There's a great debate that has been going on slowly and sporadically, over a period of years, about the purpose of trade agreements. On one side are Don Regan of Michigan Law School and economist Bill Ethier; on the other side are economists Kyle Bagwell and Rob Staiger, and several others (I'm not sure I know the names of all the people who would identify themselves as being on this side of the debate, so I'll leave it at that). However, when I mention the issue to most people, they have absolutely no idea what I'm talking about. They haven't heard a thing about it. But it's fascinating, and gets at the core purpose of trade agreements, so I'd love to see it talked about more. Regan has a new article (ungated version here) out on it, following up on a 2006 JIEL article.
The basic issue is this: What is the core purpose of trade agreements? Regan explains that "in the [trade] practitioners’ story, governments make trade agreements to reduce protectionism." That is the story most people are familiar with, and take for granted. We've all heard of protectionism; we all have a sense of what it is, although definitions may vary.
By contrast, he says, there is another view: "in the Bagwell-Staiger/Grossman-Helpman model, trade agreements will never reduce protectionism as we normally understand it." Rather, "[t]he sole function of trade agreements in the Bagwell-Staiger/Grossman-Helpman model is to eliminate terms-of-trade manipulation, unilateral trade policy that aims at improving the home country’s terms of trade. Terms-of-trade manipulation is a completely distinct phenomenon from protectionism, reflecting a different governmental motivation."
Right now, many of you are probably thinking, "terms of trade manipulation" sounds familiar, but I can't quite recall what it means. Here's an example described in the article:
Imagine two similar-sized countries, trading two goods, with national income-maximizing governments. Each country can benefit from imposing an appropriately chosen “optimum tariff”. The tariff reduces the country’s imports, and hence brings about a lower world price for those imports (it improves the country’s terms-of-trade); the country in effect collects some tariff revenue from foreign exporters (which I shall refer to as the “terms-of-trade tariff revenue”). The tariff will cause some deadweight loss in the local economy, but if the tariff is properly chosen, this loss will be outweighed by the terms-of-trade tariff revenue. So, both countries will impose optimum tariffs.
In this view, a trade agreement comes about when both countries agree to give up their optimal tariffs.
So, on the one side, you have trade agreements as a way to rein in protectionism; and on the other, trade agreements as a way to rein in terms of trade manipulation, such as optimal tariffs. (Of crucial importance, these are not the same thing at all, which I won't elaborate on here, but we can discuss in the comments).
I have a few thoughts on all this.
First, as much as I would like the debate to be a simple choice between these two alternatives, I wonder how newer "global governance" type issues, such as IP protection and labor standards, fit within these competing views? Is it still possible to describe a single purpose to the trade regime, or does it pursue multiple policy objectives that need to be discussed separately? Trade agreement provisions extending copyright terms, for example, may need to be debated on their own terms, rather than in the protectionism/optimal tariffs framework.
Second, one key distinction I see between the two views is that protectionism seems like it doesn't have to be all that precise. If you think this sort of thing helps domestic producers (which I don't!), a 10% or a 20% or a 30% tariff would all help to some degree, no matter what the circumstances (size of country, etc.). By contrast, an optimal tariff seems like a more delicate exercise, where you have to get the rate just right; and often I hear that it only works for countries with large markets. As a result, perhaps, one of the criticisms of the "terms of trade manipulation" theory is that such a practice does not exist in the real world (Regan says, "[t]he evidence suggests that countries do not, and would not, engage in terms-of-trade manipulation").
Third, in response to the suggestion that terms of trade manipulation does not exist, the defenders of this idea say the following (as explained by Regan):
Bagwell and Staiger acknowledge that practitioners do not talk about terms-of-trade manipulation, and that this casts doubt on the practical relevance of their model. In response, they point out that practitioners talk a great deal about market access. So, to defend the relevance of their model, Bagwell and Staiger argue that “we may interpret [. . .] ‘terms-of-trade gain’ and ‘market-access restriction’ as [. . . ] phrases that describe the single economic experience that occurs when the domestic government raises its import tariff and restricts foreign access to its market.”
On this point, Regan says that although "market access" and "terms-of-trade gain" may be regarded as equivalent in many contexts, they are not equivalent in the context that matters to the question of whether countries manipulate their terms of trade, namely, how unilateral tariffs are motivated. As for me, I've said before that I think "market access" is a term that has multiple meanings, and therefore may not be all that useful for trade law. From a business standpoint, of course, the term is clear: Producers simply want better access to a foreign market. The means that are used to achieve this do not matter much to them. But for describing policies and legal principles, I'm not sure market access is very helpful. The principles used to obtain market access can vary considerably. Market access might mean reducing tariffs; or it might mean repealing non-discriminatory regulations because they are not based on science; or it might mean repealing regulations where a less trade restrictive alternative exists. There are vastly different implications from these different forms of market access, and thus grouping everything under the general notion of "market access" misses important distinctions.
Anyway, I think it's an important debate, and I'd love to see more people actually debating it. Maybe this blog post will generate some interest.