Elizabeth Warren is Capitol Hill's premier proponent of strict bank regulation. She's also, increasingly, the loudest voice of Democratic Party opposition to the trade promotion authority legislation the White House needs to complete a major trade deal with several Asian countries.
In a speech Tuesday night, she linked the two issues, arguing that "after fighting hard to protect Dodd-Frank for years, Democrats in the next few weeks could give Republicans the very tool they need to dismantle Dodd-Frank." This is technically true, though a bit of a red herring in practice. But Warren is raising an important issue that's largely been missing from the debate on the Hill — TPA, if it happens, will extend into the next administration, so blind loyalty to Barack Obama isn't a good reason to vote for it.
Banks want to use trade to undermine Dodd-Frank
Warren said the specter of gutting Dodd-Frank through the trade process "is hardly a hypothetical possibility" as we "are already deep into negotiations with the European Union on a trade agreement, and big banks on both sides of the Atlantic are gearing up to use that agreement to water down financial regulations."
This is a reference to the Transatlantic Trade and Investment Partnership (TTIP), a US-EU economic pact that is being negotiated but is much further from completion than the Trans-Pacific Partnership.
The specific issue is that at the moment the United States, through the Dodd-Frank process, imposes rules about how much banks can borrow. These rules are stricter than the rules used in the European Union. Meanwhile, at the behest of American financial services companies, the US is asking the European Union to make regulatory changes that would make it easier for US-based firms to try to gain clients and business in Europe. In exchange, on behest of European banks, EU officials have asked the US to bring our borrowing rules down to the European level. The Obama administration is very committed to its bank capital rules, so they refused, and the entire financial services aspect of TTIP blew up last summer.
Warren's point is that President Ted Cruz could change his mind about this, give the Europeans what they want, and gut Dodd-Frank.
President Cruz doesn't need trade to gut Dodd-Frank
Warren is right about this, but it's also irrelevant. A Republican president looking to gut Dodd-Frank isn't going to need anything as labyrinthine as a trade pact with Europe to wreck Obama's signature financial regulation initiative.
For one thing, House Republicans keep passing bills to repeal parts of Dodd-Frank. They don't pass because the Obama administration opposes them. But with the Cruz administration's support, huge swaths of the bill would simply be repealed the old-fashioned way.
Beyond that, there is a lot of regulatory discretion in Dodd-Frank. The new president will appoint new personnel to run the SEC, CFTC, and CFPB and the Treasury Department. Later, the new president will appoint a new Fed chair and colleagues on the board. If these people want to go easier on the banks than Obama, that is exactly what is going to happen. Unlike in the case of environmental or civil rights regulations, there are no private causes of action that a regular citizen can take if she feels bank supervision is excessively lax.
Long story short, while it is easy to image a scenario in which a Republican president undermines bank regulation in 2017 it is difficult to imagine a scenario in which possession of Trade Promotion Authority is the linchpin of the scheme.
Anything is possible with modern trade deals
The larger issue here is that modern trade deals have become so expansive than essentially anything could get done in a trade deal.
Some of this is simply sleight of hand, as when content and pharmaceutical companies managed to get changing other countries' intellectual property rules onto the trade agenda. But the thornier issue is what's known as "regulatory harmonization."
For TTIP, the automobile industry is a very relevant example. Both the United States and the European Union regulate cars for safety. But the standards used are different. Consequently, even though many car models are sold in both the US and Europe, under the hood they're actually somewhat different. A Volkswagen Jetta bound for the US market isn't identical to one for the European market. Needing to make two different models of each vehicle is a hassle for car companies. It also means that if a European company thinks a given model won't be very popular in the US (or vice versa) it won't bother to build a US version.
Harmonizing the rules so the exact same cars could be sold on both continents would be a win for consumers.
At the same time, if you get a bunch of auto industry lobbyists in a room with a mandate to propose a harmonious set of regulations, they are very likely to come up with regulations that are both harmonious and lax. In principle, in other words, a trade agreement could fully or partially unravel pretty much any regulatory system. That's not to say that such an unraveling is likely in practice, but a determined opponent of new trade deals can accurately paint any number of hypothetical deregulatory scenarios.
Trade Promotion Authority will outlive the Obama administration
Warren's soundest argument is her simplest one: TPA isn't just about Barack Obama and the trust you have (or don't have) in his team.
The White House is leaning on Congressional Black Caucus members and other Obama loyalists on the Hill to try to scare up more votes for Trade Promotion Authority. But the authority Obama is asking for will last into the next administration, which will likely use it to finalize negotiations with Europe and perhaps to start work on some new deals. This means that arguments grounded in simple partisanship are misguided. There are some issues — and the inclusion of financial services in TTIP certainly counts as one — where Obama's approach likely differs from what another president would do.
Members of Congress considering the issue need to decide whether they, in general, want to see presidents negotiating trade deals, not whether they have personal confidence in Obama.