,” which is designed to balance a rising China and reassert America’s Pacific presence. So far, the pivot has included renewed defense relationships with longtime allies such as the Philippines and the stationing of troops at new outposts in Australia and other countries. Committing in principle to join an Asian trade deal helps show that the White House takes East Asia seriously as the most important economic region of the world, helping advance America’s strategic aims, says one leading Asian diplomat.

But presidential interest alone cannot guarantee a deal. Obama has virtually no shot at getting the TPP passed in Congress. Trade has never been a popular issue with the broader American public; in a continued weak economy, it’s even less popular than in the 2000s—a fact every congressperson knows. What’s more, while some previous presidents enjoyed what is known as “fast track” trade authority, which guaranteed that the president could bring a trade deal to Congress for a straight up or down vote, Obama has never had fast track, which expired before he took office, making it even harder to get any deals through Congress. Already, a caucus of powerful Democrats in Congress, whose support Obama will almost surely need to pass any trade deal, have written the president complaining about the TPP. Japan’s inclusion in the TPP, the lawmakers contend, will reward “Japan’s significant, long-standing, and persistent economic barriers put in place to block our [U.S.] exports.”

Congress is not necessarily wrong to be skeptical of the TPP or other regional free trade deals such as the TTIP. In contrast to previous rounds of multilateral trade negotiations conducted through the World Trade Organization, which were thorough and forced all signers to seriously reduce trade barriers, the new regional deals often contain weak enforcement mechanisms and few binding provisions. The TPP includes countries at such vastly different states of development—such as Vietnam and Japan—that it will be nearly impossible for them all to live up to its conditions. These pacts allow countries to claim they are free traders while continuing to prop up their favorite industries.

Rather than being actual deals, regional pacts often are more like aspirations of freer trade—aspirations that often do not come true. Sometimes the deals don’t happen at all. Just last month, the Association of Southeast Asian Nations, the major Asian regional grouping, admitted that its Asean Economic Community, a free trade area slated to begin in 2015, isn’t going to come into effect on schedule, or any time soon, for that matter.

Even worse, the regional deals can create groupings that exclude trade with other nations. A comprehensive study by the U.S. Department of Agriculture showed that, while Europe’s regional free trade agreement cut barriers in the EU, it also reduced Europe-U.S. trade by about three percent annually. China, meanwhile, has signed deals with nearly all its Asian neighbors while continuing to  increase state control and protection of its economy, compared to a decade ago. (While state-owned enterprises controlled only six times as much of China’s industrial output as private companies in 2004, today they control 11 times as much.) Indeed, a China-Southeast Asia trade deal originally inked a decade ago still does not guarantee free trade as comprehensively as past WTO rounds. Nearly every nation in Southeast Asia is complaining about the massive loopholes in its deal with China—loopholes that have allegedly allowed Chinese dumping of goods into mainland Southeast Asia.

Failure by the U.S. and its trading partners to push a serious free trade agenda in the form of renewed, comprehensive global trade negotiations will only worsen trends toward deglobalization. Trade is one of the most important pillars of global integration, and right now the other major pillars are crumbling. The financial institutions that once propelled globalization have retrenched so badly that the shift will last for years. As crisis-hit European nations have passed legislation forcing banks to maintain higher capital requirements and to invest more within their own borders, these European institutions, which had been the major sources of emerging world investments, have started a process of massive deleveraging. Until two years ago, European banks accounted for about 90 percent of all foreign bank lending in Africa, Eastern Europe, and the Middle East and 60 percent of all foreign bank loans in Asia. That figure is dropping rapidly. Japanese, American, and Chinese banks, hindered by their own problems at home, will not step into the breach.

Although some European leaders at first thought this contraction in European banks’ balance sheets would last only through 2011 and 2012, now they—and the world—are realizing that the deleveraging is a much longer-term problem. An analysis from consulting firm Deloitte estimates that 71 percent of European financial institutions will wind down their balance sheets for five years or more. Credit Suisse estimates that European banks’ returning to lending in their home markets will strip as much as $1 trillion in funding from emerging markets and even developed markets over the coming decades.

A third pillar of global integration, migration, is faltering as well. In austerity-wracked southern European nations, rabidly anti-immigrant parties already have become mainstream political players. Greece’s far-right party Golden Dawn, which has a reputation for rounding up and beating immigrants, now holds the fourth-largest number of seats in parliament. Even tiny Singapore, a country that despite the global slowdown has maintained a gross domestic product per capita of $61,000 at purchasing power parity and that depends on trade and foreign workers to prosper, has seen its public turn sour on migration. Anti-foreign worker sentiment helped propel the Singaporean opposition, dormant for decades, to its strongest showing ever in last year’s elections as it criticized the ruling party for being too lenient in allowing labor migration.

For the global economy, the continued trend toward deglobalization will mean a dearth of new entrepreneurial companies, particularly in developing nations, since there will be little capital available for the next Mark Zuckerbergs. In addition, it will mean that trade wars will only escalate, since these regional trade deals do not hold world leaders to the tough standards that previous WTO rounds did. In the long run, this could lead to an overall decline in trade, which would make the entire international economy far less dynamic, and could even lead to greater political tensions between big trading powers like the U.S. and China.

There are, however, ways out. Although the G-8 group of industrialized nations has been expanded into a G-20 that includes several emerging economies, it’s still the core G-8 summit that meets more regularly and makes the bulk of decisions on international economics. It’s time for the leaders of the G-8 to shift the real decision-making powers to the G-20, which would empower such nations as China, India, Brazil, Indonesia, and others. Devolving power to emerging nations might convince them to return to the WTO negotiating table and focus on multilateral agreements, which have a far better track record at lowering trade barriers than regional pacts do.

The White House, meanwhile, should direct incoming U.S. trade representative Michael Froman to shift his focus from regional deals like the TPP toward a full-court press to revive the global trade talks. When it comes to free trade, the administration has shown it can talk a good game. But talk alone won’t get the global economy humming again.

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