Bilateral Trade Deals Can Work, If Your Name Isn’t Trump

(Bloomberg Opinion) -- One of the most fascinating moments in recent negotiations came when U.S. President Donald Trump offered complete free trade to his European partners at the Group of Seven meetings. Trump may have viewed this as a public relations ploy, but the response was still striking: No major European political leader embraced the idea. Nor did China.

So how to make further progress on trade? Well, Trump on Monday threatened China with an extra $200 billion in tariffs, thereby moving back to bilateral pressures. The popular tendency is to condemn this bilateralism, but I don’t think it’s so simple.

There are so many criticisms of President Trump that it is easy to confuse the correct and the incorrect charges when it comes to international relations. The correct charges are that Trump has behaved erratically, alienated many allies, often rejected the value of expertise, and has caused the U.S. to be viewed as a less-reliable negotiating partner. The incorrect charge is that Trump is making a huge mistake by rejecting multilateralism. In fact, a bilateral approach to trade might yield higher returns.

I am struck by how many pro-trade economists are less than enthusiastic about the recently negotiated (if not always consummated) free-trade deals, including the Trans-Pacific Partnership. They say these agreements are no longer about free trade, but that they spread American intellectual property standards, protect the rights of foreign investors and harmonize regulations. 

It seems we are bureaucratizing trade as much as liberating it. Perhaps that is no surprise. If you wish to induce numerous nations to sign on to a deal, you will have to offer exceptions, clauses and conditions for them. The eventual result is that a free-trade treaty morphs into a managed-trade treaty. I still believe that the various trade agreements that have been passed or drawn up are for the better, but I also can’t help being disappointed by them. Note also that progress through the World Trade Organization had ground to a halt even before the election of Trump.

We are now in a setting where the world’s No. 2 economy — China, on its way to being No. 1 — is strongly opposed to free-trade ideals and free flows of information, especially for its own home market.

Enter bilateralism. The smartest case for trade bilateralism is that trade in many goods is already fairly free, but some egregious examples of tariffs and trade barriers remain. Look at agriculture, European restrictions on beef hormones in beef, and the Chinese unwillingness to allow in foreign companies. Targeted strategic bargaining, backed by concrete threats emanating from a relatively powerful nation — in this case the U.S. — could demand removal of those restrictions. Furthermore, the negotiating process would be more directly transactional and less cartelized and bureaucratic.

My colleague John Nye, an economist at George Mason University, has argued that the free-trade revolution of the 19th century came about because of a major trade agreement between Britain and France in 1860. Other European nations were fearful of being locked out of subsequent deals, and they hurried to sign bilateral trade treaties with Britain and France. There was a competition to make deals rather than cartelization of the process.

So what might be a path forward today? How about if the U.S. brutally pushes China, through cajoling, threats and intimidation, into greater liberty for trade and foreign investment? At first, that deal might appear to be at the expense of Europe. But in due time most nations would rush to conclude additional trade deals with the world’s two largest economies. Perhaps free trade would advance once again. Ideally, we would like to pull off a delicate balancing act where this process can proceed without wrecking the trade safeguards built into the WTO, the EU and other multilateral institutions.

Would this work? I am sorry to say I don’t think so. To understand why not, we must return to the limitations of President Trump. China is a tough country to push around, and the U.S. is in a poor position to coordinate a response with allies. Embracing Trump is simply too politically toxic, or too much hard work, for too many leaders. So we might simply end up with a trade war or, at best, a pointless war of rhetoric, petering out into mutual embarrassment.

But is the problem trade bilateralism? Probably not. To understand why the current approach is likely to fail, we must first grasp how it could ever possibly succeed. And if you are rooting for freer trade, maybe further multilateralism is not where you should be putting your chips.

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