“Risk” and “risk management” are not normally words applied to transatlantic trade. In general, observers assume trade is mutually beneficial, and that the benefits outweigh any costs.
Of course, life is not so simple: even in mutually beneficial interactions, there are possible downside effects, or “risks,” where the amount of risk faced is a product of the hazard (downside effect) and the probability of that effect occurring.
In that sense, however, “risk” is again an inappropriate term: although trade is always beneficial in the aggregate, some individuals are certain to be at least relatively worse off. This is not a “risk,” but an inevitability that comes with any economic growth, including that generated through trade.
The analysis that follows will therefore focus on two more narrowly defined areas of a government’s role in managing risk within transatlantic trade policy:
- the risks posed to the consumer, environment, and investors in products or services supplied from the transatlantic trading partner; and
- those posed to politicians and governments in considering embarking on an ambitious but realistic comprehensive program to liberalize transatlantic trade and investment
Managing Product and Service Risks in Transatlantic Trade
The Theoretical Level
The primary role of governments in modern societies is to protect their citizens—from foreign aggression, of course, but also from abusive labor practices, unhealthy environments, and unsafe products and services.
This last is the only relevant aspect when it comes to trade, that is, the export and import of goods and services across borders. And here, the focus is specifically on the level of safety demanded of goods and services on the market to reduce the likelihood of harm from hazards to consumer safety, to investors (in the case of financial services), or to the environment, whether the goods and services are locally produced (domestic trade) or imported from a foreign jurisdiction (international trade).
A government strives for a certain level of safety through legislation/regulation of goods and services available to its consumers and the implementation/enforcement of these measures by regulatory bodies. The level of regulation of goods and services chosen in a country reflects the risk preferences of the government of that country. In countries with little or no input from civil society, the preference level will reflect that of government officials; in an autocratic dictatorship, the preference of the ruler. In democratic societies, however, with a transparent and rules-based approach to governance, the risk preferences of the government will in general reflect the risk preferences of the voters as expressed in elections.
Reducing risk, or the likelihood of a negative effect, costs money. Ideally, the cost of reducing risk will be less than the benefits of so doing. In a democratic society, the level of risk accepted by the polity at large will therefore tend to be a function of income—the lower the level of income and wealth in a country, the more risk citizens will accept in exchange for less regulation and more growth. Alternatively, the higher the level of income and wealth, the less important the additional costs of risk mitigation and the greater the level of protection demanded. This is a wholly domestic affair—governments will regulate to the risk preference demanded even in the absence of imports from another jurisdiction.
- AICGS Business & Economics Program