And why it is so difficult to draft an US / EU trade deal.
I would like to take a moment to quickly explain why these preferential trade agreements are such a big deal, and where the pitfalls are.
There is a lot of talk about tariffs recently, but they are really just a small factor and I personally think their importance is blown out of proportion. Tariffs are a tax paid by the consumers of the importing nations usually put in place to favour local products.
But much more impotent are regulations. So tariffs might make an imported product more expensive, but so do regulations and they might even forbid you to sell it at all. Environmental standards vary, some materials might be classified toxic in different consecrations. Financial constructs might be unethical, foods considered potentially harmful, and so on.
Checking and enforcing these rules is time consuming and expensive.
But we are all humans, so what is toxic to one of us, should be toxic to all. Surely we can agree on a common set of rules? In fact that is what made the Single market so successful. But in the way this is done lies the problem.
Basically the EU is favouring the precautionary principle (Vorsorgeprinzip) while the USA is heavily champion the aftercare model (Nachsorgeprinzip). While both of them are valid models with their pros, cons and flaws they are also completely incompatible.
- Precautionary principle (EU):
Before a product is put on the market the company has to prove extensively that it is safe. Should it turn out that this product was not safe after all, due to factors the company couldn’t know and that it can prove due care. The damage inflicted to the company is regulated and limited.
pros: Generally safer products. Better security for business operations, resulting in more job security, etc.
cons: More government overhead. Higher cost and time to bring new product to market. Not just products, also medication. (And this also stifles innovation as a lot of investment is necessary to bring anything to market and can’t just try out new products.) Less potential reparation for claimants or injured in case something does got wrong.
flaws: Companies might decide to willingly break regulations if the predicted gains are higher than the set upper limit for reparation. This is particularity common in financial services, but not limited too. Industry bodies will also try to push for the low boundaries to be set.
- Aftercare principle (USA):
A company has to do little before a product can be introduced on the market. If it turns out to be dangerous, there is virtually no limit to the extend they can be sued. The idea is that companies decide themselves how much care to take. Government only gets involved if things go wrong, but can take offending companies out of business.
pros: Innovative products can hit the market much faster. Smaller leaner government. Victims can be fully compensated.
cons: Consumers are exposed to more harmful substances and practices for longer period. (Even when discovered, it might take years for courts to push for action.) Even if the system works, because these companies are almost always limited, it is often not the stakeholders but rather the workers losing their job that are hit hardest.
flaws: Too big too fail completely breaks this system. Reliance on a jury based court system allows for manipulation of opinion (funny video here doing a good job explaining this). Evidence and facts often play less of a factor in the final regulation.
Now of course this was only a very broad overview. Just think about all the other sectors like services, finance, etc.
But hopefully it gives a bit of better idea of the really complex issue when it comes to comprehensive trade deals.
I am think of following this up with some more of my own thoughts at a later time. So if you have any comments or additions, please let me know, I welcome discussion!