Mega-Regional Trade Negotiations: Implications for Emerging Atlantic Economies

Mega-Regional Trade Negotiations: Implications for Emerging Atlantic Economies

Giraffe and cloudsIn the mills of global trade negotiations there are two significant Preferential Trade Agreements (PTA’s) that are expected to reshape the global trading system: the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP). The agreements will have a direct impact on party states[1], affecting tariff levels, non-tariff barriers and establishing harmonised rules on trade, but will also resonate throughout the global trading system as party states contribute a significant amount to global trade.

To this effect Peter Draper and Memory Dube conducted a high-level strategic analysis of the effects these agreements will have on Atlantic African and Latin American states. This is the latest in a series of analyses on mega regional trade agreements which previously looked at the impact they could have on the EU, ASEAN and ACP group of countries.

The first thing non-party Atlantic states need to consider is that the agreements will have an impact on market access as trade barriers are liberalized between party states. Non-party states might also see preference erosion, particularly in products that compete directly with liberalized trade amongst the parties. Regardless of how market access is affected, non-party states are likely to experience trade and investment diversion as party states continue to integrate. The extent of trade and investment diversion also hinges on negotiations pertaining to Rules of Origin (RoO) and trade in services, which in turn will have an impact on non-party states’ flow of trade in goods, services and more importantly foreign investment.

The TPP and TTIP negotiations also hold a great opportunity for progress in terms of trade rules and harmonising regulatory standards. Should coherent, uniform standards and requirements emerge, costs pertaining to compliance for third parties could decrease, but there is a risk that these standards will be high enough to constitute a barrier for non-party members, especially LDC’s. Negotiations on rules range from the trade in goods, through intellectual property rights, investment protection, and competition policy. The opportunity for non-party states lies in leveraging current agreements with party states to align these rules for greater participation by non-party states, simplifying processes and reducing costs by having universal, predictable rules.

Atlantic African and Latin American states will need to re-evaluate their positions on the disciplines agreed upon in the mega-regionals to continue attracting investments from party states and enjoy sustained market access; this being said the greatest hurdle for non-party states will be political willingness to reform policies to align with the mega regionals. Consequently, the article investigates existing trade communities in Atlantic Latin American and African countries in light of their historical frame of economic integration. They highlight the divisions among Latin American economies’ attitudes towards global economic integration, especially with the West, and Africa’s major economies, which seem to be leaning increasingly towards inwards-looking trade and industry policies.

Draper and Dube envisage three scenarios based on the outcome of the TPP and TTIP negotiations. The first scenario, full success, envisages a utopian trade agreement with complete liberalization of trade barriers. In this, highly unlikely, scenario non-party states will suffer trade diversion and competitive liberalization will compel them to liberalize their own trade and investment regimes. The second scenario, partial success, takes into consideration the likelihood of trade-offs and concessions expected in trade negotiations, and accepts comprehensive liberalization of tariffs and regulatory compromises as a likely outcome. In this scenario non-party states will have more room and time to adjust their trade strategies and the pressure to negotiate reciprocal trade agreements with developed states will increase marginally. The third scenario, failure, sees a modest agreement on tariff schedules and largely hortatory declarations on achieving future progress. In this scenario the role of global trade leadership will be heavily contested by the US, EU, and China. For non-party states this means pressure to establish reciprocal trade agreements with competing powers will increase. The outcome of these reciprocal agreements will depend on how non-party states play the competing powers against each other, but regardless of the extent of failure in this scenario the WTO will continue to drudge along without further resolve.

The constant in all three scenarios is that non-member states will continue to be pressured to comply with rigorous behind-the-border regulatory norms and to liberalize trade policy. Atlantic Latin American and African states that position themselves to be included in Global Value Chains, via regulatory upgrades and trade and investment policy liberalization, will be better placed to manage the transition.

The full article, as published by the German Marshall Fund of the United States (GMFUS), is available for download here. Another article pertaining specifically to the strategic implications for South Africa is available here.

