Free trade lives on, beyond America’s borders

Free trade lives on, beyond America’s borders

By Luke Vargas   
Published
European Council President Donald Tusk, Japanese Prime Minister Shinzo Abe and President of the European Commission Jean-Claude Juncker at the Japan-EU Summit on July 6, 2017. Courtesy: EC Audiovisual Service
European Council President Donald Tusk, Japanese Prime Minister Shinzo Abe and President of the European Commission Jean-Claude Juncker at the Japan-EU Summit on July 6, 2017. Courtesy: EC Audiovisual Service

“Wake” is a weekly foreign policy broadcast produced by Talk Media News and hosted by Luke Vargas from U.N. Headquarters in New York.

The following is a complete transcript of Episode 13, “Free Trade Lives On, Beyond America’s Borders.”

Subscribe to weekly episodes of “Wake” on iTunes or Google Play, and follow the broadcast on Twitter @WakeOnAir.

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Luke Vargas: As world leaders gathered for G20 summit in Hamburg, Germany, officials from Japan and the European Union were celebrating a victory on free trade. After four years of talks, a brand new EU-Japan free trade deal is complete. With the US out of the Trans-Pacific Partnership, a US-EU trade deal on hold, and a protectionist U.S. President, what can we expect on the global free trade horizon?

Is the rest of the world continuing to deal as the U.S. backs away?

We’re taking on those questions next on Wake.

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Thanks for joining us. We’re coming to you today from U.N. headquarters in New York as we look at free trade deals.

We’ll get to the politics later, but let’s start with the details of the EU-Japan deal itself, and to help us do that we head to London, where we’re joined by Iana Dreyer, founder and editor of Borderlex, an online news outlet that focuses on EU trade policy.

Iana Dreyer, thanks for joining us today.

Iana Dreyer: Hello. Thank you for having me on your program.

Luke Vargas: Help us get to know this deal. Give us some of the key details that people need to know about the E.U.-Japan agreement.

Iana Dreyer: So the E.U. and Japan just agreed, politically, on an agreement. It’s a way of ending four years of rather laborious negotiations without having it completely done, the final stretches of the deal. So it could still take perhaps a year until there’s a full-fledged text, but it’s a good way of signaling that the core elements of the deal are there. It’s a good way of not going back.

And obviously the context. The wanted to have an agreement just before the G20 that is taking place in Hamburg right now, where international trade, free trade is one of the contentious issues there.

It is a deal that goes quite far in making trade in agriculture less costly and more frictionless between the E.U. and Japan, and that’s where Japan has done the biggest effort. The other part is, it’s a big deal on autos in all aspects – tariffs, regulations, cooperation, recognition of standards, that kind of stuff.

I think that these are really the core gains. It’s a huge agreement. It’s probably going to have more than 1,000 pages. But these are, I would say, the core achievements of the agreement.

Courtesy: European Comission
Courtesy: European Comission

Luke Vargas: Iana, free trade deals can sometimes get messy when countries have cherished industries around which countries want to maintain protections. Looking through the executive summary of the trade deal, I just see rice and seaweed as markets that are entirely cut out. Were you surprised how little areas of contention there seemed to be here?

Iana Dreyer: Not really. Japan was ready to do a deal, and it’s been reforming its agricultural sector – a process, political process going on in Japan itself, I understand, that was prompted by the TPP negotiations.

On the other hand, when you also look at the details, there are still many areas that maintain protected. I mean there are exclusions on rice and on seaweed. Rice is also an issue for the E.U. – it has a very small rice sector, but it clamors for protection there, too. So it was a sort of tacit agreement that they’re not going to touch that.

And then when you really look at the nitty gritty of some of the agreements, a lot of it is just opening more tariff-rate quotas – it’s partial liberalization.

What is interesting, I think, in this agreement is the regulatory part, what the experts call the SPS chapter, the one dealing with sanitary and phytosanitary issues. That’s where most exporters to Japan struggle in exporting, you know, approval processes, recognizing foreign standards.

