Free Trade’s Bleak Outlook

(Bloomberg View) -- After years of talks and a week or two of comic opera, Canada and the European Union stifled resistance from Wallonia -- the French-speaking part of Belgium -- and signed their Comprehensive Economic and Trade Agreement. It was a good result, though with disturbing implications.

CETA is a new kind of free-trade agreement. Going far beyond the elimination of most tariffs on goods, it also breaks down non-tariff barriers, and aims to foster trade in services and increase flows of foreign investment. Think of it as a scaled-down version of the Transatlantic Trade and Investment Partnership the U.S. hopes to reach with the EU. Even though the Walloons' objections to CETA were dealt with, after a fashion, the episode inspires little confidence in TTIP's prospects.

CETA will now go ahead in two stages. Tariff reductions and other conventional trade measures will happen “provisionally” starting next year, but some of the reforms will have to await ratification, which could yet take years. It's not impossible the deal could still unravel.

A regional parliament in one EU country was able to nearly kill CETA because Europe had deemed the pact to be a so-called mixed agreement, as opposed to an ordinary trade deal. EU trade deals don't require parliamentary ratification; mixed agreements do. If the EU wants to reach more CETA-like deals, this precedent was an error. Securing agreement in all the EU's national (and some of its regional) parliaments will never be easy.

Free Trade Feud

That CETA almost failed is especially telling, because Canada's attitude toward regulating business and investment is not that different from Europe's. If TTIP is ever put to EU parliaments, opposition will be stronger, fueled by antipathy to American-style capitalism. Enhanced free-trade agreements with other countries -- perhaps including Britain, post-Brexit -- could also be harder to conclude.

Would it be such a bad thing if these deals didn't go forward? Indeed it would, because promoting international competition in services and investment boosts growth and helps consumers everywhere, lowering costs and raising living standards in the aggregate. Complementary policies (such as income support and assistance with retraining) are also needed, to help workers who may suffer because of stronger competition. But the worst outcome will be if governments fail in that task and then retreat on trade, which is the emerging trend. That would be as dumb as responding to the labor-market downside of technological progress by throttling innovation.

In some areas, admittedly, tactical flexibility might make sense. There's a case for relenting on nonessential provisions that attract particular opposition. Arrangements for resolving disputes between foreign investors and host-country governments are proving especially contentious. Even though the complaints are mostly misguided, international arbitration measures might be more trouble than they're worth, especially for agreements between countries that have well-functioning legal systems.

The main challenge for the governments involved, though, is to make the case for trade and competition. They should press forward with CETA, TTIP and the Trans-Pacific Partnership -- but they can't expect to succeed unless they meet anti-globalist opinion head on. So far, that's something they've conspicuously failed to do.

--Editors: Clive Crook, Mary Duenwald

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.