Trump’s G7 Free Trade Zone Is a Breathtakingly Ambitious Idea. But Has It Been Thought Through?

 

President Trump’s idea to turn the G7 into a free trade zone strikes one as a bit impulsive and underthought. After all, the Trump trade record this year seems to suggest a different direction, from solar panel and washing machine tariffs back in January to the steel and aluminum tariffs in March to China tariffs perhaps coming up.

Of course, none of that makes a G7 free trade zone necessarily a bad idea. Not at all. In theory, at least, it’s a remarkable one, breathtaking in its ambition. As Financial Times trade reporter Shawn Donnan writes:

Imagine an industrialised free trade area for the ages with no tariffs or other barriers to commerce and only a goal of shared prosperity in the 21st century? From Europe in the Atlantic east to Japan in the Pacific west it would cover a $36tn economic zone and almost half of global output. It would be a remarkable free-market alliance against a rising China and its brand of state-directed capitalism. Talk about a presidential legacy project. It would be huge.

Yuge, even. But it would also be a massive political undertaking, not least of all here in the United States. It’s not as if US trade policy has been run by Adam Smith and David Ricardo. America’s relative low import tariff average, notes Cato’s Scott Lincicome in a 2016 analysis, hides some awfully high tariffs on products such as peanuts, tuna, and light trucks. There’s a whole bunch of restrictive quotas, too, as well as non-tariffs barriers. The US might well be one of the most protectionist advanced economies, by some measures.

And it’s not just domestic interest groups that would need to be dealt with. There’s the administration’s own professed views on trade. First, Trump hates trade deficits, and there’s nothing about a free trade zone that guarantees the US would have equally balanced trade or run trade surpluses. Indeed, its overall trade deficit situation might not be much changed given it is due to macroeconomic factors not dumb deals. Second, it is tough to square a desire for some idealized free trade zone with the interest by some in the administration such as Peter Navarro to repatriate global supply chains. Third, it would seem natural for a free flow of good, services, and capital to also include talent. Has the president signed on to that idea, as well?

More from Donnan on the complexity of such an arrangement:

The first negotiation, presumably, would be over how much time any transition would take and how many products would be covered. Before long the aforementioned politically powerful industries would weigh in and begin seeking different timelines for different products, pleading the risk of job losses and closed factories. Eventually the issue of non-tariff barriers would surface. Would the EU agree to a zero tariff on beef raised on hormones? Or chicken produced with a chlorinated wash? What about auto safety and emission standards? Would the highly protected US sugar industry sign on? Would services be included? What about data flows? How would it all be policed? How would anti-dumping cases be handled?

Indeed, the whole enterprise sounds so difficult one wonders if success is really the goal, given its bolt-from-the-blue nature. As Lincicome tweets: “Finally, a major reason for skepticism: protectionists/cronies/pols have long used the impossible True Free Trade dream as an excuse to maintain their protectionism/subsidies (see eg Big Sugar and “zero for zero”).”

Published in Economics
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There are 13 comments.

  1. Inactive

    a)

    I have been led to understand that it’s impossible according to the EU treaties. A member of the EU cannot enter into trade agreements on their own. They can only be a part of EU trade agreements. It’s one of the reasons for Brexit.

    For a G7 Free Trade Agreement to happen, France, Italy, and Germany would have to leave the EU.

    Trump is trolling, not that there’s anything wrong with that.

    b)

    The G7 is a bit of an anachronism in itself. The members of the G7 are no longer the seven richest nations on Earth. Strictly speaking, Italy and Canada should lose their memberships and be replaced by China and India.

    Also, why seven? What’s so special about that number? Why not 10? A G10 would mean that Italy and Canada get to keep their seats, and also Brazil would get a seat.

    c)

    And then there’s the G20. Again, why that number? Why not do these things in multiples of 10? So a G10 and a G100?

    It’s all just so silly…

    • #1
    • June 13, 2018 at 1:25 pm
    • 2 likes
  2. Member

    I’m confused. Is Free Trade good or not?

    • #2
    • June 13, 2018 at 1:43 pm
    • 1 like
  3. Thatcher

    JimP,

    When trolling reveals an underlying truth it’s not trolling anymore but a truly creative idea. Why don’t we stop making excuses for the undemocratic EU that has used an absurd unlimited migrant policy to beat down wages and extort fealty from its own member states.

    EU Isn’t Exactly a Champion of Free Trade

    With the possible exception of China, the EU imposes the strictest and most draconian tariffs in the world.

    The World needs to breath free again and Trump’s willing to give it a chance. That’s good enough for me.

    Regards,

    Jim

    • #3
    • June 13, 2018 at 1:52 pm
    • 5 likes
  4. Podcaster

    Economists and Political Pundits: Trump is an economic idiot who doesn’t understand why tariffs are never a good idea!

    Trump: Trade between G-7 countries should be tariff free.

    Economists and Political Pundits: Whoa. Have you thought this through?

     

    • #4
    • June 13, 2018 at 2:09 pm
    • 8 likes
  5. Member

    “Eventually the issue of non-tariff barriers would surface.”

    I don’t think the non-tariff barriers really ever went completely away, and they would be ramped up very quickly…of course, they wouldn’t be *called* that.

    While it might be theoretically possible to eliminate formal monetary tariffs by treaty, I can’t imaging any treaty language which would realistically suppress the non-tariff barriers.

     

    • #5
    • June 13, 2018 at 2:26 pm
    • Like
  6. Podcaster

    David Foster: …of course, they wouldn’t be *called* that.