The agreement is quite thorough in going into that kind of procedural issues. So in principle there will be less bans on imports of meat for sanitary reasons, it’s going to be a more controlled process, and more dialogue going on instead of just random complete bans on imports of, for example, meat. And I think that’s where the achievement is, in a way.

A European Commission infographic highlights existing barriers to trade between the E.U. and Japan.
A European Commission infographic highlights existing barriers to trade between the E.U. and Japan.

Luke Vargas: We hear a lot about how we’ve got a 21st century global economy now. And yet a lot of trade deals are pretty old. Is there anything that’s particularly modern about the E.U.-Japan, and ways it targets things that previous free trade deals did not?

Iana Dreyer: On one level I would say it’s not very modern, because it really covers these traditional sectors, it’s an agricultural agreement, so it’s really old-fashioned in that sense. It’s also about cars – you know, good old-fashioned industry.

We don’t really know where the agreement is going on services. Services, that’s where most of the innovation comes from, where most jobs are, where the future lies, economically. Here there is still no chapter. They have a few commitments there, but there’s little in the way of more market access there. Some regulatory dialogue, perhaps, in finance, but that already existed before.

In that sense it’s an old-fashioned agreement. But what they have achieved in these old-fashioned sectors is really more innovative ways of dealing with the behind-the-border aspects of these trade barriers, as I mentioned earlier, all the sanitary and phytosanitary procedures.

They really put in place mechanisms that help to deal with problems more thoroughly, to make systems more transparent, less costly, less discriminatory, while maintaining public policy objectives on the environment and health and safety.

Luke Vargas: Finally, Iana, take us beyond the text of this deal, if you would. Are there any clues from the way this deal was negotiated or announced that you think have broader, perhaps global ramifications? ‘

Iana Dreyer: Certainly the Trump factor really played in making this deal happen. Obviously the negotiations started four years ago, the context was very different – Japan wanted to have the same deal as Korea, because Korea signed a free trade agreement that advantaged cars on the E.U. market in 2011 – so it was about catching up with the Koreans. And then it turned into a deal that is about stating a commitment to open markets, to rules-based trade, to generally an open, multilateral system.

And obviously the failure of the TPP was very important in making this deal happen in the last months. It became a clear priority for Japan. The E.U. deal was less of a priority while TPP was being negotiated and, the Japanese were waiting for that. And so it was turned into a statement about free trade in a world where we don’t know where those trading systems are going, where there’s potentially trade frictions or trade war with the United States and its partners happening.

Luke Vargas: Iana Dreyer, Founder and Editor of Borderlex, thanks for being with us.

Iana Dreyer: Thank you for having me on your program.

Luke Vargas: Let’s open up the discussion now and bring in two new voices.

Caroline Freund is a senior fellow at the Peterson Institute of International Economics and formerly an official at the World Bank, the IMF and the Federal Reserve. Caroline, thanks for joining us.

Caroline Freund: Pleasure to be here.

Luke Vargas: And also with us is Joshua Meltzer, senior fellow in the Global Economy and Development Project at the Brookings Institution, and a former Australian diplomat posted to Washington and involved in precisely this topic, trade negotiations. Joshua, welcome to the show.

Joshua Meltzer: Pleasure to be here, thanks.

Luke Vargas: Iana covered a number of relevant details from the EU-Japan deal, but both of you are looking more narrowly at implications to the U.S. economy. Carolyn, are there any other details of this agreement you’d like to highlight?

Caroline Freund: Well I would highlight that it’s a way for Europe and Japan to take leadership in setting global trade rules. And if you look at the document they’ve put out on the agreement, that’s exactly what they said: cementing Europe’s leadership in setting global trade rules, and sending a powerful symbol that cooperation, not protectionism, is the way to tackle global challenges.