In this podcast, Guillaume Xavier-Bender of GMFUS interviews Peter Draper about the impact that the Transatlantic Trade and Investment Partnership (TTIP) will have on countries in the South Atlantic.

 

[1] TPP members: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States of America and Vietnam.

TTIP members: European Union and the United States of America.

Mega-Regional Trade Negotiations: Implications for Emerging Atlantic Economies

ASEAN in a Mega-Regional World

Giraffe and cloudsIn trade policy the negotiating action is now in “mega-regionals” – big-block trade agreements revolving around one or more major powers. ASEAN is involved in two, the American-led Trans-Pacific Partnership (TPP) and the Chinese-led Regional Comprehensive Economic Partnership (RCEP). Are mega-regionals good for trade and economic growth? Will they spur regional and global economic integration? Where does ASEAN stand?

As of 2013, there were 261 free trade agreements (FTAs) in Asia, over a hundred of them operational. Asia’s three major powers, China, Japan and India, are heavily involved. Among ASEAN countries, so are Singapore, Malaysia and Thailand. ASEAN also has its own ASEAN Free Trade Area (AFTA), now upgraded into the ASEAN Economic Community (AEC). And ASEAN has collective FTAs with China, Japan, South Korea, India, and Australia-New Zealand.

The strength of FTAs varies enormously. US FTAs in Asia are by far the strongest. They have the widest sectoral coverage and go deepest with disciplines to ensure market access. But they contain exemptions for politically sensitive sectors, and are riddled with complex and discriminatory rules-of-origin (ROO) requirements. EU FTAs are the next strongest. But intra-Asian FTAs are generally weak – they are “trade-light”. The better ones remove tariffs on most goods, but they are weak on disciplining protectionist regulatory barriers in goods, services, investment and public procurement. That is true of Chinese, Japanese and Indian FTAs, as well as the FTAs of ASEAN countries.

Overall, the new wave of FTAs has not given a big boost to trade and foreign investment. But nor has it impeded trade growth. Effects have been broadly neutral, or at best marginally positive.

Now attention has shifted to mega-regionals. There are three being negotiated: TPP, RCEP, and the EU-US Transatlantic Trade and Investment Partnership (TTIP). TPP’s membership is twelve to date (USA, Mexico, Canada, Chile, Peru, Australia, New Zealand, Japan, Singapore, Brunei, Malaysia and Vietnam). It started earlier than the others and is the closest to completion. RCEP’s members are the ASEAN countries plus China, Japan, South Korea, India, Australia and New Zealand.

Taken together, these three mega-regionals account for the bulk of world trade and GDP. Mega-regionals potentially amplify the gains from trade liberalisation. If done cleanly and comprehensively, they would iron out distortions caused by multiple and overlapping FTAs among members (such as differing ROOs). With a bigger integrated economic space, they can reap economies of scale and spur technological innovation. This is particularly important for global supply chains. Regional production networks to serve global markets are the biggest drivers of productivity, employment and growth in international trade. They have a big stake in integrated regional and cross-regional markets. Still, mega-regionals are not “multilateral”: they discriminate against non-members. That is a big potential source of disruption to global supply chains.

TTIP and TPP are the most ambitious mega-regionals. They cover markets for all goods, services, investment and government procurement, and go deep into regulatory disciplines, including on intellectual property, food safety and technical standards, and customs procedures. In TPP, “twenty-first century” innovations include rules to facilitate supply chains and e-commerce. But there are major barriers that stand in the way of success. Protectionist lobbies are big obstacles in several countries, including parts of agriculture and autos in the USA, agriculture in Japan, government procurement in Malaysia, and state-owned enterprises in Vietnam. The US insists on intellectual-property, public-health, labour and environmental standards, and ROO requirements that may impede market access for developing countries. And the Obama administration lacks Trade Promotion Authority from Congress, without which TPP is unlikely to be concluded and ratified. TTIP has also been slowed down by obstacles on both sides of the Atlantic.

