If you despise the European Union, you'll hate the iniquities of TTIP - obsolete before signed

Both candidates, it seems, would ditch The Trans-Pacific Partnership (TPP) and its companion free trade agreement with the European Union, the Transatlantic Trade and Investment Partnership (TTIP). Even Hilary Clinton has voiced concerns. 

Left and right have been oddly united in their suspicion of these proposed free trade treaties; on the right, they are depicted as a further, stultifying regulatory intrusion on national sovereignty, while on the left they are seen as an undemocratic corporate racket. If you loathe the European Union, you’ll hate TTIP, which seems to sanction a still grander invasion by foreign jurisdictions, multi-nationals and arbitrators of national sovereignty.

A perhaps more pertinent criticism, however, is just how out of date such traditionally framed, free trade agreements already are, for the nature of trade is changing in ways that have left regulators and politicians trailing in their wake. You’ll be pleased to know that free trade is alive and well, only these days it is championed by the digital economy, which TPP and TTIP barely touch on, focusing instead on old fashioned concerns around standards, public procurement, and agriculture.

But before examining this phenomenon, and its implications for the major trading blocs, let’s first explode a few myths about the nature of protectionism and free trade. Contrary to popular belief, it was not trade tariffs that caused the Great Depression of the interwar years. Protectionism was a reaction to financial and economic crisis, not a cause. 

This is not to argue that the trade war triggered by the famous Smoot-Hawley Tariff Act of 1930, which imposed swingeing US import charges on more than 50,000 goods, was inconsequential.

To the contrary, it was very much part of the catastrophic breakdown in international relations that characterised the period. Growing calls for protectionist measures today threaten a similarly destructive deterioration in inter-government relations. Trade is the best antidote yet invented to international conflict, but to thrive, it must be seen to be fair, and if it is not, it will exacerbate divisions.

As it is, the direct economic and social benefits of enhanced international trade have always been somewhat arguable and in any case quite hard to quantify.  According to estimates by the European Commission, the potential economic stimulus from TTIP would be €120bn (£96bn) for the European economy, €90bn for the US economy and €100bn for the rest of the world.

These gains, if achieved, are obviously not to be sneezed at, but are also quite trivial in the scale of things and even on the Commission’s reckoning, will take a long time to be realised. With average tariff rates even now at very low levels (less than 5 %), traditional barriers to trade are already close to non existent.

The great bulk of supposed TTIP gains are instead expected to be derived from the elimination or alignment of Non-Tariff-Measures (NTMs), such as laws, regulations and standards. Harmonisation of these requirements tends to be beneficial to big, international corporations, but it can be quite harmful to small and medium sized enterprises, which struggle with the extra regulatory burden.

Be that as it may, many of the other criticisms levelled at TTIP are mainly paranoid nonsense. There is no direct threat to Britain’s national health service from private sector American healthcare providers, as sometimes claimed. It will be left entirely up to individual governments to decide which public services are contracted out, and which are not.

No attempt is being made in the TTIP talks to harmonise intellectual property rights, or pharmaceutical pricing regimes. The pharmaceuticals industry would of course very much like to impose America’s much more protective patents regime on Europe, but TTIP will give it no such opportunity. Indeed the dynamic is likely to be entirely the other way around. With growing pressure on US healthcare budgets, Europe’s cheaper use of generics promises to be increasingly adopted in the US.

Nor is the Investor State Dispute Settlement system, or ISDS – a feature of free trade agreements which has caused consternation among developing countries and theoretically allows international companies to sue the pants off democratically elected governments – much to worry about in this context.

ISDS arbitration procedures are being reformed to make them more transparent, open to participation by political forces and subject to appeal. In any case, I cannot for the life of me see that there is anything wrong in giving investors redress against governments which flout the law of contract.

All the same, you have to question quite how relevant elaborate free trade treaties such as TTIP are to the modern trading environment. One of the features of the post-crisis world is that international trade has essentially stopped growing, in marked contrast to the previous thirty years when it grew at about twice the rate of GDP. This hiatus has now been going on for so long that it cannot any more be lightly dismissed as a temporary, business cycle effect.

Growing protectionism may have played some part, but it’s plainly not the main event. In any case, many have concluded that the big surge in globalisation, which saw emerging markets entering the global economy for the first time and many companies internationalising their supply chains accordingly, may have come to an end.

A fascinating new report by McKinsey Global Institute, Digital Globalisation - The new Era of Global Flows, finds this is very far from being the case. Trade in goods and services may have slowed, with cross-border capital flows declining markedly, but the digital economy is growing like Topsy, leading to an ever more connected world. 

The amount of cross-border bandwidth has grown 45 times since 2005 and is projected to increase by an additional nine times over the next five years as flows of information, searches, communication, video, transactions, and intra-company traffic continue to surge.

In addition to transmitting valuable streams of information and ideas in their own right, data flows enable the movement of goods, services, finance, and people in ways that are not being captured by national statistical agencies. Virtually every type of cross-border transaction now has a digital component. Remarkably, McKinsey finds, digital flows—which were practically nonexistent just 15 years ago—now exert a greater impact on GDP growth than centuries-old trade in goods.

Looking at the underlying causes of slowing trade in goods, you see that labour costs are no longer as important in deciding where to base manufacturing capacity as they were. Closeness to market, quality of the labour force, logistics and infrastructure have become bigger determinants. Only in labour intensive industries such as clothing and textiles are labour costs still a primary consideration.

Automation is shrinking the pool of goods which is sensitive to wage costs, which in turn is pressing down on trade. This is plainly good news for service based economies such as the UK and the US. At the same time, the internet has given small scale manufacturing and service industries a global market which is largely divorced from the protections of the major trading blocs.

There is a sense in which digital innovation is rendering Byzantine “free trade” treaties such as TTIP, substantially obsolete before they are even signed, though this is my inference, not McKinsey’s. By the by, protected single markets such as the EU or the US look less relevant in promoting trade. As ever, the politicians and their officials are several steps behind the markets.