The Trans-Pacific Partnership, the agreement between the U.S., Japan and 10 other countries, was a way for the U.S. to set the rules for global trade. Now we’re going to see, instead, Europe and Japan doing that.

Japanese Prime Minister Shinzo Abe and President of the European Commission Jean-Claude Juncker at the Japan-EU Summit on July 6, 2017. Courtesy: EC Audiovisual Service
Japanese Prime Minister Shinzo Abe and President of the European Commission Jean-Claude Juncker at the Japan-EU Summit on July 6, 2017. Courtesy: EC Audiovisual Service

Luke: Joshua?

Joshua Meltzer: Yeah I think that that’s absolutely correct, and the other dimension I think is that the trade agreement is significant in also what it reveals in terms of the broader costs of having an absence of U.S. leadership on some of these issues, which are increasingly important.

So for instance, if you take an issue like the environment, the Trans-Pacific Partnership agreement, which President Trump withdrew the United States from on his first day of office, included particularly robust provisions in areas such as curtailing subsidies for overfishing, dealing with trade in illegally-sourced lumber and the like. And the recently signed agreement between Japan and the E.U., while it has a decent chapter on environmental commitments, is nowhere near as substantial as what we saw in the TPP.

Similarly, when you think about 21st century economic issues around digital trade the U.S. has very much been a leader on this issue and the FTA between the E.U. and Japan is not as robust. So what we’re also seeing that there is a real cost in terms of getting substantive good outcomes when the U.S. has a back seat on some of these issues.

Luke Vargas: Josh, before we get more into political costs to the U.S., let’s stay with economic costs. Is it possible to diagnose which U.S. sectors or companies might be hurt by the EU-Japan agreement?

Joshua Meltzer: It’s well understand that bilateral trade agreements can lead to forms of trade diversion, which is basically the situation where countries outside of the trade agreement lose out as the other countries create preferential access for their own businesses. And this can have negative implications in terms of trade, but there can be potentially some positive dynamics that flow from it.

For the United States, for instance, if you think about automobiles or you think about agriculture, certainly you’re going to find that the Japanese automobile companies are going to have preferential access into the E.U. markets, agricultural products from the E.U. are going to be more competitive in Japan, and so there’s going to be potentially some real costs for U.S. industry into essentially the world’s first and third largest sort of economies in a sense.

The potentially positive dynamics are that it creates a political imperative to try to rectify this, and this has been referred to as competitive liberalization – essentially where, as countries do more bilateral trade agreements, other countries essentially also do additional trade agreements to try to address these and remedy these sort of deficiencies of market access.

And certainly I think one of the outcomes of this deal is that it’s going to put increased pressure, and it’s going to create a certain political conversation in the United States that just standing still is not a sort of stable status quo as other countries move ahead, and there are going to be real costs to U.S. businesses as a result.

Luke Vargas: Caroline, do you expect U.S. business to be calling up the Trump administration and demanding a new free trade deal after watching their Japanese or European counterparts benefitting from this new deal?

Caroline Freund: Absolutely. I think agriculture especially is getting very frustrated because they were very much behind having an agreement with Japan and other countries through the Trans Pacific Partnership because of very high tariffs on those types of products.

Just to give a specific example, the tariff on beef in Japan is nearly 40 percent, and now Europe is going to be able, over a period of time, to export at duty-free. And that’s going to be problematic for beef exporters to Japan.

So they’re going to pressure for more liberalization. And in terms of cars, I would add that in addition to thinking about the duty-free access that, and in this case, Japan will have in the E.U., where they have 10 percent tariffs on cars, Japan and Europe have also adopted the same type of regulations.

And so their standards – a Ford Fusion made for the European market and the U.S. market is a slightly different car because of these regulations on, you know, the color of the side lights and how thick the glass should be  – they’re both high standards, but they’re different.