RCEP looks the least ambitious. If it follows the pattern of intra-Asian FTAs, it will remove tariffs on about 90 per cent of goods over a fairly long timeframe. But it will have weak disciplines on non-tariff regulatory barriers that are the biggest obstacles to trade in the region. It might end up agglomerating the “noodle-bowl” of FTAs among members rather than ironing out distortions among them. In such a scenario, RCEP will create little new trade and investment, and cause extra complications for global supply chains. But negotiations still have some way to go.

Much depends on US and Chinese leadership. President Obama’s leadership is needed to conclude a “high-quality, 21st-century” TPP – and open the door to eventual Chinese membership. But he has conspicuously failed to lead on international trade. Similarly, the Chinese leadership has been defensive on trade policy for almost a decade. But there are signs that China is becoming interested again in regional and global trade liberalisation. It will take Chinese leadership to inject more ambition into RCEP.

All ASEAN countries are in RCEP and four are in TPP. What should they do on mega-regionals? First, they should push for ambitious agreements that are wide (with maximum sectoral coverage) and deep (with strong disciplines on regulatory barriers), with relatively simple ROOs and open accession clauses for non-members. Only this type of mega-regional is likely to create significant trade and investment, and facilitate the expansion of global supply chains.

Second, they should back this up with intra-ASEAN measures, such as accelerating progress on AEC and strengthening provisions in existing FTAs. But it must be recognised that mega-regionals, and indeed other FTAs, are not a panacea. Political realities will inevitably dilute their ambition and quality. Given their gaps and distortions, they are unlikely to deliver the huge gains that many pundits predict. This applies to TPP, RCEP and AEC.

The key policy implication that follows is that ASEAN countries should go as fast, wide and deep as possible with unilateral liberalisation. They should also “multilateralise” preferences in existing FTAs as far as possible, i.e. extend them to non-members on a non-discriminatory basis. This is how ASEAN countries have liberalised and integrated into global supply chains in the past. That is unlikely to change in the future.

This article is reproduced  from a regular column for the Singapore Straits Times. Sally is a Tutwa Senior Associate.

Mega-Regional Trade Negotiations: Implications for Emerging Atlantic Economies

Mega-regional trade agreements revisited

Giraffe and cloudsThe high politics of international trade continues to attract much international interest. Central to this are the so-called mega-regional trade agreements, notably the Trans-Pacific Partnership (TPP) negotiations and the Transatlantic Trade and Investment Partnership (TTIP). We have been closely involved in analysing the implications of both arrangements, in terms of geopolitics; impact on the WTO; and economic implications for those not included in them, particularly the African, Caribbean, and Pacific countries which we previously reported on.

The latest effort includes my involvement in the World Economic Forum’s Global Agenda Council on the Global Trade and FDI System, which has just released its report on the subject and contains many interesting insights from multiple perspectives. I presented key insights from this report in Bonn recently, at a public event organized by the German Development Institute. The turnout was good, and the discussion intense; not surprising given the German public’s interest in overall relations with the US in the wake of ongoing spying revelations and controversy over investor-state dispute settlement systems in investment agreements.

Previously Tutwa Germany Director Andreas Freytag coordinated a research project for the Konrad Adenauer Stiftung, the political foundation linked to Angela Merkel’s governing party, on the implications of the TTIP for Europe. This covered economic implications; and explored the politics of the proposed agreement.

We expect that this subject will remain of intense international interest. As far as business is concerned the key implications are environmental in nature. Essentially, these agreements, if successfully concluded, have the potential to rearrange global geopolitics, trade flows, and trade regulations at many levels. Therefore they bear close watching even if, from the southern tip of Africa, they appear to be taking place in another world.

Mega-Regional Trade Negotiations: Implications for Emerging Atlantic Economies

Mega-regional trade agreements – implications for outsiders

Giraffe and cloudsThat power in the global trading system is shifting east and south is not news. How this will affect geopolitics, and future trade and investment rules, however, is the subject of intense debate. I recently participated in one such debate hosted by the International Institute for Strategic Studies in Manama, Bahrain.

