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Trade Agreements Under Attack: Can They Be Salvaged And Is It Worth It?

Trade agreements are under attack because of a combination of traditional and new factors.
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Part of the current anti-globalization backlash in advanced countries takes the form of opposition to trade agreements. Presidential candidates in the United States have come out against the Trans-Pacific Partnership (TPP), with one of them promising to renegotiate the long-standing North American Free Trade Agreement (NAFTA); negotiations on the Trans-Atlantic Trade and Investment Agreement (TTIP) have been suspended, among other reasons to minimize the risk that resistance may impact elections in some European countries; and the Comprehensive Economic and Trade Agreement (CETA) is on edge on the decision of the regional parliament of small Wallonia, Brussels, to oppose an European Union-wide agreement with like-minded, friendly Canada.

Trade agreements are under attack because of a combination of traditional and new factors, from "trade 101" opposition of protected producers to new public fears of the regulatory race to the bottom. Addressing these concerns with the right policies and the right arguments is the way forward to ensure that deep agreements can receive public support and deliver on their promises of boosting trade and improving welfare. The experience of Costa Rica and the current debate in several advanced economies offer useful insights.

It was October 7, 2007. Costa Rica was to decide whether it would be part of the United States-Dominican Republic-Central American Free Trade Agreement (CAFTA). In the first referendum in its history and with 60 percent of electoral turnout, the country voted for CAFTA - the "yes" camp won by three percentage points.

CAFTA is a deep trade agreement, like others. It establishes a framework to govern trade and investment flows between the parties, while phasing out tariffs and disciplining other trade measures. It also includes chapters on labor and environment and a mechanism for settling disputes, including investor-State controversies. CAFTA's approval confronted opposition in all countries (including in the United States) but it was particularly debated in Costa Rica, the last country to ratify the accord after a tortuous process that lasted almost five years after the conclusion of the negotiations.

The reasons for the controversy may not have been evident at first glance. Costa Rica is considered a success story in that it has transformed itself from a commodity exporter to a diversified economy, integrated into global value chains. Life sciences, business and information process outsourcing and eco-tourism drive the country's exports, with the United States as its major trade and investment partner. CAFTA was a natural step to consolidate this relationship, strengthen its already solid network of trade agreements, continue to attract investment and most importantly, create more and better jobs.

Public sector unions strongly campaigned against CAFTA. They opposed Costa Rica's commitment in the agreement to open for competition the long-held public monopoly on telecommunications. But opposition stemmed from other sources as well -and understanding this was essential to counter the anti-trade narrative that risked not only CAFTA's approval but Costa Rica's growth model.

First, today's free trade agreements are complex and long documents, encompassing many topics (to govern international production networks). Once they move to the forefront of the public discussion, the agreements' content becomes a source of anxiety. Some of these concerns are legitimate and merit a good discussion. Other worries, however, stem from misconceptions lacking any rationale but fueled by social media (and, in some cases, by a transnational network of opponents); in Costa Rica, some of the most extravagant claims included that as a result of CAFTA, the universal healthcare system would go broke, public education would be privatized and sovereignty over water resources would be at stake. One by one, all of these myths had to be debunked with data and evidence.

Second, Costa Ricans in earnest worried about the impact of the agreement. They knew CAFTA would promote growth and this was good, but wanted to make sure that more people could participate in the opportunities associated with enhanced trade and investment. Programs were demanded to strengthen skills -which included IT and English language proficiency- and to help small and medium-sized enterprises address binding constraints. There was also concern for those perceived to be in danger of being negatively impacted by the agreement, mostly small-scale farmers, who after a long transition period, would nevertheless end up facing competition from larger farmers, who sometimes benefited from domestic support from a richer treasury.

Third, some groups were concerned that CAFTA would erode their benefits. There were probably three of these groups: unions in the public telecom monopoly (but other public sector unions in solidarity), rice producers (five or six large producers who have benefited from a long history of protection at the expense of the poorest consumers) and to a lesser degree, firms who copied agrochemical and pharmaceutical products, irrespective of intellectual property rights. This was the core of the opposition to CAFTA. The rationale underlying the resistance needed to be explained to the public, which was not always easy to do -unions and rice producers have a strong capacity to mobilize in the streets. And this is always scary for politicians and citizens alike.

Fourth, part of the opposition to CAFTA had an ideological undertone. The referendum took place against the backdrop of populist leaders coming to power in some Latin American countries. In an era of high oil prices they were ready to contribute in kind, and otherwise, with their brothers in the region, in particular with the purpose of defeating the "empire from the North" in an otherwise friendly ally of the United States.

In this context, the campaign for CAFTA was not easy. It demanded a leader -President Oscar Arias- who was ready to invest all of his political capital in having CAFTA approved. But it was not enough. It required those in favor of CAFTA -entrepreneurs, workers, farmers, students and Costa Ricans from all walks of life- to come together under a common umbrella to defend CAFTA. And that is what happened. A civil society movement was formed and drove the pro-CAFTA campaign, which included putting out the intellectual rationale for the agreement, the massive communication effort, including in social media and the real support on the streets -with a pro-trade demonstration- and on the referendum day.

The process was very much like a roller coaster. Public opinion fluctuated day by day and at the end, it became pretty emotional. A few days before the referendum, the "no" camp was leading the polls. At the end, the "yes" won. The huge effort that leaders and ordinary Costa Ricans put into making it work delivered. There was also probably a bit of luck. Referenda can be risky processes and at the end, anything can happen.

CAFTA came into effect in Costa Rica in 2009. After five years of entry into force, a study by the World Bank concluded that the country has derived significant positive benefits from the agreement, including increased exports and foreign direct investment. The telecommunications market has shown extraordinary growth in access and price reductions, and service supply is now abundant. Concerns about impact of CAFTA on different areas has not materialized. And Costa Ricans came back to their own lives. The country continues to face many challenges, for sure, but it is better off with CAFTA than without it. There is a realization that domestic policies must continue to play their part and deliver.

One very important point that the CAFTA referendum shows is that despite the well-documented positive impact of trade on growth, productivity and poverty reduction, there is the need to make a case for it. This requires a combination of being open in recognizing valid concerns and shortcomings, being proactive in implementing policies to bring many onboard and promote growth, and being ready to engage and tackle the irrationality that quite frequently surrounds the discussion. Otherwise, the "no" may prevail to the detriment of the majority that needs the most the opportunities associated with trade.

In the ongoing discussion on trade agreements in some advanced countries, three additional elements seem to be relevant. First, there is a vicious circle in many advanced economies of low growth, diminished expectations and trade pessimism. As one feeds into the other, it is difficult to find the consensus to re-ignite growth through open trade -though it does not follow how opposition to trade agreements could help re-ignite growth. Second, trade agreements seem to have become the venue to channel the rejection of other dimensions of globalization. This is probably true in the United Kingdom and Germany, where the anti-trade rhetoric is really a rejection of immigration. And third, there is a concern, particularly in some European countries, that trade agreements may reduce regulatory standards, which somehow seems to ignore the importance of regulatory cooperation in a world where production is fragmented in different countries. In going forward, addressing these concerns will be as relevant as tackling the most traditional elements of the opposition to trade agreements.

Evidence from a comprehensive database on trade agreements at the World Bank shows that deep trade agreements -at the core of the current discussion- significantly increase trade in goods and services. In a low-growth environment, this is not a minor consideration. Trade agreements need to be salvaged. This will require a combination of solid analytical underpinnings, strong political leadership, complementary domestic policies and savvy communication strategies. It is not easy, but it is definitely worth it.