Trade Deals Aren’t the Same as Free Trade

Most trade agreements are exercises in managed deals — not free trade.

By Samuel Gregg Published on December 9, 2016

Perhaps the most significant policy-revolt of the 2016 Presidential election concerned free trade. Not just the eventual winner, Donald Trump, but the Democratic primary’s runner-up, Bernie Sanders, savaged trade agreements such as NAFTA and the TPP. While miles apart on many issues, Trump and Sanders — and millions of Americans — agreed that the United States’ commitment to free trade wasn’t working in America’s favor.

What few seemed to realized, however, is that trade agreements aren’t the same thing as free trade. Yes, we can argue about whether particular trade agreements promote, on balance, greater economic liberalization. But if we’re going to have a national debate about free trade, we should recognize that trade agreements are far from truly free trade.

All Trade Agreements are Managed Trade

There’s no-one-size-fits-all form of trade agreement. Some are bilateral arrangements between two nations. Others are multilateral and embrace several nations. Within that framework, there are several possible arrangements.

You can have, for instance, single markets like the European Union. These involve the free movement of goods, services, capital and labor between all member-nations of the single market. But barriers are maintained or created against all non-single market members. Another model is a preferential trade area. Participating nations give preferential access to certain products from all the area’s members. Tariffs are reduced, but not completely abolished.

Trade agreements are thus full of conditions and restrictions agreed upon by governments. They have little in common with the vision of free trade outlined in Adam Smith’s Wealth of Nations.

Note, however, that all trade agreements involve two or more governments negotiating how their citizens economically interact with each other. That also means they’re indirectly deciding how the same citizens will economically engage with people from nations who aren’t part of the trade agreement.

These intergovernmental negotiations cover subjects ranging from what tariff-levels will be applied to various goods, to what will be each participating country’s minimum wage. They typically involve nations agreeing to adopt laws affecting matters as specific as patents, food-safety standards, immigration, environmental regulation and working-hours. Regular meetings are held between all governments who signed the agreement in order to keep tweaking it.

More could be said about what goes into making and maintaining trade agreements. The point, however, is that the process is controlled by governments. And during that process, all governments are heavy lobbied. Whether it’s particular businesses, environmentalists or trade unions, they all want provisions written into trade agreements: provisions that protect and promote their interests.

Trade agreements are thus full of conditions and restrictions agreed upon by governments. They have little in common with the vision of free trade outlined in Adam Smith’s Wealth of Nations.

In its essence, free trade concerns individuals and groups freely exchanging goods and services with other individuals and groups across national borders. These exchanges are unencumbered by tariffs, duties and quotas, unassisted by subsidies, and not subject to conditions which must be fulfilled before exchanges takes place. A real free trade agreement would amount to a single phrase such as: “There shall be free trade among the parties.” In this light, it’s not an exaggeration to describe trade agreements as exercises in fake free trade.

What’s a Free Trader to Do?

Many trade agreements seek to remove restrictions and impediments to free exchange in order to progressively realize the benefits of free trade. These advantages include greater efficiencies in production for business, and lower prices for more and better quality goods for consumers. Above all, free trade facilitates free and open competition. This means that businesses can only profit by meeting consumer demand in more effective and innovative ways rather than through securing privileges from governments.

Nations, however, are more than economies. Nor can national interest be reduced to GDP growth. Economic relationships between nations have implications for their political relationships, and vice-versa. Governments thus can’t — and shouldn’t — think only about the economy when making decisions about their relations with other sovereign-states. And however much bureaucrats at supranational and international institutions like the European Commission and the UN might desire it, nation-states aren’t going away. Quite the contrary.

So what should committed free traders do in an age of growing economic nationalism and often justified skepticism about trade agreements? Should they critique trade agreements for adding layers of complication to free exchange and creating new opportunities for cronyism? Or, should they promote those sections of a trade agreement which do liberalize trade, while simultaneously trying to limit its protectionist implications?

The answer, I’d suggest, is “all of the above.”

Work for Freer Trade, Not Utopia

Expecting governments to agree to “free trade — period” is utopian. For one thing, legitimate issues of citizenship and sovereignty are part of the equation. That’s especially true with regard to the free movement of labor between countries, that is, immigration.

Second, free traders can’t expect governments to immunize themselves from pressures from the societies they govern. Brexit and the rise of Trump and Sanders illustrate what happens when political classes become sealed off from the people they rule. At some point, any people with an ounce of self-respect will revolt. And, at least in America’s case, it has resulted in a return of economic nationalism. Adam Smith himself favored gradually reducing, rather than immediately abolishing, trade barriers because he recognized that transitioning from managed economies towards freer trade could, if mishandled, easily backfire.

Given these constraints, perhaps the most productive path forward for free traders today is to (1) fight for those liberalizations contained in trade agreements, while (2) relentlessly criticizing the ways in which any given trade agreement stimulates cronyism. Given Americans’increasing hostility to “rigging the system,” showing how protectionism feeds cronyism is one way of rehabilitating the case for free trade.

Granted, this won’t defuse some Americans’ present hostility to free trade. But it may help illustrate that criticisms of free trade are better directed at managed trade — and more particularly at those upon whom it confers privileges at the expense of everyone else.


Samuel Gregg is Research Director at the Acton Institute and author of For God and Profit: How Banking and Finance Can Serve the Common Good (2016).

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