Richard North, 04/05/2016  
 


If you care to Google "TTIP", a goodly number of reports will refer to it in terms of the creation of "the largest free trade area in the world". And in the simple designation of "free trade area" lies one of the most prevalent misunderstandings, quite literally, in the world. TTIP is not a free trade area (FTA).

The worst of it is that there appears to be no uniform definition of what constitutes an FTA. Wikipedia seems to get it about right, telling us that it involves "cooperation between at least two countries to reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other".

Investopedia puts it more simply, defining it as "a group of countries that have few or no price controls in the form of tariffs or quotas between each other". The Financial Times lexicon, however, considers a free trade area exists: "when two or more countries eliminate tariff and other barriers affecting their trade, while at the same time maintaining or applying tariffs to imports from non-member countries.

The OECD is more specific about those "other barriers", insisting that an FTA is "a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members".

This latter definition is demonstrably not true. There are many examples where free trade areas exist yet, between members, there are major non-tariff barriers (NTBs). Generally, those agreements which deal specifically with NTBs are termed "second generation" FTAs.

The defining characteristic of an FTA, therefore, is an agreement to eliminate of tariffs and (most) quotas between parties. Without those crucial elements, an area defined by a trade agreement does not qualify as a free trade area.

The main distortions arising from this occur at two levels. Firstly, there is the assumption that, because a geographical area is called a free trade area, it is necessarily an area in which free trade is conducted.

Here, nothing could be further from the truth. Recent history has shown that where tariffs have been progressively reduced, they have been replaced by a complex skein of non-tariff barriers, the financial cost of which is often equivalent to or greater than the original tariffs. In terms of deterring trade, the effects are often more severe and, by no measure can trade be regarded as "free" – as in devoid of restrictions.

The second level of distortion occurs when groups of countries get together to address non-tariff barriers but, for a variety of reasons, do not concern themselves with tariffs.

This may be the arrangements between China and the EU. Historically, in the tradable products which interest China, EU tariffs were already low so there was little to be gained from an FTA. Instead, on accession to the WTO, China undertook unilateral (i.e., non-preferential) tariff reductions while, in its trade agreements with the EU, focused on reducing specific NTBs.

Because there is no mutual agreement on tariffs, the assumption is that there are no "free trade agreements" between the parties, and thus no free trade. The effect of the actually trade deals, though, may be significantly greater in securing trade improvements than the classic FTA.

However, where there are then even more sophisticated trade deals, such as TPP, CETA and TTIP, the outcome is still very far from securing free trade. Rather, as we're seeing, parties agreeing to harmonise rules and standards, and to cooperate in the framing of new rules.

Thus, restrictions are not removed. They are simply harmonised, so that they no longer constitute barriers to trade for those who can afford the compliance costs, and for those whose systems are sophisticated enough to enable conformity with often complex procedural requirements. Again, by no measure is this free trade.

Rather than apply the misleading description of "free trade area" to the likes of TTIP, therefore, it would be more appropriate to call them what they are: common regulatory areas, or CRAs.

The mother of all CRAs is, of course, the European Union, but there is much more to the Single Market than just that Not only is there a common regulatory code, in the absence of common standards applicable to specific products, there is a treaty-mandated mutual recognition of local standards.

But there is even more. Underpinning the Single Market are the four freedoms: the free movement of goods, services, capital and people. These are not add-ons. They are a fundamental part of the Market and go towards making the CRA complete.

This is the reason why those who are advocating "free trade" agreements for a post-Brexit UK – applying the misleading description to a tariff-free zone – are completely missing the point. 

Even those who propose using as a model the more sophisticated "second-generation FTAs such as CETA (the EU-Canadian Comprehensive Economic and Trade Agreement) need to understand that this is nowhere near meeting the degree of harmonisation that we see in the Single Market.

Agreements such as CETA are not full CRAs. They might be best described as partial, with only limited harmonisation and then only in specific sectors. Furthermore, there is no mutual recognition of standards. Where there is no common code for a specific product, Canadian exports must conform with EU law, and vice versa. The respective parties retain legislative autonomy in relation to food-related and environmental regulations – and much else.

In terms of trade, anything short of a full CRA with the four freedoms represents a more restricted trading arrangement than the Single Market. And anything less than that will attract a financial penalty - even if it manifests only as an opportunity cost.

This puts the likes of Boris Johnson, Gove and, latterly David Bannerman, on the spot. If they want to take what they insist on calling the "free trade" route, then there will be a cost. It is their responsibility to identify the extent of that financial penalty, and then to argue that Brexit is worth it. What they cannot do with any validity, is argue that there is no financial penalty. Nor can they argue that a partial CRA confers the same degree of access to the EU Member State markets as does participation the Single Market. It does not.

Alternatively, and more sensibly, we can adopt the Efta/EEA route, as part of an evolutionary process of which even the Adam Smith Institute – spiritual home of "free trade" doctrine – seems to approve. That way, we remain a participant in the Single Market CRA and there is no financial penalty. 

For the time being, though, we really should stop referring to TTIP and agreements like it as "free trade agreements". They are not. Even if TTIP is approved, which looks increasingly unlikely, it will never be any more than a partial CRA.

And there, in identifying more accurately the nature of the beast, is illustrated its lack of appeal. Seen as a corporate stitch-up between EU and US interests, the harmonisation of regulation is better done at a global level, out in the open at a multilateral rather than bilateral level.

In short, we don't need behind-closed-doors trade agreements to deal with restraints on trade. Intergovernmental agreements, emphasising transparency and accountability, are a better option, especially if priority is given to trade facilitation as well as harmonisation.

Above all else, non-tariff barriers are the target, recognition of which requires breaking away from the tired old mantras, and understanding what we are dealing with. What we end up with is not free trade, but managed trade – and the better the management, the better the results.






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