    Canada doesn’t have tariffs. They have a supply management policy.

    • #6
    • June 13, 2018 at 3:19 pm
    • 1 like
  7. Member

    I think it’s clever, I’m not sure why, but clever. But it may mean he’s open to some interesting things. If trade is tariff free in a G-7 that would mean tariffs and other barriers on the rest of the world would have to be agreed on or there’d be a nightmare of pass throughs. This opens the way to uniform external tariffs on every non trade zone goods. I like it, but just drop the other 6 and do it.

    • #7
    • June 13, 2018 at 3:35 pm
    • Like
  8. Member

    It seems to me that the EU always tries to have it both ways- one unit when it is convenient, and separate countries when that is the most beneficial to them. There is nothing whatever wrong with calling them on it, and pointing out that proposed tariffs are merely a response to the French agricultural restrictions, to AirBus dominance (surprise!) of EU airlines, etc. 

    And then if the gang wants to avoid US tariffs that balance the equations a bit, just enter a G7 free trade zone. It would take a vote in the Brussels assembly, but they can agree to or change whatever they wish to change. If they insist on keeping all their cake, there is a price to pay- but it is absolutely correct for the US to continue rhetoric of willingness to go full free trade within the G7 zone.

    • #8
    • June 13, 2018 at 7:46 pm
    • 4 likes
  9. Member

    Probably the effort will just reveal that nobody anywhere really believes in free trade or wants a less corrupt government. The sure sign of failure will be trade treaties longer than a single page containing a single sentence. One day we’ll just cut to the chase and go with @iwalton ‘s plan. Considering that a set of tariffs was the 2nd law Congress passed (Madison favored an impost–equal tax on all imports–which is a still dumb but much less corrupting policy), odds are I’m an idiot for believing that.

    • #9
    • June 13, 2018 at 8:10 pm
    • 1 like
  10. Member

    SParker (View Comment):

    Probably the effort will just reveal that nobody anywhere really believes in free trade or wants a less corrupt government. The sure sign of failure will be trade treaties longer than a single page containing a single sentence. One day we’ll just cut to the chase and go with @iwalton ‘s plan. Considering that a set of tariffs was the 2nd law Congress passed (Madison favored an impost–equal tax on all imports–which is a still dumb but much less corrupting policy), odds are I’m an idiot for believing that.

    Why is it dumb? it’s the only way the US can devalue even if it’s one time, and it raises revenue in a less distorting way than almost any other tax. If we took it seriously it would lower some distorting special interest tariffs and raise others modestly. Only Singapore has uniform tariffs because they’re at zero Most countries with relatively high tariffs are third world, the rest of us have very low average tariff rates. We use regulations to erect trade barriers, Japan uses cultural practices we can’t get at, China uses permitting and other administrative process we might be able to get at more. Of course a uniform tariff is the bargaining chip to avoid a trade war and self inflicted economic damage with tariffs on things like steel and aluminum. Remember the theory of second best. First best is zero tariffs second best isn’t fewer tariffs its uniform tariffs on everything. 

    • #10
    • June 14, 2018 at 5:31 am
    • 1 like
  11. Inactive

    EJHill (View Comment):

    David Foster: …of course, they wouldn’t be *called* that.

    Canada doesn’t have tariffs. They have a supply management policy…

    Ackshully, Canada imposes a 270% tariff on most dairy products. It can do this because a) dairy was specifically excluded from NAFTA, and b) it imposes this tariff on all countries, not just the United States.

    https://www.theglobeandmail.com/report-on-business/a-guide-to-understanding-the-dairy-dispute-between-the-us-andcanada/article34802291/

    • #11
    • June 14, 2018 at 7:20 am
    • Like
  12. Inactive

    SParker (View Comment):

    Probably the effort will just reveal that nobody anywhere really believes in free trade or wants a less corrupt government. The sure sign of failure will be trade treaties longer than a single page containing a single sentence. One day we’ll just cut to the chase and go with @iwalton ‘s plan. Considering that a set of tariffs was the 2nd law Congress passed (Madison favored an impost–equal tax on all imports–which is a still dumb but much less corrupting policy), odds are I’m an idiot for believing that.

    One big issue isn’t ambivalence towards free trade in and of itself, but rather quite reasonable questions about how enforcement of those treaties affects national sovereignty. Countries don’t tend to like being subject to the rulings of courts and/or tribunals that they don’t control.

    Say CountryA passes a law that CountryB thinks creates a non-tariff barrier that violates their Free Trade Agreement. So, CountryB takes the issue to an international court/tribunal to adjudicate the case. Should that court have the right to tell CountryA that it’s not allowed to pass its own laws?

    • #12
    • June 14, 2018 at 7:27 am
    • Like
  13. Member

    While in Germany, my neighbor engaged in a rather long and frustrating pre-internet search for a specific model of De Tomaso Pantera. As a certified car nut, he knew there was one early 1970s version sold in Europe which could not be imported into the US because it did not comply with Department of Transportation safety regulations. But this was a special model because all one had to do was punch out the pre formed corner marker indentations, add cornering lights (courtesy of JC Whitney) and it was transformed into a legally importable classic.

    This is a non trade barrier.

    The list of non trade barriers is extensive. Those barriers to trade are in place arguably to ensure goods imported into the US comply with federal laws and regulations.

    Let’s start with the tariffs.

    • #13
    • June 14, 2018 at 8:05 am
    • Like