Why big trade deals never seem to work for America

Shots have been fired in the dispute over the Trans-Pacific Partnership (TPP) — the looming trade deal between the U.S. and 11 other countries.

The salvo came from Sen. Elizabeth Warren (D-Mass.) in a Washington Post op-ed, warning about the "Investor-State Dispute Settlement" (ISDS) courts embedded in the deal. The ISDS courts are international arbitrators staffed by a rotating stable of unelected lawyers, which would provide companies an arena to effectively sue governments when they make a policy choice that effects their business — like a hike to the minimum wage or a new environmental regulation or whatnot. Warren sees them as a threat to U.S. sovereignty and a potential way to gut environmental and labor protections.

Judging by the bipartisan opposition to the TPP, she's far from alone. This can all be seen as a lesson in how markets are inescapably social constructs, and how important that fact is in thinking through these sorts of trade deals, and economic policy as a whole.

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American politics tends to treat the market as if it’s an objective referee, operating separately from and prior to political or social preferences — until of course those preferences try to impose themselves. Politicians worry about whether this or that solution is "market-based," assuming that's an objective thing that can be identified. We judge policies by whether they "interfere" with the market, while shying away from "picking winners and losers."

This gets everything backwards.

Think of all the decisions a society has to make before a market can even function. What’s property? Can you own land? The minerals under it? The air over it? Can you own genes? An idea? How do you handle contracts and settle disputes? Will the currency be publicly controlled, or will there be private and competing currencies? How do you handle public goods and natural monopolies? Et cetera.

You can’t even talk about a market as a thing that exists until government or some other social arrangement has answered these questions. And that’s before you get into questions of what to regulate — safety, transportation, worker exploitation, pollution, etc. Hence, markets are socially constructed.

Crucially, how these questions get answered inevitably has massive effects on how a market distributes incomes; is inequality high or low, and do we get a "bulb" economy or an "hourglass" one? Our incomes are socially constructed too.

This is where international trade deals like the TPP come in. You need a market to have trade, and you need to answer those questions to have a market. Human beings solved this problem in recent centuries by banding together into nation-states, creating large areas ruled by a single set of answers. But now globalization is driving us to the point that even nation-states aren’t big enough. "There is a real competition over what rules of the road will shape the global trading system," Michael B. Froman, the Obama administration’s chief trade negotiator, told The New York Times.

America and everyone else involved in the TPP isn’t about to band together into one giant super-government. But as global trade expands, all those "rules of the road" have to be stitched into working agreement between countries. And someone's inevitably going to decide how to do that.

So the TPP is literally the social construction of a new market in real-time.

Which brings us back to those ISDS courts. The White House’s response to Warren is worth reading to get a sense of the nuances involved. Administration officials make a reasonable historical argument that most ISDS cases actually shook out in favor of national sovereignty. And of course the lawsuits can’t force a country to directly change its policies.

But ISDS courts can force countries to pay out damages or remunerations if domestic policy changes alter the rules under a company’s feet. That’s a real pressure that can be brought to bear on governments, and it runs the risk of rendering national sovereignty more a theory than a practice.

A large part of the trepidation with which many American voters view the TPP probably boils down to a philosophic or even moral objection to this state of affairs. Within America, these sorts of disputes are handled by American courts, which are ultimately accountable to the democratic will: judges are either elected directly, or appointed and approved by elected representatives. Not so with the ISDS courts. But if markets depend for their very existence on the a priori choices of societies and governments, why should a private company be able to pressure a government into changing those choices?

Obviously, if the rules of the road can change under companies, that makes international trade harder to engage in.

But, well, so what? If a society decides it just doesn’t think the costs of international trade outweigh the benefits, you'd think it should be free to bow out. Froman is probably correct that’s impossible in practical terms. But then shouldn't that impossibility carry countervailing moral obligations to make sure new trade agreements benefit all Americans in a just manner?

That hasn't happened. The boosts to America’s conglomerate national income brought about by recent free trade deals have gone overwhelmingly to the elite, while overseas competition has hollowed out a lot of the manufacturing jobs that supported the middle class. If you look at changes in global income over the last quarter-century, just about the only group that hasn’t seen any serious growth is roughly the top quarter — right where the U.S. working and middle class sits. But the global elite have made out like bandits.

That’s evidence that, when the time came to socially construct these new international markets, elites leveraged the process to make sure all the new income flowed to them. So it’s no surprise that many voters just don’t trust the TPP. Who can blame them?

But go back and look at that global income growth again. The other group that made out like bandits is basically everyone who is poorer than Americans and the average citizens of most western nations — i.e. almost the entire world. The rise of global trade has been a massive boon to global poverty reduction.

So it would be a tremendous loss if the American middle class decided to bow out of participating in global trade. But they deserve to be able to trust that they, too, will be helped by the process.

In his Times article, Porter suggests the way to make sure they get their cut is through European-style social democracy. "European workers displaced by China can rely on a deeply rooted network of public support," he writes. "American workers are pretty much on their own."

That’s a good idea. Unfortunately, the forces in American politics most enthusiastic about global free trade tend to be the same forces that see the market as existing prior to the government, and that see social democracy as a massive and intolerable interference in the market.

Like I said, that "social construction" business is important.