Trade Agreements – Small and Big

The Comprehensive Economic and Trade Agreement (CETA) that just passed the European parliament but still needs to be ratified by close to 38 European parliaments as well as by Canadian provinces is a big trade agreement. Actually, the label is misleading as CETA is more about market opening, protection of intellectual property rights and about safeguarding cross-border direct investments than not is about the abolishment of tariffs and quotas. Given the complexity of this agreement it is overly courageous if not a bit silly when politicians make the promise of large numbers of new jobs and income improvements of average households that would be entrusted by such a big agreement. Already international economics 101 teaches us that fully liberal trade increases the pie but also changes the slices of the pie. Specialization effects are overall positive for the macro aggregate, the pie, but the composition of the pie changes, too. Some slices will shrink and being over-compoensated by the growth of other slices. In other words, even though the models show net benefits, they also show that some sectors will win and others will lose: a move to full liberal trade creates winners and losers. It is up to domestic institutions to make sure that losers are getting compensated and winners keep up to stay winners. Parts of the additional pie can bee used for exactly those purposes. From the political economy literature on trade we know that economies with a relatively high integration in the global economy have relatively strong welfare states, indicating that openness is best dealt with by means of the welfare state.

We also know that there is no automatic mechanism that would ensure that losers are eventually compensated. As a matter of fact, the many reforms Western welfare states underwent in the last twenty years or so, dealt with all kind of challenges but not so much with the losers of liberalized trade. Winners moved forward and left the losers behind.The argument that welfare states, measured in terms of social expenditures to GDP, have not shrunk is a valid observation but should not interpreted that this was due to ongoing or even increased compensation policies. rather, welfare state expenditures dealt with aging processes and overall the financing of the health sectors. One could make the argument that across the board losers were moved in systematic ways out of the labor markets into a kind of still reserve of worker, or in form of a Prekariat, that is a group of workers who are only partially part of the formal labor market and thus without the hope of a steady income stream. The modulation of this part of the working population added to the rise in inequality.

Coming back to CETA, my concern is that politicians are not aware of the difference between growth of the pie and change of the composition of the pie. As a result, politics is not prepared to deal adequately with the losers. Interestingly enough, most of the protests against CETA, or for that matter, against TTIP did not deal with the change of the composition of the pie. Protest was mainly directed against potential health issues, the opening of public procurement markets and the undermining of political democracy due to the planned investor-staste dispute mechanisms. All those concerns were valid. I would make the case that political parties failed in defending basic interests of their voters when it came to trade agreements and that it needed civil society organizations to make the point. It is in the nature of such political protests that exaggerations and scaremongering play a prominent role. In case of CETA it was exactly the influence of civil society that brought Canada and the EU back to the table, and CETA today is in many ways different from CETA of October 215 when then PM Stephan Harper proudly presented the CETA-text as the best of all worlds.

The fact that CETA today is better then CETA of the past is no complimentary ticket for governments to lean back and let the markets work. On the contrary, if CETA is to become a ‘gold standard’ then it needs supportive economic policies to make this happen. The installation of regulatory cooperation groups that consist of lobbyist is not the way to go. Rather, it needs truly comprehensive policies to increase the pie and at the same time take of the change of the pie.