USTR Katherine Tai explains the Administration rejection of free trade agreements
In a recent interview on Amanpour and Company, USTR Katherine Tai was asked pointblank why the Biden Administration has decided against pursuing new free trade agreements with friends and allies as a way of securing resilient supply chains. Here’s her response:
A traditional trade agreement like we've negotiated in the past is not actually a very good supply chain-creating framework. Free trade agreements between countries, two countries or three or more, are meant to facilitate integration between those countries.... However, the preferences that are created through those agreements are not airtight. They are designed to be weighted in favor of overall liberalization. So every single one of our free trade agreements does create benefits for what we would call free riders, other countries not a part of that agreement. The concern that we have right now is that part of that aggressively liberalizing ... type of framework, has led us to the point where you are chasing the lowest cost, that production has shown that it ends up pooling in only certain places around the world, and sometimes only one place.
Tai added:
Trade agreements take too long to negotiate, they are not participatory enough. And what right now what we need are agile systems, agile approaches to cooperating with our partners and our allies to adapt to all the changes that are happening in the global economy.
There’s a lot to unpack here. I gather that Tai’s point about “free riders” has to do with the dilemma of rules of origin in FTAs. Rules of origin that are broad, or as Tai would say not airtight, allow a significant amount of the value of the product to be added in countries not parties to the FTA, while still qualifying as originating within the free trade area for purposes of preferentiality. This can benefit producers in those other countries who happen to be part of the supply chains for FTA origin-qualifying products. On the other hand, very restrictive rules of origin, while reducing the free rider effect, by requiring that virtually all of the value of a product be added within the free trade area to qualify for preferentiality, may well significantly limit the liberalizing impact of the Agreement. Why? Presumably because if there are no or only higher-cost producers within the free trade area for certain inputs or links in the supply chain, the preferentiality obtained by trying to comply with strict rules of origin may be outweighed by the additional cost and obstacles of replacing producers of inputs outside the free trade area with those within. One may as well pay the MFN tariff, and source according to what makes sense economically. Thus, Tai suggests, the overall liberalization goal of FTAs isn’t really compatible with highly restrictive rules of origin.
If this theory can be verified empirically (like Tai I’m a jurist not an economist and this is a bit above my pay grade), it significantly challenges the case for FTAs over multilateralism based on countries being more willing to liberalize through agreements where free riders can be excluded. If further liberalization is the goal, one may as well invest more effort in multilateral negotiations at the WTO. Of course, US pursuit of FTAs in the neoliberal period has been driven more by corporate interests (Big Pharma and Big Tech seeking more anti-competitive rents through IP, for example) than a serious concern for liberalization. At least some of the agreements that Tai critiques are better explained by the power of corporate lobbying than a failure to grasp the intellectual insight about free riding This brings us to Tai’s comments in same interview on shifting political alliances on trade in Washington. :
In trade [as well as competition] ,… the traditional center has been free trade Republicans and pro-business New Democrats. What we see is that the progressives on the left and the populists on the right are meeting in a new center, one that is pro-worker and pro-competition, that is trying to take on the oversized corporate power, looking to rebalance, right, the equities within our system, and that gives me a huge amount of room to move on a bipartisan basis.
Of course, Tai is not original in identifying this new kind of political alliance or coalition. What’s interesting is the acknowledgement by the country’s top trade official that is has become the basis for Administration policy.