And now Europe and Japan are setting these standards, so U.S. carmakers are going to be out – their supply chains are going to have more difficulty being competitive. So they really do get hurt by not being at the forefront of dealmaking. So I do anticipate that they would, you know, push for the U.S. being a part of these next deals.

Cargo ships docked in the port of Tokyo. Flickr photo: Jdmoar
Cargo ships docked in the port of Tokyo. Flickr photo: Jdmoar

Luke Vargas: Caroline you mentioned a nearly 40 percent tariff on U.S. beef in Japan. Off the top of your head, what tariff was the U.S. aiming for with the TPP, which involved Japan? Do you know the number?

Caroline Freund: In the TPP they were cutting these tariffs over a period as well, these agricultural tariffs on meat and other products. And so instead of them being cut to the U.S. they’re being cut to the E.U.

Joshua Meltzer: Well I guess we’ve spent some time about autos and agriculture, and from an export perspective they are certainly important. But it’s also important to remember that the U.S. is one of the, well the world’s most sort of significant and successful services exporter, and the economy is approximately 80 percent services. The U.S. runs a growing trade and surplus in services globally.

So you think about professional services, financial services, insurance, education, banking, the rest of it – and these are often where the barriers are actually highest, whether they’re investment barriers or regulatory barriers and the like, and where making progress on reducing those barriers can really deliver some really significant benefits.

And this is also underscored in I think how you need to think of these trade deals and the reduction of barriers in a win-win sense, because it’s a win for the United States clearly to be able to export more of its professional services.

Courtesy: European Commission
Courtesy: European Commission

It’s also a win for the other economy to get access to world-class cutting edge professional services which improves their business productivity and competitiveness as well. So these work both ways, and I believe it benefits for all countries, and this is certainly where the TPP, the Trans-Pacific Partnership, made significant inroads, significant progress, on the services side.

And it’s an area where we don’t see really any attention at the moment from the administration with this sort of complete focus on issues around manufacturing products and steel, which are important but really are increasingly not the key drivers of the U.S. economy.

Luke Vargas: Caroline, what are some other U.S. trade priorities?

Caroline Freund: Services is exactly what came to my mind as well, but what I would add is really intellectual property and data. The U.S. has the world’s leading technology companies, and so we have a real interest in setting the rules around this new type of trade, trade in data flows.

And Europe has very different views on the type of restrictions that should be on these data flows, and so it was really important in the Trans-Atlantic Trade and Investment Partnership (TTIP), the potential agreement between the E.U. and U.S., to address these differences. And instead, with Europe and Japan leading the way, I think what you’re going to see is Europe’s concern over privacy issues taking the lead.

And similarly for intellectual property, it was a big struggle in the Trans-Pacific Partnership to protect the intellectual property of our pharmaceutical companies, and there are different regulations in Europe and Japan and our companies would like to see the world accept protections more similar to what we have in the United States.

Luke Vargas: These deals are always so mammoth in length and complexity and involve so many hundreds of lawyers, working over years and years that I’ve long had the impression the folks from each country engaged in the talks day to day can’t be anything but cordial, and that this kind of work, which is conducted well outside the public eye for the most part, are not tremendously partisan.

Talk to me about the world of global trade. Can trade talks continue productively behind the scenes, even as heads of state are scoring points off one another? Josh?

Joshua Meltzer: It’s important to I think keep in mind that the sustainability of any agreement between two countries ultimately depends upon both parties realizing that the outcomes are in their best interest.

The idea that you sort of, in a commercial sense, sit across the table and force the worst deal down someone’s throat so be it, is not really that applicable to trade negotiations. Both sides come at it to better understand each side’s regulatory and trading systems, to work out how they can actually reduce barriers, find community, and these negotiations proceed over often many years, and developing trust along the way is a key component to being successful year.

And as I said, you get to an end point where both parties walk away, need to walk away pleased with the outcome if you’re going to really have this agreement be sustainable and fully implemented. And in that respect, the process is really quite different to what you might see in a private sector context.

