Trade agreements: is "unbundling" the future?

10/07/2014

A little while ago, the Financial Times ran a piece by Alan Beattie on UKIP's trade policy (above), who argued that it "would leave Britain isolated and vulnerable". I didn't write a review then, as there was more to the issue which Beattie was raising.  He chose to confine it to what he termed "Farage's dream of prosperity" which is to be "born of a US treaty". This, Beattie thought, was "a dangerous fantasy".

The points he made, however, went far beyond UKIP's trade policy, and could have been raised without reference to "Farage's dream", one that comes with a promise of a new trade deal "as soon as Britain's exit liberates the UK from the dead hand of European protectionism".

To the unjaundiced eye, writes Beattie, this (UKIP's policy) looks great. But he then observes: "Sadly, such agreements with the US have progressively less to do with free trade and more with restricting competition at the behest of well-organised American industry lobbies".

This is actually the substantive point. It isn't just UKIP which is being led astray. Trade agreements across the board are not what they used to be. For instance, Beattie suggests that, if we attempted a deal with the United States, first up would be the US pharmaceutical industry targeting the National Health Service, the very name of which makes American drug lobbyists visibly bristle.

The centralised NHS procurement system holds down the price of drugs based on the service's own assessments of value for money. This has far-reaching consequences: a quarter of all government purchases of medication worldwide use NHS reference prices, according to estimates by the Office of Fair Trading. That does not suit American pharmaceutical companies, which prefer procurement prices based on markets rigged by restrictive, litigious patent regimes.

The inference, which Beattie develops in his piece, is that trade deals have become encumbered with all sorts of side issues, which extend far beyond the simple necessities for international trade, and move into the area of harmonising domestic policies.

Then, on Monday last, this same theme was picked up by Martin Khor, an executive director of the South Centre, a research centre of 51 developing countries, based in Geneva.

Khor writes of "overloaded 'trade deals'", opening his piece by declaring: "Once upon a time, trade agreements were just about trade. The negotiator's principle was: I'll allow some of your products to enter my market if you allow some of mine to sell in yours". He adds: "Both countries could estimate what the benefits would be for them, and if it was mutually satisfactory, a good deal was made".

Today, though, Khor continues: "trade deals are not mainly about trade any more". The trend, he says, started when intellectual property, services and investment measures entered into the system of trade rules when the old GATT (General Agreement on Tariffs and Trade) was transformed into the WTO (World Trade Organisation).

By way of example, Khor offers companies' patent rights. If they are not "respected", it permits the aggrieved nation to impose extra tariffs on imported products, blocking them as punishment.

This, we are told, has complicated the rules of trade since non-trade issues invaded the system. But this complication at the WTO is minor compared to the bilateral free trade agreements (FTAs) involving the United States and the EU, he says.

A prime example is the Trans Pacific Partnership Agreement negotiations, involving Malaysia and eleven other countries. Under the leadership of the United States, the TPPA includes chapters on many non-trade issues including intellectual property (with standards far higher than in the WTO), rules on investment liberalisation, a system where foreign investors can sue the host states in an international tribunal, and opening up of services sectors to foreign ownership.

Then there are the two issues that directly intrude into the way the government operates. Government procurement, or the rules on how the state decides to award contracts for goods, services and projects, is to be opened to foreigners as if they were locals.

And government-owned enterprises, including private companies in which the state has a share, are to be governed by rules that prevent them from having advantages. The way they buy and sell goods and services are also to be opened to foreigners as if they were locals.

In other words, says Khor, the "free trade agreement" has gone far beyond the terms of importing and exporting goods, and penetrated deep into the structure of the domestic economy, including how local businesses are allowed or disallowed from benefiting from government policies, and how the government conducts its business.

Central to this process is the concept of "regulatory convergence", not dissimilar to the harmonisation of rules that has been a core feature of the EU's Single Market, so much so that when the EU sets the parameters for third countries to join the European Common Aviation Area (ECAA), it writes of its neighbours "linked to regulatory convergence through gradual implementation of EU rules".

Despite the pervasive influence of this concept, to be found as much in the current Transatlantic Trade and Investment Partnership (TTIP) negotiations, too many of the more superficial pundits – Farage included – still believe that current trade deals are a way of cutting back the burden of regulation. As both Beattie and Khor testify, it has precisely the opposite effect.

For this reason, and a complex of others, resistance to the current range of negotiations is building. It is getting harder to reach agreement, and taking longer, so much so that many believe that the day of the comprehensive FTA is over. There are simply too many obstacles.

As an alternative, we are now suggesting in Flexcit a process called "unbundling". Rather than relying on ambitious free trade agreements that promise much but are often able to deliver little, the idea is to go for sector-specific (or even product-specific) solutions, on a multi-lateral or even global level.

Sometimes known as the "single undertaking" approach, they are easier to negotiate and can yield results relatively quickly. They also pose less of a challenge to sovereign entities, which makes them less of a threat to small nations.

An example is the initiative on the classification, packaging and labelling of dangerous substances, which emerged as the Globally Harmonised System of Classification and Labelling of Chemicals (GHS). The first version of the code was formally approved in December 2002 and published in 2003.

This very small step exactly typified "unbundling". Globally negotiated rather than geographically anchored, this was a multilateral rather than a bilateral agreement with a very narrow but vital effect on one particular sector.

Labelling of hazardous materials – more particularly difference in labelling – has been an important non-tariff barrier, restricting trade in a major industrial sector. The entirely uncontentious initiative eases the flow of goods for negligible cost, without any of the baggage we see in contemporary free trade agreements.