The United States, stimulated by its relatively declining global strategic position, is driving two ‘mega-regional’ trade agreements: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). While motivations behind this US strategic thrust are varied, its primary intention is to reassert its primacy over the global trading system through cementing ties in East Asia and Europe, respectively. China is a key reference point, some would say target, of both initiatives.

So what implications does this hold for non-parties’ trade interests? I have been involved in two processes assessing these issues. First, for the African Caribbean and Pacific (ACP) group of countries; and second for South Africa.

The results of the first study, commissioned by the ACP MTS programme for the ACP group, were presented to Geneva-based Ambassadors in January this year. The consulting report has just been formally published by the European Centre for International Political Economy (ECIPE), with which I am associated. The paper contains a detailed assessment of the potential economic impacts based on a comprehensive literature review; a detailed assessment of the policy and regulatory issues under negotiation in the TPP since it is far advanced; elaboration of three scenarios for how these negotiations may play out; and broad implications for ACP countries.

Related to this I have been working with the South African Institute of International Affairs to sift through the implications of these mega-regionals for South Africa’s trade strategy. This was discussed at SAIIA’s recent public forum on trade policy. The conference report will be uploaded soon, together with the background papers which cover: the systemic implications for South Africa; implications for South Africa’s relations with the BRICS; and implications for South Africa’s regional trade strategy.

This remains an issue at the centre of the global trade agenda. More posts on this will surely follow.

What is the future of the WTO?

What is the future of the WTO?

Giraffe in city street [News]That the World Trade Organization (WTO) has been in the grip of a systemic crisis since 2008 is well known. Notwithstanding relatively minor successes at the Bali Ministerial in December 2013, the WTO’s negotiating function remains effectively stalled. The Nairobi Ministerial, set to take place in December 2015, is not likely to yield systemic solutions, notably to break the Doha Round impasse. The longer this negotiating stalemate endures, the more the WTO’s foundations will crumble, particularly the much-prized jewel in its crown: the Dispute Settlement System. Why? Because an institution that is not able to modernize and continuously update its rules will be, and is being, bypassed. In its 20th year, the WTO faces an intensifying existential crisis.

Competing visions

There are many reasons for this. But at the heart of the problem lies a competing vision for the WTO. One vision is content with “WTO 1.0”; an organization that gives priority to the bulk of its developing country membership with focus on restraining negotiating ambition for fear of the consequences of over-stretching the policy and institutional capacities of those members. A different vision offers “WTO 2.0”, in which the rules are continuously updated and expanded to reflect the realities of modern trade and investment, particularly the global value chains (GVCs) that drive them.

Two broad constituencies, inter alia, advocate “WTO 1.0”: least developed countries (LDCs) and other poor or small country groupings such as small island developing states (SIDS) and small, vulnerable economies (SVEs); and large emerging markets such as India, Brazil, and South Africa, plus a range of middle-power developing economies. These countries, for the most part, share a view that the WTO should not impose undue obligations on its members, and that differential obligations, or special and differential treatment (SDT), should permeate the system. Many are also sceptical that GVCs will confer the benefits proffered by WTO 2.0 advocates, arguing instead that the gains from GVCs are unevenly spread, with the benefits concentrated in developed world multinational corporations while the costs are concentrated on their developing country hosts.

Again, two broad constituencies advocate “WTO 2.0”: developed countries represented, inter alia, by the OECD; and developing countries wishing to integrate better into GVCs, such as those comprising the Pacific Alliance. These countries share the view that the WTO rules need to be extended and updated, and reciprocal market access too. Hence they advocate for incorporation of new issues such as competition and investment into the WTO rules architecture.