Australian Prime Minister John Howard and President George W. Bush during a State Arrival Ceremony on the South Lawn of the White House in May 2006. Courtesy: White House Photo / Paul Morse
Australian Prime Minister John Howard and President George W. Bush during a State Arrival Ceremony on the South Lawn of the White House in May 2006. Courtesy: White House Photo / Paul Morse

But the politics do matter, and the dynamics between leaders matters. But, for instance, I used to be an Australian trade negotiator. During the bilateral trade negotiations between Australia and the United States, there was a very good personal dynamic between the then-Prime Minister Howard and the then-President Bush, which certainly helped move that negotiation along more quickly than would otherwise have been the case.

I think if you currently look at, for instance, the NAFTA renegotiations, the animosity that President Trump has stirred up with regard to Mexico on a whole range of issues is going to absolutely complicate the sort of political dynamics which are going to be needed to move that to a successful negotiation.

Luke Vargas: Caroline, President Trump has touted a lot of new deals that are supposedly priorities – from one on one deals with the U.K., with Japan, with China, not to mention the NAFTA renegotiation. Simply in terms of capacity, are there enough trade negotiators, enough government lawyers to spin this many plates at once?

Caroline Freund: Yeah, there’s never enough capacity, and you could see that in the past with the Trans-Pacific Partnership and the E.U.-U.S. trade pact, that the Trans-Pacific Partnership was put on the front burner, and the Trans-Atlantic Partnership on the back burner.

So that’s going to be the same case now, especially when at the same time, trade restrictions are being pursued by the administration on other fronts, which is going to take some of that trade capacity as well.

So I think that the NAFTA renegotiation is turning out to be much, much bigger than they thought when they started it, and it’s basically going to be what takes up the capacity over the next year and a half.

Luke Vargas: Josh, any thoughts on capacity? And momentum, if the U.S. needs to decide what to prioritize, what do you think comes first?

Joshua Meltzer: I absolutely agree with Caroline’s observation, and it’s always important to remember that essentially the United States had renegotiated NAFTA in the context of the Trans-Pacific Partnership deal that was signed and on the table in front of Trump.

Mexico and Canada actually joined the TPP negotiations relatively late, and in fact part of the deal that allowed them to join at the late stage was that they accept what had been agreed to up until that point. And Mexico and Canada actually gave up quite a bit in order to be part of the TPP, and the U.S. really had to do very little.

And part of that was possible also because they just wanted to be part of this new trade bloc, this new regional group had ambition to expand and become global eventually. And those positive dynamics and opportunities for trade are just not going to be present in this NAFTA renegotiation.

So to even get to the TPP I think is going to be a very difficult task. As you get beyond that, certainly, even harder, and this is going to take, as Caroline said, a considerable amount of time, particularly as we run into presidential elections in Mexico next year.

And then the other challenge of course is going to be getting these agreements through Congress.

Luke Vargas: Speaking of opposition to free trade deals, it’s been coming from multiple fronts in the U.S. – from the populist right, it seems, to the populist left, from health campaigners to environmental activists to labor leaders, even to the President himself. Caroline, what is the current status of opposition to trade deals in the U.S.

Caroline Freund: I think it really depends on who the partner is. So when the partner is a low-wage country perceived as having poor labor and environmental regulations, then there’s a lot of opposition in the U.S.

This is one thing that was interesting about the partnership between the U.S. and Europe, is I think that there was actually a lot less opposition from those standard groups, because of Europe is thought of as having higher environmental standards or similar, higher labor standards, and similar wages to the U.S. So there wasn’t the traditional type of backlash from the AFL-CIO and other labor groups, environmental groups.

In terms of the NAFTA renegotiation, it’s really interesting because what’s happening is there are a lot of beneficiaries from NAFTA, it turns out, especially agriculture and autos, the same two sectors that keeping coming up.

