1.1 The Race for Free Trade Agreements
In this book, we use FTAs (Free Trade Agreements) as a broad term, covering all types of agreements between subsets of countries with an aim to liberalise trade in goods or services.1 FTAs have developed since the 1950s, starting with trade in goods and within geographical regions. For a long time, there was a perceived conflict of interest between the GATT (General Agreement on Tariffs and Trade, part of the WTO—World Trade Organization—from 1995) and the FTAs. The GATT had a strong focus on non-discrimination, expressed in the MFN (Most Favoured Nation) criterion—trade partners should be treated equally. Article XXIV (=24) of the GATT allowed FTAs as an exception from the MFN principle, and hence FTAs have been legal according to GATTs rules since 1947. At the same time, major actors such as the USA and later the EU had the perception that if all trade was covered by FTAs, it would undermine the world trade system. For this reason, an FTA between the USA and the EU was not on the agenda for decades. FTAs were mainly within world regions and not across—we had the EU and NAFTA (North American Free Trade Area) and agreements in all world regions, but not FTAs across the Atlantic and Pacific. There was peaceful coexistence between the FTAs and the GATT/WTO, except some moments when the USA feared that European integration would undermine the global trade system.
All this changed from the turn of the century, when the spread of FTAs accelerated and several countries revised their trade strategies. There were several reasons underlying this change. The potential virtues of FTAs had been demonstrated during the 1990s, with the establishment of NAFTA (1993) and the EU internal market (1992), plus the EU enlargement and the European Economic Area Agreement in 1994. Another reason was globalisation and the rise of Asia, expanding trade with Asia and creating a need for inter-regional FTAs. China became a WTO member in 2001, and there was globalisation in harmony. A third reason was the slowdown of the WTO: From great success when the WTO was established in 1993/1995, to growing North-South frictions and dwindling support for new reforms. The mixture of lukewarm developing countries and anti-globalisation protests, with the “Battle of Seattle” in 1999 as a turning point, cooled down WTO reforms and the organisation never recovered fully in spite of wholehearted attempts. With a need for governance and demand for FTAs that the WTO could not satisfy, FTAs became an alternative. A fourth reason for the new approach to FTAs was the pioneering change of policies by some small countries such as Chile, Singapore and European Free Trade Association (EFTA) countries, aiming at inter-regional FTAs across the globe. The FTA race had started, and big nations gradually changed their minds and became more proactive. From the economics of FTAs, outsiders may lose from the trade discrimination inherent in FTAs—so there can be “domino effects” (Baldwin 1993; Baldwin and Jaimovicz 2016; discussed in Chap. 9).
For all these reasons, there was an exponential spread of FTAs across the globe from the turn of the century (Chap. 3). The last turn of this spiral was President Obama’s initiative for “plurilateral” FTAs across the Pacific (TPP, Trans-Pacific Partnership) and the Atlantic (TTIP, Transatlantic Trade and Investment Partnership). A large number of other FTAs were also in the making (Chap. 3). The global FTA network was not only extended but so was the agenda of the agreements, with an ever-growing appetite for complexity and regulatory issues beyond tariffs for trade in goods—the archetypical FTA backbone. When the EU went to Washington for TTIP negotiations during 2013–2016, their delegations typically counted about 90 persons—an army of experts covering different areas.2 International agreement on regulation is however not an easy task; parallel to the escalating travel expenditures often came difficulties in achieving the requested regulatory cooperation: At the end of Obama’s presidency, TTIP was still quite far from the “gold standard” promised at the outset.
1.2 The Crash of 2016
Year 2016 dealt two heavy blows to the FTA agenda: First came Brexit, the British referendum interrupting a 60-year cycle of ever deepening and widening economic integration in Europe. Second, Donald Trump was elected President of the USA, with a nationalist and protectionist trade agenda, leaving the TPP on his first day in the White House. The election of Trump ended a 70-year history with the USA at the front seat of the liberal world trade order. There were signs of retraction even some years ago, but Trump jumped across the fence, into a new terrain of trade policy bilateralism with a nationalist scent and “America first” replacing multilateralism.
The two shocks have by no means cancelled the FTA agenda; on the contrary the “Brexiteers” of the UK promise to be the “champions of free trade” (HM Government 2017, p. 51), aiming at FTAs across the globe, including with emerging economies. At the time of writing, Trump’s trade policy is yet in the making, but the aim is to go for bilateral rather than multilateral trade agreements, and renegotiation of trade agreements with a sharp focus on the US trade balance.
In spite of the promise of a continued FTA agenda, the “shock of 2016” challenges global trade policy in fundamental ways. First, there is an earthquake for existing institutions. The UK Government has promised to start trade policy more or less from scratch, with full autonomy and having to build up a new set of agreements across the globe that took other countries decades to develop.3 For the EU, Brexit is a serious challenge, raising fundamental questions about the entire EU project. In the absence of UK, the EU will become different—not least in the trade area where the UK has been the eloquent spokesman for the “liberal North” (see Elsig 2010; Young and Peterson 2014). Trump deceived USA’s trade partners and allies by withdrawing from TPP , which was signed in 2016 after arduous negotiations and with a result strongly influenced by US priorities (and largely even in line with the priorities of the Trump team). He has also signalled that if WTO ’s decisions are in conflict with US priorities and laws, these may not be followed (USTR 2017, 2018). At the US national level, the change of policy was also an institutional earthquake, with heads rolling and internal struggles.
While less explicit from the outset, Brexit and Trump also challenge the ever-widening regulatory agenda of the FTAs. The UK and the USA share a wish to retain national autonomy and avoid ceding authority to international bodies. For the UK, it is the EU supranational governance that is rejected (not the multilateral trade institutions), but for Trump even the more modest powers of the WTO are questioned (ibid.). In this field, the road from rhetoric to practice is unclear for both. Trump will have to understand that the “USA first” slogan has little appeal beyond US borders. The issue of national autonomy is certainly not new—it is a standard element in national debates on trade policy. But only on a few occasions has the “populist” rejection of regional or global governance overruled the mainstream.
Paradoxically, Trump ’s cancellation of TPP and possibly TTIP could also strengthen the global trade system since these “megalaterals” aimed at creating a regulatory system that might compete with the WTO. According to Subramanian (2017), “deep is out” and “super-globalization” with global rule-setting will be toned down. According to this, the demise of the megalaterals could revitalise the WTO and leave the rule-making to national or regional institutions. The truth of this prediction remains to be seen.
Trump has also challenged trade policy by linking issues. For theory and discussion on issue linkages, see e.g. Harstad (2015) or Horstmann et al. (2001). In his morning twitters or messages to car companies (“make in USA or pay big border tax”), investment, trade and taxation are linked. In Trump’s trade policies, especially as portrayed by Navarro and Autry (2011) with China as the chief culprit, the US trade deficit is a key problem along with “unfair” trade practices (currency manipulation, counterfeiting, lax regulations and subsidies). While some of these issues have been part ...