Tuesday, 24 January 2017

The Return of the Bilateral FTA

Time was, and this was only a few years ago, that the Big Talk was all about regional or mega-regional trade deals. You know, what the TPPA was meant to be (and, in truth, without the US it is unlikely to go anywhere). In fact, people would often talk about competing visions in the Asia-Pacific: the trans-Pacific region (TPPA) and the Asian-region the (Regional Comprehensive Economic Partnership, RCEP). These days everything looks very different. Globalisation is bad. Manufacturing is God. Immigration is... worse than before. And sure we can talk about how it is easy to read too much into an election in one nation (i.e. the US) where a candidate who would have lost pretty much anywhere else triumphed (i.e. Trump of the 2+ million less vote), but this has little to do with popular sentiment (although, in any case, the "Left" has never been fond of the TPPA)  because it is the political powers that be who get to set the agenda with trade deals. Which is the problem.

Leaving aside questions like "do strategy games turn people into sociopaths?" one of the first things I try to do when I play Total War games is secure as many trade deals as possible. Why? Because the more people you trade with, the better off you are. The exception, as far as I can see, is when you start a new trade deal with a faction whose ports are blockaded. Some of your trade gets taken from existing partners and allocated to the new faction. Consequently, you're worse off than before because you're actually trading less. But real life doesn't work like this. In fact, having twenty different trade partners who all have twenty trade partners (generally many of the same countries) is known as a "noodle-bowl" and it is, to the economists of trade, a problem. It is also one of the big things that results from a proliferation of bilateral trade deals.

As we've discussed on this blog before, humans are not the world's great thinkers. We like to make intellectual shortcuts (indeed, wouldn't function without them) and actually can't always take the long way round (as it were) because issues are too intractable, complex or require knowledge we don't (as yet possess). This is the crux, as I see it, of the focus on Small and Medium Enterprises (SMEs) in the trade literature. After all, it is the SMEs who need the most help from trade deals (bigger firms have economies of scale, after all) but the typical SME lacks the technical knowledge to maximise benefits from an environment where several trade deals can overlap. Firm A might trade with Singapore, Firm B with Vietnam and Firm C has to do business with Firm A, Firm B and source goods from, say, China and Australia. In other words, from the ground up (i.e.from prospective users), trade deals aren't a matter of grand political narratives (how they're sold to the public at large) nor theory brought to scale (FTAs are a good thing, grow the cake) because there is this critical idea of practical use which is where our insights from what I'll call "choice theory" come in.

Obviously we want to be able to trade with as few arbitrary barriers to trade as possible. This is not to say "de-regulate" because the way to think about regulations is as "corrections that force people to take the long routes rational models of behaviour are based on". If you've watched Fantastic Beasts and Where to Find Them you might remember that Kowalski is denied a loan because "the bank must be protected". In principle, though, banks are all too willing to believe that they are protected, which is how you get sub-prime mortgages being made and then the risk being traded... until it all collapses (hence, the hilarious, Lemming Brothers reference in Zootopia). In other words, a regulation is something useful. Arbitrary regulations, on the other hand, simply exist and have effects (which are broadly predictable) but aren't tied to the best possible outcome. I argue here that if we remove arbitrary barriers, you make the reasoning much simpler, and the heuristics that people actually use will work better. To use an analogy, a soccer team plays much better when everyone is working on the same wavelength. You don't have to worry that one of your defenders is going to try pass it out (i.e. trades with Australia) when everyone else boots it up field (i.e. trades with Vietnam). When your variables are the same as their variables...

The solution is, obviously, to try and harmonise all existing deals and create consistent standards (i.e. actual standards). However, we have to remember that we are people and we're talking about the real world. This is where there are two more visions/conceptions. There is a global approach (the WTO) and then there is the regional approach (develop a network, make it bigger, subsume everyone). But there is also the nationalistic angle. It seems mighty risky to have one's food be grown overseas. Everyone knows that war can disrupt the food supply, but if they need your money, are they more or less likely to go to war when they're already getting it? What about manufacturing? Value adding processes! Yeah, but maybe in your country, you'll get more out of the resources you have if you do something else. And when you've got a noodle bowl, there are already several competing ways of trading (FTAs are complex beasts). And so, for all these reasons, politics gets in the way. Hence, harmonising deals (e.g. the TPPA or the RCEP) can be "too flexible" and it's easier to just keep treading the same path as ever. This leads to "on paper only" FTAs, i.e. no utilisation if their provisions and thus no harmonisation. And the WTO route seems quite unlikely to work, in part because people often feel regional loyalties too (which makes regional deals attractive) but mostly because it doesn't seem to work in practice.

So, with the demise of the TPPA (in all likelihood) should New Zealand enter into negotiations for an American FTA bilaterally? Well, I'm not going to pretend that my explanation above is perfect, but I think, in principle, yes. It would be better to have a TPPA-type thing (and although I have mellowed on ISDS, think of it as the teeth of a provision) than a bilateral agreement, but I think it is easier to create bigger deals from bilateral agreements than from scratch. The exception is if you have wildly divergent standards (a problem in the RCEP and an absence of bilateral deals). The trouble is, for New Zealand, is that we tend to get shafted in bilateral deals with big countries. That was the beauty of the TPPA, in some respects, it's built on the P4 agreement, which is NZ + NZ scale economies, so that gave us a bit more power (although, as Australia needed to throw some weight around, not enough). If an FTA with the US makes comparative advantage more difficult than using WTO rules, don't agree. And with Trump's rhetoric and love from rural Americans, I rather suspect we'd be better off negotiating extremely slowly and hoping someone with guts comes in at the next US election.

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