Tuesday, November 27, 2012

Potential US-EU Trade Deal Inverts Typical Trade Politics

. Tuesday, November 27, 2012

Standard stories of trade politics often begin with reference to Olson's logic of collective action, which argues that small groups with common interests may be able to effectively mobilize politically, thus influencing policy in ways which benefits them at the expense of the majority. Trade generates diffuse benefits for large numbers of consumers but concentrated costs for smaller numbers of (comparatively disadvantaged) producers. Consumers will find it more difficult to overcome collective problems and mobilize politically than affected producers. Therefore, the logic of collective action expects trade policy to be protectionist absent two conditions:

1. A countervailing small group of comparatively advantaged producers that is able mobilize politically in favor of open trade, at least for their goods/services.

2. An international negotiating process that allows states to reciprocal concessions: you liberalize your comparatively disadvantaged markets and I'll liberalize mine.

But the trade deal that the US-EU are negotiating inverts this dynamic. According to the NY Times, because trade between the US and EU is already relatively liberalized, the benefits and costs of further liberalization are diffuse:

Tariffs on goods traded between the United States and the European Union are already low, averaging less than 3 percent. But companies that do substantial amounts of trans-Atlantic business say that even a relatively small increase in the volume of trade could deliver major economic benefits. 
“The reason we care about this is because these base line numbers are so huge,” said Karan Bhatia, a former deputy U.S. trade representative who is now vice president for global government affairs at General Electric in Washington. “This could be the biggest, most valuable free-trade agreement by far, even if it produces only a marginal increase in trade.”
As a result, the normal political dynamic does not exist, and all of the major parties seem to be in support:
There does not seem to be any broad-based political opposition to an E.U.-U.S. trade agreement, as there was to Nafta.
Indeed, the political push seems to be for more liberalization rather than less:
Last week, a coalition of food and agricultural groups led by the National Pork Producers Council in the United States wrote to Mr. Kirk, expressing concern that a free-trade agreement might leave them out.

The council complained that in the past, Europe had blocked imports of genetically modified corn and soy products and objected to American companies’ use of product descriptions like “Parmesan” cheese. In Europe, that label is reserved for cheese that comes from the Parmigiano-Reggiano region of Italy.
Presumably Italian cheese producers would be opposed to this, but because the margins are so low they may not be willing to pay the high costs necessary to build a broad enough coalition which would be able to meaningfully impact the bargaining process. And, in fact, it seems as if no such coalition has yet formed:
“I haven’t heard anyone say it doesn’t make sense,” said Peter Beyer, a member of the German Parliament from Ms. Merkel’s party, the Christian Democrats, and a major advocate of an agreement.  
That could always change as details from the plan emerge. Technical details can matter quite a lot in these negotiations, particularly if the negotiators start harmonizing technical standards on goods like pharmaceuticals. But because the underlying dynamic is different -- diffuse benefits and costs rather than diffuse benefits but concentrated costs -- this negotiation may go more smoothly than other trade deals.

Finally, this deal could invert trade politics in another way: by bringing other countries back to the WTO table to complete the Doha round. I wrote about the potential for that previously.

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Potential US-EU Trade Deal Inverts Typical Trade Politics
 

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