Next week, leaders will meet for the first EU-Latin America summit in a very long time. The most important item on the menu is the trade agreement between the EU and Mercosur, the trading bloc comprising Brazil, Argentina, Paraguay and Uruguay. The deal was agreed in 2019 after years of talks but has still not been ratified. Most of the blame for that lies in Europe where two forces have stalled its conclusion, one traditional and one much more recent. The traditional one is agricultural protectionism. The newer, much more interesting one is the EU’s move beyond what we could call standard trade liberalisation towards including new elements in trade deals — in this case, environmental and climate demands.
The Mercosur countries did agree to climate and environmental provisions — designed to protect the Amazon from deforestation — but European green politics overtook the process. Brussels has been pressured to request additional provisions to make the green aspects of the deal legally binding. These extra commitments are what Brazil, in particular, has been resisting.
We shouldn’t expect a breakthrough on the Mercosur deal at the summit, but we can hope for some political meeting of minds that allows a final agreement to be sealed soon. But today I am less concerned with the details of the green provisions than with the principle behind them and how this reflects an entirely new approach to trade policy.
What is new about it is that trade deals have started to cover not just specific products (and to some extent services) but the methods by which they are produced. The EU-Mercosur deal’s attention to deforestation is just one of many examples. The same agreement also contains a provision where eggs will only receive favourable import treatment if they have been produced in accordance with EU animal welfare standards. The EU is not alone: when the US renegotiated the old Nafta trade deal with Canada and Mexico, it only extended tariff reductions to cars produced by labour paid above a certain amount. Nor are non-conventional considerations only pursued through bilateral trade agreements. The EU is using unilateral trade policies too, such as the carbon border tax on imports from countries with less stringent emissions regulation than the bloc, or requirements on human rights in EU companies’ global supply chains. A new EU law banning imports of palm oil from cleared forests has held up its trade talks with Malaysia and Indonesia.
All these new trade rules are examples of otherwise identical products being given different treatments depending on the method of production. This is legally controversial, or at least novel, as David Henig explained in a Borderlex column a few weeks ago. Traditionally, treating identical products differently has been seen as a sign of protectionism, to be justified with the exceptions allowed by international trade rules. Interestingly, the same tension exists within US law, where the Supreme Court has just upheld California’s animal welfare restrictions on sales of pork products produced in other states. Henig similarly suggests that legal refinements are possible to allow for a consideration of production methods while preventing protectionism.
I agree, but I am more concerned with the economics than the law. What economic rationale is there for these extra conditions on trade if we believe there are generally gains from voluntary economic exchange?
One answer is “externalities” — free trade is not always efficient, so it should be made a bit less free in order to achieve greater efficiency. Carbon tariffs could be a case in point here: without them, domestic carbon regulations simply shift polluting production abroad — “carbon leakage” — with the result that pollution stays the same but goods are more expensive. But two things about this answer bother me. The first is that the externality argument does not generalise easily to other areas (European hens would not be any less protected without an animal welfare provision in the Mercosur deal). The other is that it takes for granted that there is a trade-off between free trade and these other considerations.
I think there is another, more ambitious argument for including non-conventional considerations in trade policy, founded both on economic efficiency and pro-trade liberalism. It is this: modern consumers themselves distinguish between otherwise identical goods that are produced in different ways. Today, many people care directly about whether a product is produced in ethical ways — say, with the use of child or slave labour — or ways that threaten the environment. A T-shirt made with cotton from concentration camps in Xinjiang is simply a different product from one with ethically produced cotton. Moreover, the digital revolution’s blending of goods with services means that “production methods” don’t end when a good is sold. For many consumers, a car that spies on you by sending data about your behaviour to a manufacturer in a different jurisdiction is a different product from one that doesn’t.
There is a narrow but important economic research literature on “procedural utility”, the idea that we care not only about the outcomes we achieve but the ways in which those outcomes are reached. Here is one early contribution. It is a topic I take a particular interest in because my own PhD was an extensive argument about why and how economics needs to take process-dependent preferences into account. (For those interested, the published version included a mathematical model of process-dependence, an experiment demonstrating people do care about processes separately from outcomes, and a philosophical argument about why it’s perfectly rational to do so.)
Because people care about production processes, it is a mistake to think that taking them into account violates free trade. Free trade cannot mean forcing a consumer to accept the replacement of one preferred product with a different one they consider inferior because of how it was produced. Of course, there is a need to guard against protectionism — arguments about production methods could be made in bad faith. But that is no different from other product rules, such as prohibiting the import of toys with lead-based paint, for example. Free traders have nothing to be ashamed about in accepting rules on production methods in trade policy. We can, and should, be confident that the new approach to trade policy is here to stay.
Other readables
Contrary to what much market punditry expected, the Italian government’s cost of borrowing has come closer to Germany’s over the past year. Erik Nielsen of UniCredit explains why.
In his podcast, my colleague Gideon Rachman interviews the great Anu Bradford, who coined the term “Brussels effect” and has a new book out on how to regulate artificial intelligence. (Strictly speaking, this is not a readable but a “listen-able” — but you can always read the transcript if podcasts are not your thing. Do give Gideon’s a try if you do not already follow it.)
Numbers news
The eurozone has seen very strong jobs growth since the pandemic — but behind the numbers lurk big differences between countries and a fall in average hours worked per job.
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Ukraine faces a dramatic demographic challenge.
Source: Economy - ft.com
