Donald Trump has made his distaste for multilateral trade agreements clear. He campaigned on a strong anti-NAFTA agenda and withdrew from the Trans-Pacific Partnership (TPP) process within days of taking office. The TPP would have put in place common trade rules for the U.S. and 11 of its trading partners in South America and Asia.
According to the White House, President Trump will soon bring his lifetime of negotiating experience to instead creating bilateral trade deals, negotiating with one country at a time. The image of the tough negotiator with a lifetime of real estate experience bringing these talents to bear on one-to-one negotiations has an instinctive appeal. Yet will this approach be effective in advancing the interests of the U.S.?
Let’s stay in the realm of the real estate developer: President Trump may have successfully negotiated many real estate deals, but a major factor facilitating these transactions was a relatively standard set of rules in place in each country, state, or district. What if a different set of government regulations had applied to each property? Or each city block or zip code? The central problem with bilateral trade deals is the “spaghetti bowl” problem described by Columbia University economist Jagdish Bhagwati: different sets of trade rules linking pairs of countries create a mess.
The U.S. already has 12 bilateral trade agreements in effect, most signed under President Obama. At least part of the appeal of multilateral trade agreements is reducing this pairwise complexity: a trade agreement among six countries can replace 15 different sets of rules; even a small agreement (by number of countries) such as NAFTA gets us from three sets of rules down to one. TPP would have superseded numerous pairwise agreements, between , for example, Canada and Chile, Japan and Mexico, and Singapore and New Zealand. The Congressional Research Service Office even included a picture of the existing spaghetti bowl in its report to Congress on TPP.
The messier the spaghetti bowl gets, the more likely it is that businesses will avoid it entirely, especially in politically sensitive industries where the rules are complex. In my research in the textile and apparel industry, I found that many businesses preferred to simply pay the tariff that the free trade agreement eliminates rather than to navigate the tangle of rules in the bowl. In fact, according to the American Apparel and Footwear Association, as trade agreements proliferated, less and less apparel was sourced in trade agreement countries. Industry executives told me that it was easier to buy from non-trade agreement countries such as China than to risk running afoul of the rules in the bowl.
Who will win – or lose the least –in a transition from fewer multilateral trade deals to more bilateral deals? The much-maligned multinational corporations are vocal proponents of the multilateral approach since they clearly prefer to play by fewer sets of rules. Yet these large firms also have the trade compliance teams and the lawyers to navigate the spaghetti bowls.
It is smaller firms and their workers who will find it most difficult and expensive to deal with multiple sets of rules governing their imports and exports. In addition, the process by which trade deals are negotiated has long come under criticism both for its opacity and for its responsiveness to special interests. Both of these problems are likely to be more serious when developing sets of pairwise trade rules, to say nothing of the time and administrative costs associated with monitoring and enforcement.
There may be some short-term wins associated with tough bilateral negotiations: Perhaps U.S. steel companies will fare well in one negotiation, agricultural producers in another. But in most business settings, transparency, fairness, and economic growth are all best served when rules are universally applied. International trade is no different.
At the end of WWII the U.S. began to lead the process of developing multilateral rules for trade. To abdicate this leadership in favor of doing one deal at a time is not in the long-run interests of the U.S. economy or its workers.
Pietra Rivoli is Professor of Finance and International Business at the McDonough School of Business at Georgetown University.