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5.1. The political challenges facing regional trade regimes

p. 217-221

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1One of the most important developments in the international economy in recent years has been the appearance and expansion of multiple free-trade regimes organized into regional groupings of the sort represented by the North American Free Trade Agreement, the European Union and, in more embryonic terms, the Association of South East Asian Nations, and the emerging Latin American free trade area.

2In many respects, these regimes represent the latest stage in a worldwide movement toward free trade that began in Manchester over 150 years ago. As such, they have been widely applauded by economists. However, these regimes are proving much more controversial in political terms. Measures of the sort that were used to meet general acclaim as steps toward free trade are now often greeted with suspicion as more threatening reflections of “globalization”. How is such political controversy to be explained let alone resolved? The purpose of this brief essay is to offer some reflections on these questions.

3At the heart of the matter is whether regional trading regimes not only provide benefits but also impose costs. To begin, let us distinguish between what might be termed the “external” costs of such regimes, namely the costs they impose on other regions, via protection or exchange-rate movements for instance, and their “internal” costs, by which I mean the costs they impose on their own members.

4In general, the international community tends to regard the internal costs of such regimes as negligible and their potential external costs as the major concern. After all, these are regimes that provide great benefits to their members, and the question most often asked is whether they do so at the expense of outsiders. However, I am going to reverse this problematic because, on the whole, I judge the external costs of such regimes to be low. There are good reasons for believing that, once nations within such regimes accustom themselves to free trade with one another, they become more welcoming to free trade with other regions. After all, once national firms have adjusted to regional competition, they are better prepared for global rivalry. In short, it is likely that the growth of free trade regions breeds more free trade, rather than protectionism, across regions.

5Instead, I think we need to ask more seriously whether there are any internal costs to such regional trading regimes, i.e. costs for those who belong to them, thinking in terms of the full range of economic, political and social costs. I am going to make three points about this, all of which stem from a perspective that emphasizes the importance of institutional arrangements to the performance of the economy.

6To begin, we should note that the nature of the issues involved in the establishment of free trade regimes is no longer as simple as they once were. For well over 100 years, the central issue in trade negotiation was the reduction of tariffs on imported goods. Free trade meant the elimination of tariffs at the border. This was not always easy to achieve, but it was a straightforward issue, one with a limited set of social implications, and one whose implementation was relatively easy to monitor.

7Today, the central issues in trade negotiation extend well beyond tariffs to include what some call non-tariff barriers but which, in fact, extend to many spheres of economic and social regulation. The key issues of contention in the European Union or between the United States and Japan now include government procurement policy, the regulations governing retail distribution, many labor market practices, environmental regulation, and many other matters of wide social import.

8One result is that the establishment of a free trade regime calls into question many of the practices that are central not only to the economy but also to the character of collective life in the nations concerned. Another is that the standards that such practices should meet, if trade is to be genuinely “free”, are no longer clear-cut or obvious. It is one thing for the United States trade representative to call for “a level playing field” but altogether another to decide just what that means. Perhaps the playing field should be level, but whose playing field is that to be: one approximated by the social regulations of Germany or one reflecting the social regulations of Britain – which are currently very different.

9In short, the establishment of free trade regimes now entails aligning a wide range of social regulations, and as yet we have no universally-accepted standards on which such alignment can be based. As a result, trade negotiations, which were never simple, now involve an ideologically-charged contest about issues on which there is no clear consensus across nations, namely issues that go to the heart of what is a good society and what kind of life people should want to lead.

10My second point speaks to why this is important. Most arguments about the advantages of free trade turn on the economic theory of comparative advantage. As is well known, this theory explains why a more extensive exchange of goods between two countries will be of benefit not simply to one but to both of them. Classic versions of it emphasized the way in which different factor endowments, say, of land, labor and capital, would allow each nation to specialize in a distinctive set of goods, thereby producing more for all more efficiently.

11Today, however, there is a growing recognition that the comparative economic advantage of a nation can be created not only by its factor endowments but also by the institutional infrastructure within which its businesses operate. Many German firms, for instance, draw distinct advantages from an institutional setting that allows for close cooperation between management and workers on the shop-floor, that limits hostile takeovers in the market for corporate governance, and that fosters inter-firm cooperation in many kinds of endeavors. Conversely, British firms draw distinct advantages from an institutional environment that allows rapid turnover of personnel, makes substantial amounts of venture capital available to entrepreneurs, and privileges low-cost production. It is partly for this reason that we find distinctive patterns of industrial innovation in the two countries.

12I cannot argue this point in detail here but, if one accepts that something called “institutionally-created comparative advantage” exists, one can ask: what does that imply for the development of free trade regimes?

