{F} ree Trade Agreements (FTAs) benefit America’s economy and strengthen diplomatic alliances when they are done right. Yet, every single FTA the U.S. currently has in the works has stalled. What can be done to fix this problem?
In a new report, we propose a two-part strategy to get FTAs moving again. One, keep them simple. Two, start with a readily achievable agreement to set a precedent that bigger agreements can follow. Switzerland would make an excellent partner for setting a free-trade precedent.
The core concept behind a simple FTA is mutual recognition of one another’s regulations. Under mutual recognition, if American regulators approve a product, then it is automatically approved in partner countries, and vice versa. With that sort of regulatory trade barrier lowered, consumers can quickly benefit from wider selection, more affordable prices, and faster access to new innovations.
Producers would benefit from faster approval times and lower regulatory costs for pharmaceuticals, appliances, agricultural products, electronics, and countless other industries, while gaining access to new markets and new customers.
Regulators would benefit by avoiding redundant approvals in each partner country, saving agency resources.
The potential benefits to all concerned are enormous. Drug approvals in the U.S. can take over a decade and cost more than a billion dollars per drug. Europe, Japan, and other allies have faster and less expensive approval systems with similar or better safety records.
Mutual recognition is appropriate for strong allies in developed countries with comparable regulatory standards. Our regulations may not be identical but will be similar enough for trade purposes.
Unfortunately, new trade deals are overdue with Europe, the U.K., and other allies. The years-long negotiations are so daunting the Biden administration is unlikely to even start the process, even in a second term. Sticking to mutual recognition and a few other key trade-related provisions would make those important FTAs much easier to pass.
The everything-bagel approach to trade agreements has failed. Beginning with a side agreement attached to the North American Free Trade Agreement (NAFTA) in the 1990s, subsequent agreements have taken on more and more trade-unrelated issues. Environmental concerns, labor standards, intellectual-property provisions, and the like have taken over trade agreements to the point where the United States-Mexico-Canada Agreement (USMCA) that replaced NAFTA is more than 2,000 pages long.
Worse, the Biden administration’s proposed Indo-Pacific Economic Framework (IPEF) no longer has any trade provisions at all and consists entirely of trade-unrelated issues.
Because politicians are reluctant to try new things, the mutual recognition-based approach needs a proof of concept. Switzerland is an ideal partner with which to test it.
Switzerland and the U.S. already enjoy a friendly relationship, which should make negotiations easier. Both countries also have relatively liberal economic policies. According to the Fraser Institute’s most recent Economic Freedom of the World report, Switzerland is the world’s third-freest economy, while the U.S. ranks fifth, out of 165 countries. Similar starting points also make for smoother negotiations.
Consider that if the U.S. and Switzerland had a mutual recognition FTA, the infant-formula crisis of 2022 would have been much less severe. Protectionist U.S. regulations such as tariffs and ever-changing label and ingredient requirements shut out foreign formulas on purpose, while cozy state contracts have concentrated the domestic industry into just four major producers.
When one factory went down in Michigan, the whole system collapsed, and many families had nowhere else to turn. Meanwhile, stores just minutes across the Mexican and Canadian borders were fully stocked.
Once Congress temporarily undid some of those regulations, Swiss producers were among those who sent formula to desperate families. If the U.S. had mutual-recognition agreements in place, it would not have taken an act of Congress and the president invoking the Defense Production Act to do what companies are willing to do on their own.
The mega-agreement era of FTAs has been a disaster. Stuffing as much as possible into each FTA has worked about as well as America’s annual omnibus budget battles and shutdown dramas. Trade agreements should stick to trade, and other issues should be negotiated separately.
A mutual-recognition agreement with Switzerland or another close ally could set a precedent that can lead to larger agreements that would boost economies around the world while strengthening alliances against Russia and China.
Ryan Young is a senior economist at the Competitive Enterprise Institute (CEI). Kent Lassman is CEI’s president and CEO. They are coauthors of the new study, “Toward a US-Swiss Trade Agreement.”