WASHINGTON, DC – June, 2017–Tariffs and import quotas are no longer at the center of most trade negotiations because they are generally low for most manufactured goods. Today, modern trade negotiations necessarily focus more on non-tariff barriers, which have a greater impact on modern global value chains (GVCs) than tariffs and quotas. The Obama Administration negotiated the Trans-Pacific Partnership (TPP) to provide a new framework for 21st Century trade that addressed the barriers GVCs face.
Of course, even before President Trump withdrew the United States from TPP, it faced an uncertain future in the U.S. Congress. This was due, in part, to opposition from groups concerned that trade liberalization would exacerbate income inequality, while others were concerned with new features in TPP aimed at removing nontraditional barriers to GVC trade. This post looks at how the nature of GVCs affects the substance and politics of trade policy, using the TPP as a template. A second post will examine what the new GVC-informed trade agenda implies for the process of trade negotiations.
Trade Costs Beyond Tariffs
Trade liberalization focused strictly on lower tariffs on goods does not address the fundamental nature of modern global value chains. The fragmentation of trade that is the mark of many supply chains today relies on access to cheap and reliable technologies for communication and the cross-border flow of information. Access to low cost transportation services, as well as financial, business, and professional services are also crucial for well-functioning supply chains where tasks are spread among a number of different countries before the final product reaches its destination. Many global supply chains also rely on an open and stable foreign investment climate to one degree or another.
As the nature of global trade has evolved, the trade policy agenda is increasingly focused on an array of nontariff barriers that raise transaction costs across these lengthy supply chains. The policies and practices impeding services trade, the free flow of information, or restrictions on foreign investment are often regulatory in nature and, at least nominally, aim at achieving public policy goals not directly related to trade. As summarized by Sherry Stephenson in a recent report (p. 10):
[T]he approach to trade that is needed now with the advent of GVCs goes well beyond the earlier trade agenda. Rather than being “at the border,” the new thinking that is required must also encompass “behind the border” policies of a regulatory nature, namely all of those aspects that affect the functioning of the supply chain at every point of its operation.
Among the policies that increasingly concern trade negotiators are differences in product standards, regulation of services, and barriers to cross-border information flows. The TPP sought to address these areas but, in so doing, also stirred concerns over where and how to draw the lines between practices that unnecessarily impede trade and those that are legitimately needed to protect consumer health and safety, individual privacy, or national security.
Where the TPP Broke New Ground
The features of the TPP that led to supporters calling it the “gold standard” for 21st Century trade agreements include chapters on competitiveness and business facilitation, small and medium enterprises, and regulatory coherence that had not appeared in previous U.S. preferential trade agreements (PTAs). Many of these new chapters set out guidelines for how to address these issues, but they are often not subject to dispute settlement provisions and are therefore less enforceable than other parts of the agreement.
The e-commerce chapter, which is designed to promote digital trade as well as facilitate GVC trade, goes well beyond what had been included in earlier such agreements. TPP also includes higher standards than in previous U.S. FTAs and World Trade Organization agreements aimed at preventing sanitary and phytosanitary standards and other technical barriers from interfering with trade. U.S. demands for market access for American services exporters and investors also went well beyond what the World Trade Organization requires. There is language in these chapters addressing a country’s right to regulate and to protect online privacy and national security. However, critics continue to question whether the exceptions strike the appropriate balance between regulators, investors, and consumers.
Political Challenges to the New Trade Agenda
With the changes in trade patterns wrought by GVCs, trade negotiators are playing catch up. While the substance of trade policy is having to adapt to new realities, the process of negotiating and ratifying trade agreements needs an update as well. In this time of fragmented trade and global supply chains, the meat of trade negotiations is increasingly over issues that are behind the border. And that shift raises political sensitivities in ways that negotiations over traditional border measures did not. The new agenda also makes the process of trade negotiations, which many view as nontransparent and unaccountable, far more politically sensitive than before. When trade negotiations touch on standards or other regulatory issues, part of the concern is who decides what a country’s food safety or online privacy or banking regulations look like. How to reform the U.S. approach to trade negotiations to ameliorate those concerns will be the subject of a future post.
Kimberly Ann Elliott is a Senior Fellow with the Center for Global Development and the author or co-author of numerous books and articles on trade policy and globalization, economic sanctions, and food security. Previously, she was with the Peterson Institute for International Economics. The views expressed here are her own.
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