13At least one component of the answer is clear and of startling significance. The presence of institutionally-created comparative advantage means that, in seeking to adjust their institutions to some common “standard”, the nations entering into such regimes face the danger of losing their distinctive comparative advantage. Attempts to “level the playing field” can wipe out many aspects of a nation’s institutional infrastructure. But if it retains no comparative advantage, a nation has little reason to enter into a free trade regime. This is the great paradox at the heart of contemporary trade regimes; and it is the management of this paradox that poses the greatest challenge to them.

14If we adopt such a perspective, it is much easier to understand some of the conflicts within the European Union. Why should Tony Blair, the leader of a social democratic party, be so insistent about delaying the application of the Social Charter to Britain and so determined to limit further regulation from Brussels? In some measure, the answer must be that he realizes Britain draws many of its distinctive economic advantages from relatively low levels of social and economic regulation, and he is hesitant to give these up. Conversely, Germany has resisted various efforts to deregulate its capital or labor markets in part because the existing regulations confer certain kinds of advantages on German firms.

15In short, the establishment of regional trading regimes entails the negotiation of comparative institutional advantage, which carries great potential costs and raises unusually-intense political dilemmas for their member states.

16My third point bears on the resolution of such dilemmas. Given the far-reaching social consequences of the issues at stake in such negotiations, securing durable agreement on them is increasingly likely to require the development of special institutions – namely, political institutions of the sort that have long been necessary for forging agreement and mobilizing popular consent on matters of broad social import.

17However, institutions of this sort are not easy to construct, and herein lies one of the greatest dilemmas facing regional trade regimes. They have real needs for institutions with two kinds of capacities. First, they need institutions with what might be termed “negotiating capacity”, namely, a capacity for forging agreement among member states with some quite different interests. This is widely recognized. But, to an increasing extent, these regimes also need institutions with what I would term some “representative capacity”, which is to say institutions capable of generating decisions that are responsive to the views of national electorates and – equally important – seen to be responsive to the views of those electorates. Otherwise, the regulatory reforms mandated by such regimes will be seriously lacking in social or political legitimacy.

18This is a problem because these two capacities generally demand very different kinds of institutions. Negotiation is often best accomplished behind closed doors, where deals can be made and the costs of those deals (to one group or another) obscured. But representative capacity demands transparency and open debate, often moral debate, which can militate against compromise and effective “deal-making”.

19Looking across the regional trade regimes in the world today, one finds very different levels of institution-building. Where the level of economic integration to which they aspire is limited, their accompanying “political” institutions are usually also fairly limited, as in the North American Free Trade Agreement. Where economic integration is more developed, as in Europe, institution-building has gone much farther. But even Europe has been better a building institution with “negotiating capacity” than with “representative capacity”.

20Indeed, the development of regional trade regimes has intensified a tendency, apparent in many spheres of politics today, to put decision-making about issues of wide social importance in the hands of independent agencies far-removed from democratic control--whether they are the World Trade Organization, the European Court of Justice or the proposed European Central Bank.

21Here in lies one of the greatest challenges that regional trade regimes will face in the coming years. As they come to affect more and more aspects of collective life, the political pressure on such regimes from the electorate will grow and that will include demands for institutions with some sort of representative capacity.

22Such pressures are already apparent in Europe, where the moves toward more intensive integration taken at Maastricht have generated a popular backlash against the European Union that is growing in magnitude. For years, most ordinary Europeans did not care very much about the European Community, and that worried Community officials a great deal. But, in retrospect, that public apathy can be seen as something of an advantage.

23Today, more and more Europeans believe that the decisions taken by the EU have a substantial impact on their own lives. And they are beginning to blame the EU, rightly or wrongly, for rising levels of unemployment, falling social benefits, and even the quality of fruit in the local grocery stores. This reaction is beginning to find serious political reflection in the rise of the National Front in France, in the popularity of anti-EU appeals in Denmark, in the fratricidal conflict within the British Conservative party, and elsewhere. There are signs of similar reactions to NAFTA in the United States and Mexico that go beyond the traditional cries of pain from formerly-protected economic interests.

24There are two ways to moderate such conflict. Rising levels of economic prosperity provide the perfect balm, but they cannot always be secured. The other avenue, which is more difficult but may ultimately prove more necessary, entails creative institution-building with a view to strengthening the “representative capacity” of the institutions that preside over regional trade regions.

25In sum, the issues that such regimes raise are not simply technical matters that can easily be decided by experts. On the one hand, the institutional adjustments they require touch on some of the basic parameters of social life. On the other, there is no simple standard by which such issues can be resolved. Although some claim to have found such a standard, by and large, their claims simply elevate to the status of an ideal a set of practices that encapsulate the interests and ideology of one or two countries. Thus, the long-term challenge facing such regimes--and one that will intensify as they deepen – is to find institutions for resolving such issues that embody both “negotiating capacity” and “representative capacity”. The creation of regional trade regimes requires more than market-making; it also demands institution-building, and to date most such regimes have been much better at the former than they have been at the latter.

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