This Time is (Not) Different: Trade and the Free Flow of Capital

On May 10, I joined the FT Weekend Festival to participate in a panel on “trade, tariffs and taxes: the new realities of the cost of doing business.” The panel was moderated by Rana Foroohar and included Professor Ken Rogoff and Stephen Vaughn, former General Counsel at USTR under Ambassador Lighthizer.

In this post, I’ll cover some things we didn’t have time get into on the panel. I draw on one of Professor Rogoff’s books, co-authored with Professor Carmen Reinhart: This Time is Different.

This Time Is Different Syndrome

This Time is Different was published in 2009, in the wake of the financial crisis. At its core, the book is about the hubris of financial elites, who believe their omniscience insulates them from the mistakes of their predecessors. The authors dub it “this-time-is-different syndrome.”

This-time-is-different syndrome applies to more than just financial elites, though. The same tendencies affect the trade blob. We declare ourselves enlightened, dismiss historical lessons, and repeat avoidable mistakes.

“This Time is Different” Syndrome and Trade Policy

As I have written many times, the policymakers who established the WTO either lacked interest in, or were ignorant of, the true trade vision of the architects of the post-World War II economic order. Those architects had lived through the gold standard, the Gilded Age, the Great Depression, and two World Wars. They wanted to create a set of trade rules to prevent, in the words of John Maynard Keynes, “the disastrous consequences of a laissez-faire system.” That set of rules was the Charter of the International Trade Organization.

Alas, the WTO hews closely to the very system Keynes rejected. Where the ITO reflected the internationalization of the New Deal, the WTO reflects the internationalization of Reaganomics and Thatcherism. The latter is about deference to the marketplace and skepticism of government’s role in shaping markets. The former is about promoting shared prosperity and establishing disciplines on excessive economic power, whether of private or public actors.

The lack of labor, environmental, and antimonopoly rules at the WTO reflected a laissez-faire orientation that — as laissez-faire policies are wont do — aggravated inequality, harmed the planet, and paved the way for the rise of monopolies, private and public.

This Time is (Not) Different: Trade Agreements and Capital Mobility

The book explains that financial liberalization is a “precursor “to crisis. Liberalization facilitates high cross-border capital mobility, which facilitates surges of capital inflows, which facilitate asset bubbles, which burst… leaving a crisis in their wake. (151-161). Bretton Woods negotiators were aware of risks associated with undisciplined cross-border capital flows: the highest incidence of banking crises was during the Great Depression, and governments took action to discipline financial markets and capital flows thereafter. (204) There was “relative calm from the late 1940s to the early 1970s.” (205) Cross-border capital flows are not per se a problem - but as the book demonstrates, if left unregulated, they contribute to boom/bust cycles that have devastating consequences.

Modern American trade agreements are not silent on the subject of cross-border capital mobility. They include investment provisions that require governments to allow it. And not just capital mobility, but capital mobility “freely and without delay.” So… the high cross-border capital mobility that facilitates surges of capital flows, asset bubbles, and bubble bursts.

One of those agreements is the U.S.-Korea agreement, KORUS, initially concluded in 2007. KORUS and other pending deals did not get a vote in Congress until several years later – in the case of KORUS, 2011. In the meantime, we went through a global financial crisis, and countries that had big surges of capital inflows, like Iceland, ended up using capital controls to dig themselves out of the mess. Yet even agreements negotiated after the financial crisis -- like the 2019 updated KORUS itself, and the renegotiated NAFTA -- included capital mobility provisions designed to restrict the government’s ability to constrain these surges.

Last week, the United States and the United Kingdom negotiated an agreement to negotiate. It includes digital trade. There be dragons with digital trade negotiations, as private monopolies look to use trade agreements to preserve if not expand their dominance at home and abroad.

But the more interesting part is that financial services are included as a subset of digital trade. Usually financial services is its own chapter.

What, if anything, should we take from this frame? Will the crypto crowd succeed with this Administration where they failed with the last one, in trying to get their preferred (de)regulatory regime embedded in an international agreement? Will the Administration favor tech firms over banks?As Reinhart and Rogoff point out, it is not only financial liberalization that is often a precursor to financial crises, but financial “innovation.” (217)

The US-UK agreement is described as “historic,” which is a bit of a stretch. If we want to reference a truly historic US-UK agreement, we should look at what FDR and Churchill outlined in 1941 — an agreement about collaboration in service of freedom from fear and freedom from want. It was the wellspring for both Bretton Woods and NATO.

Capital Flows and Negative Externalities

Cross-border capital mobility isn’t only about asset bubbles. It’s about arbitrage. Cross-border capital flows in a trading system that does not establish a floor for labor, the environment, or the tax base can move around the world and arbitrage those regimes. They can even put downward pressure on those regimes. Nice factory you got there – would be a shame if we moved it to a place that doesn’t recognize independent labor unions, weakens environmental rules to attract investment, and/or doesn’t make me pay too much in taxes.

As we convinced ourselves we’d reached a level of sophistication that meant financial liberalization was an unfettered good, we failed to provide guardrails against the kind of arbitrage that leads to a race to the bottom. Seen through that lens, it’s not too hard to understand the worker backlash against deindustrialization that was aggravated by trade policy choices. Yet that’s a dynamic too many neoclassical economists still don’t want to accept.

The May 10th Agreement

The FT Weekend Festival panel was on May 10th. Coincidentally, that’s the anniversary of a deal that House Democrats reached with the George W. Bush Administration on those pending trade agreements mentioned above, like KORUS. The agreement meant that U.S. FTAs would, among other things, include labor and environmental rules enforceable on the same terms as the goods and services chapters.

While the United States has earned its reputation for using these agreements to force American monopolists’ priorities down other countries’ throats, May 10th was a situation in which the United States showed leadership in seeking to address negative externalities. For many years thereafter, other countries only included these provisions in trade agreements if the United States was at the negotiating table. The EU’s agreement with Mercosur, for example, does not have labor and environmental provisions enforceable on the same terms as goods and services chapters Here in the United States, despite the May 10th agreement. Project 2025 claims that labor is “trade-unrelated.” But labor, like capital, is a factor of production.

Why have we privileged capital over labor?

Revisiting Bretton Woods

As we confront a United States that is currently uninterested in wearing the mantle of global leadership, we will have to think about what kind of system we believe should succeed the one we’ve had.

Let’s lose the hubris that infected the post-Cold War architecture and recognize that this time is not, in fact, so different. The rules of economic governance require guardrails to protect against excessive behaviors that harm democracy today, just as they have before.

Times change; people don’t.