As usual, this polar spectrum view conceals important realities. Advocates of WTO 2.0 seem unable to deal with the power of agricultural lobbies in some countries. Agricultural lobbies are quintessentially products of the WTO 1.0 world. This chronic failure fuels the sceptics in that WTO 1.0 paradigm who argue, justifiably, that double standards undermine trust and the legitimacy of the WTO. For this reason the agriculture problem has to be fixed, but almost certainly won’t be. Similarly, there are growing lobbies in certain WTO 1.0 countries that want their governments to sign up to WTO 2.0 rules or market access commitments, but their concerns are routinely sacrificed to the dominant WTO 1.0 paradigm. South African services exporters targeting African markets come to mind.

Shift in balance of power

These “low politics” of trade are now merging with the “high politics” of global affairs. The ongoing rise of emerging markets in world trade and investment, particularly represented by China, is slowly but surely tilting the balance of global power away from the North and West, towards the East and South. This poses serious challenges to the western architects of the WTO, and the broader global trade and investment order in which it resides. These tensions are reflected particularly in the US and play out in various internecine political battles, tying the Executive’s hands in its attempts to exercise leadership of the trading system, particularly in the WTO.

Consequently the US is looking elsewhere, to the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These “mega-regional” trade negotiations represent, at once, an attempt to pioneer new rules among like-minded countries consonant with the WTO 2.0 vision, and an attempt to restore US primacy over the global trading system. The overt intention is to extend US, and US-EU, regulatory preferences to the WTO down the line, through a process of competitive liberalization.

This high stakes poker game has unpredictable consequences. Of most importance is that no one can predict whether mega-regionals will ultimately succeed. While the TPP’s conclusion does appear to be in sight, its final adoption is hostage to a complex political cycle incorporating, not least, the 2016 US elections. The TTIP’s future is less certain, since negotiating power is much more diffuse between the parties, and EU regulatory preferences diverge in significant respects from those in the US.

So how might this all end? In the concluding chapter of our World Economic Forum report on the high and low politics of trade, Robert Lawrence and I set out three scenarios:

  • Building blocks: The TPP and TTIP conclude smoothly, taking account of “outsider” concerns, and a virtuous cycle of trade and investment liberalization ensues. The regulatory agenda is incorporated into the WTO through inclusive plurilateral arrangements, modelled along the lines of the Trade Facilitation Agreement’s “ladder” of SDT provisions. WTO 2.0 is built incrementally, by providing consensual pathways between it and WTO 1.0. Almost certainly this scenario would require a lasting fix of the agriculture problem.
  • Stumbling blocks: In this, more likely, scenario the hurly-burly of trade negotiations gives rise to many compromises in the TPP and TTIP, including on regulations. So US and EU primacy in the global trading system is not decisively restored, leaving behind leadership ambiguity. But enough is done to convince key developing countries, notably China, to converge with mega-regional outcomes, so that the critical mass shifts towards WTO 2.0. But in the absence of decisive leadership, and competing visions for WTO 2.0, progress towards that vision is by no means assured. In short, the outcome is one of continued ambiguity in which Chinese and Indian preferences, with their own domestic reform imperatives in mind, loom ever larger.
  • Crumbling blocks: There remains a substantial possibility that the TTIP, especially, could rumble on for years without reaching a decisive conclusion. Therefore, US and EU primacy in the trading system would be hamstrung, hastening the advance of potential Chinese and emerging market leadership. However, since those countries will not be in a position to exercise decisive leadership for years to come, the outcome is likely to be stasis, and continued exercise of influence through regional formations – such as RCEP in the Chinese case. Thus the centrifugal forces unleashed by continued stasis in the WTO would acquire full force and with unpredictable consequences.

Clearly it is not possible to say where the WTO system will end up until we are clear how mega-regionals, especially the TPP and TTIP, shape up. Nonetheless, a world of stumbling blocks seems most likely, with the WTO poised nervously in-between while the great trading powers position themselves for leadership and influence. This scenario may turn out well, especially if China’s regulatory preferences converge towards US and EU norms, but that outcome is far from certain.

The World Economic Forum report, The High and Low Politics of Trade, is available here.