From the Swiss Formula to the Swiss Cheese Approach to Trade

It is a sign of times that many government officials today spend considerable time thinking about what products that should not be embraced by efforts to liberalise trade and subject to trade disciplines of the World Trade Organisation. At an event last week, where I presented a paper on trade and biofuels, it was suggested by a government representative that new bilateral trade agreement show have specific provisions that carve biofuels and feedstock out of trade agreements, allowing governments to use measures that discriminate between products.

Likewise, last week there was among trade folks an interesting discussing about some proposals from the U.S. and Malaysian governments about finding mechanisms in the TPP to exempt tobacco products from trade disciplines. Cato’s Simon Lester published a good piece about this idea last week – and he discussed it at greater length in a paper from last year.

It is a strange type of discussion. I don’t know how many different type of regulations that exist for tobacco products, but they are many and very few of them have had any consequences for trade or trade rules. The only recent case in the WTO concerned a measure by the U.S. government that was ruled against – but it was ruled against because it was blatantly discriminatory. The U.S. could easily have upheld its own regulation – if it also had designed a regulation that would have consequences for tobacco producers in the U.S. and not only tobacco producers abroad.  And this is the thing with trade rules: they are designed to protect against discrimination, not to shield trade from regulation.

The TPP debate also concerns investment protection rules and a case brought against Australia’s plain packaging rules under the Hong Kong-Australia bilateral investment agreement. Critics claim this case is not about discrimination, but about a government’s right to regulate – and, hence, that it is not a legitimate case. It may be true that the case does not concern discrimination, but investment treaties are not only about protecting against discrimination. They are also about protecting against government actions that may have drastic consequences for an individual foreign investor – and that take away some fundamental commercial rights that other producers still can enjoy. I don’t know what the outcome of that dispute will be, but my point is that government’s have signed such treaties because they are in many instances a necessary condition to enjoy foreign investments and that they deliberately come with provisions intended to protect the value of an investment from sudden government action that disproportionally hits a foreign investor. And like we have rules to balance difference interests in trade, we need such rules also for investments. Governments do not sign away a right to regulate in investment treaties, but they subject themselves to disciplines for regulations. If they want to take actions that have consequences for a foreign investor, they have to do that on solid grounds. And this is what will be determined in this case.

The larger problem is that this new approach to trade negotiations is proliferating. Governments and various trade lobbies are promoting ideas that are based on a cherry-picking approach to trade negotiations. Some products are considered to be “good” and are worthy the embrace of an open and rules-based system for global commerce. Products that are “bad”, however, should be denied that treatment. And if you look at various proposals discussed recently, the list of products that are not considered worthy of such treatment gets quite long. Apart from fuels and tobacco, there are various proposals with the same effect on chemicals, pharmaceuticals, alcohol, raw materials, timber products (from furniture to toilet paper), et cetera.

This is not a new situation. The world trading system has always been challenged by governments that think some products should not be covered by agreements. But the trading system has also advanced in a way that contradicts that view. You don’t have to spend much time thinking of this to understand why approaches to trade liberalisation and rules – like the so-called Swiss formula used in tariff negotiations – cast a very wide net and include all products that are considered legal. If one government wants to pick one set of products out, other governments will reciprocate by taking other sets of products out. And what you have after a while is, at best, a Swiss cheese-style trade agreement. At worst you don’t have a trade agreement at all.