Courtesy: American Farm Bureau

And they’re both worried about what they might lose in a NAFTA renegotiation. Now you’re having, because the renegotiation isn’t put in the standard format of ‘we want to improve trade,’ it’s being put in the context of ‘we want to reduce the trade deficit’ – which is a very strange way to negotiate a trade agreement – there’s much more fear from industry, actually, about what they’re going to lose in the NAFTA renegotiation than from standard groups that oppose trade.

Luke Vargas: Before we wrap up, let’s look to the future and the trade deals that are in the pipeline now, as well as those yet to be dreamed up.

The TPP was unusual in that it combined Asian, North American and South American countries. In a world in which the U.S. doesn’t want to lead on free trade, are we going to keep seeing more odd coalitions of countries teeming up as negotiating partners?

Joshua Meltzer: Well I think it’s just worth pointing out that the other large trade agreement currently being negotiated is the Regional Comprehensive Economic Partnership agreement in Asia, which includes the 10 ASEAN countries plus Japan, Korea, China, Australia, India and New Zealand, and excludes the United States.

And when that deal is concluded it will provide, again, preferential access for those businesses in those countries, and the exclusion of the United States.

And this would not have mattered had the TPP gone into effect, but in the absence of it, this deal has suddenly become a lot more significant and potentially challenging for the U.S.

You know, the U.S. is going to spend a lot of energy and time now negotiating trade deals, specifically NAFTA and possibly with Japan – though that will be challenging – but essentially deals that had already been done and negotiated under the previous Bush and Obama administrations, while countries are going to be moving ahead.

So I think the United States has put itself in a difficult position by its own decisions, and I think it’s going to take a number of years to work itself out, but I think other countries, as we see with Japan and the E.U., are going to keep making progress.

Vice President Mike Pence administers the oath of office to U.S. Trade Representative Robert Lighthizer. Courtesy: Office of the U.S. Trade Representative
Vice President Mike Pence administers the oath of office to U.S. Trade Representative Robert Lighthizer. Courtesy: Office of the U.S. Trade Representative

Luke Vargas: Caroline, any predictions about where the Trump administration heads of trade?

Caroline Freund: Well the Trump administration is hard to predict on trade. So I think, to be reassuring, when he talked about 45 percent tariffs on China, 35 percent tariffs on Mexico, ripping up NAFTA – none of that has passed and doesn’t seem like it will happen. And I think there’s some recognition of how global supply chains have made trade a lot more complicated than they thought, and help the U.S. to benefit.

That said, I do think the focus is still this obsession with trade deficits and protection – that’s the wrong way to go in a world economy that’s getting increasingly integrated. And I would add that it’s not just the regional cooperation agreement in Asia that will facilitate trade. China is also embarking on the One Belt, One Road initiative, which is basically spreading infrastructure around the world to promote trade.

And this is really critical, because there are two types of cost to trading. There’s of course the tariffs and those type of barriers you face. But there are also simply transport costs – how long goods sit in customs before they go through, and things like this, how difficult ports are to assess, whether big ships can come in – and China changing that in their realm is going to make them a much more powerful trade zone.

And part of the reason for the Trans-Pacific Partnership was to counterbalance that. And now the U.S. no longer has that. So my biggest concern is probably less about the protection that the U.S. is going to put in place, but about the absence of our presence as a leader in global trade relations.

Luke Vargas: Caroline Freund, senior fellow at the Peterson Institute of International Economics. Thank you so much for being with us.

Caroline Freund: Thank you.

Luke Vargas: Joshua Meltzer, senior fellow in the Global Economy and Development Project at the Brookings Institution. Thank you.

Joshua Meltzer: Pleasure.

Luke Vargas: If you like what you just heard leave us a review on iTunes or follow the program on Twitter @WakeOnAir.

I’m Luke Vargas, signing off. Join us again next week on Wake.

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