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In response to my call for Uncle Sam to adopt unconditionally a policy of unilateral free trade [2], Tom Palmer – who is among the smartest and wisest people I know – sent the following germane question:
What do you think of the role of “trade agreements” governing regulatory standards? Those were less common and much simpler in the past, so compliance was not much of a problem. But mutual recognition of regulatory issues is massively complex. Your thoughts?
Below the fold is a much-edited and expanded version of my e-mail reply to Tom.
Why not simply require that all goods and services sold in the U.S. meet domestically set U.S. standards? For example, if new automobiles sold in the U.S. must meet certain minimum fuel-economy standards, foreign-assembled automobiles would be no less subject to this regulatory requirement than would American-produced cars.
I understand, of course, that the setting of regulatory standards often serves protectionist goals [3]. Many regulations that appear to be pro-consumer are, in fact, anti-consumer and pro-particular producer(s). A regulatory standard that is so costly that it can be met only by small handful of firms – all (or most) of which happen to be domestic – will benefit particular domestic producers and harm domestic consumers no less than would a tariff on imports of this good. And, yes, in this case the tariff would be the more honest and above-board means of enabling members of a domestic special-interest group to screw consumers.
So, Tom, you’re correct that in practice – the state and politics being what they are – a unconditional policy of unilateral free trade in the U.S. would fail to rid Americans of every last vestige of protectionism. Trade will never truly be made free.
In an ideal world some international tribunal would continue to play for different countries the same role that U.S. courts play for different U.S. states whenever state governments are accused of adopting health and safety standards chiefly to protect domestic producers. Such a tribunal could, in principle, be created absent any of the other items on the agenda of the likes of the WTO. And it would be good if such a tribunal existed. (Such a tribunal would, alas, still elicit screeches from many protectionists that it – the tribunal – threatens U.S. sovereignty.)
Yet I see no practical prospect of establishing any such international tribunal whose sole duty is to distinguish ‘legitimate’ health and safety regulations from protectionist measures disguised as health and safety regulation.
So the tradeoff is this: we continue with the status quo – a policy regime under which Uncle Sam lowers tariff barriers only in exchange for the lowering of tariff barriers by other governments. One benefit of this current regime is that it does have international dispute-resolution mechanisms that can expose protectionist regulations and take steps to pressure offending governments to eliminate whatever such regulations are discovered. Under this regime a great deal of overt protectionism remains, yet this problem is somewhat leavened by the pressure put by these dispute-resolution mechanisms on governments, including our own, to eliminate protectionist measures that are disguised as health and safety regulations.
Under an announced U.S. policy of unconditional unilateral free trade, would the protectionism Americans thereby come to suffer in the form of a greater number of protectionist measures disguised as health and safety regulations outweigh, or be outweighed by, the reduction in overt tariffs and other overt import restrictions? I strongly suspect that the freeing effect on trade of such a policy would greatly outweigh the added risk of protectionist measures masquerading as health and safety regulations.
My empirical assessment here could, obviously, be mistaken. But I don’t think it is mistaken. Not only – under an unconditional policy of unilateral free trade – would producers everywhere on the globe be free to sell without penalty to Americans if these producers meet U.S. regulatory standards for products sold in the U.S., such a trade policy would also eliminate the many unseemly parts of trade agreements that practically seem inseparable from such agreements.
By “unseemly parts” I refer to provisions against so-called “dumping” and other alleged “unfair trade practices.” These provisions are explicitly meant to prevent imports from being sold at prices “too” low, or in quantities “too” high, in the domestic market. Under an unconditional policy of unilateral free trade, we’d be spared countervailing duties and other overt trade restrictions that arise as a result of these ever-present exceptions, in trade agreements, to trade liberalization.
In conclusion, I cannot prove that an unconditional policy of unilateral free trade would, in reality, make trade freer. That is, I cannot prove that a reaction by Uncle Sam to such a policy would not be such a huge increase in protectionism masquerading as health and safety regulations that Americans’ trade would be made less free.
But my strong sense is that the resulting freeing-up of trade of the policy that I propose, while not cosmically ideal, would be far greater than any amount of freeing up that we’re likely to get even from the most successful multilateral or bilateral trade agreements.
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Of course, even better would be for government to greatly reduce its role in setting health and safety standards for products. Leave the setting of such standards to competitive markets. To the extent that this Edenic outcome would materialize, the extent of the problem of protectionism disguised as health and safety regulations would shrink. But pleading for an unconditional policy of unilateral free trade is pie-in-the-sky enough for one day. I dare not also plead for a simultaneous reduction in the state’s nasty itch to regulate.