A Megaregional Challenge

13 february 2016

In Search of a Way Out of New Trade Labyrinths

Alexei Portansky is a professor at the School of World Economics and World Politics at the National Research University–Higher School of Economics; senior researcher at the Institute of World Economy and International Relations, Russian Academy of Sciences.

Resume: The mega-regional trade agreements do not mean undermining the WTO, as some believe—there are no serious players in the world that would have such plans. The problem’s solution lies in gradual harmonization of the multilateral (WTO) format and regional/preferential and mega-regional (TPP and TTIP) formats.

News that might radically change the habitual picture of the global economy and attract everyone’s attention does not happen often now. Fundamental changes usually take decades to materialize. One such example was the emergence of new leaders—China, India, and Brazil—in the world economy at the turn of the century. However, the year 2015 was marked by events whose effect on the global  economy and trade will most likely be significantly felt in the next few years.

Transpacific Partnership: Standards and Rules of a New Level

Reports from Atlanta on October 5, 2015 about the completion of negotiations among twelve Pacific Rim countries on the establishment of a Trans-Pacific Partnership made international headlines (no one had expected the negotiations to be completed so soon), attracted everyone’s attention, and triggered talk of upcoming major changes in the global economy. Real changes will happen in a couple of years, after the TPP ratification process is over, given that the present TPP members account for about 40 percent of world GDP and 30 percent of world trade. In addition, these figures may well increase as five more countries announced in early December 2015 their interest in joining the TPP.

The TPP is the first trade agreement of a new format—a mega-regional trade agreement. The agreement was signed by 12 countries: Australia, Brunei, New Zealand, Vietnam, Singapore, the United States, Canada, Chile, Japan, Mexico, Malaysia, and Peru. The Transatlantic Trade and Investment Partnership (TTIP) agreement between the U.S. and the European Union, which is still being negotiated, may become one more mega-regional trade agreement, which may even surpass the TPP in terms of economy and trade. The U.S. plays the leading role in both partnerships. Finally, there is a third format of a mega-regional trade agreement. This is a Regional Comprehensive Economic Partnership, now being negotiated by China, Japan, South Korea, India, Australia, and New Zealand. It is viewed as a kind of “Chinese counterweight” to the TPP, although some of these countries are members of both associations.

Much has already been said and written about the Trans-Pacific Partnership, although the text of the agreement is yet to be thoroughly analyzed. But it is obvious that the TPP is an entirely new type of agreement, containing the highest international trade standards and norms, which do not exist even in the WTO. These include investment rules, modern labor and environmental standards, etc.

The implementation of the TPP is a major item on the Obama administration’s world trade agenda. Washington openly emphasizes its dominant role in the project: speaking of the TPP in the spring of 2015, President Obama stressed that the U.S. could not allow countries like China to write the rules for the global economy. The absence of China among TPP members is evident proof that one important goal of the TPP is to neutralize China’s power in global trading. Naturally, Washington never said point blank that the door to the TPP was closed to China. In the fall of 2015, U.S. Secretary of State John Kerry even officially invited Beijing and Moscow to join the partnership. However, before this headline-making statement, Washington made it quite clear to Beijing that to join the TPP it would have to reach preliminary accords with Washington, which was obviously humiliating for the world’s second largest economy.

The U.S. efforts to contain China in the region go beyond trade and economic frameworks and involves a serious military-strategic aspect due to the special position of the South China Sea. Goods worth more than U.S. $5 trillion—a quarter of world trade—are supplied via this sea every year. These include East Asian container ships with industrial products, and Middle Eastern oil and LNG tankers. The South China Sea is a route of major importance to the global economy with, perhaps, the heaviest maritime traffic. For China, this is a sensitive area, through which about 60 percent of its exports and imports go. Seeking to strengthen its control over the sea, Beijing creates man-made islands to extend its territorial waters. In response, U.S. warships demonstratively violate Chinese restrictions. For example, the U.S. aircraft carrier USS Theodore Roosevelt and the U.S. destroyer USS Lassen sailed the South China Sea last fall. Beijing’s concern over the presence in the sea of the U.S. 7th Fleet capable of disrupting its commercial communications led to a serious deterioration in relations between the two countries last year.

However, even under U.S. military pressure, Beijing maintains self-control and restraint, thinking, above all, of the future of its economy, rather than demonstration of readiness to give a military rebuff to America.

TTIP: Intriguing Developments

As was noted above, if successful, the TTIP project will have an even greater trade and economic potential than the TPP—its share in global GDP will be about 50 percent, and about 40 percent in world trade. The factor that prompted the EU and the United States to enter into talks on a free trade area was the lack of progress in the WTO Doha Round of multilateral negotiations amid the global economic crisis. In November 2011, the U.S. and EU leaders made a decision to establish a working group to find ways to promote multilateral economic growth and competitiveness. In February 2013, the working group submitted its recommendations on a wide-ranging free-trade agreement, called Transatlantic Trade and Investment Partnership.

But the TTIP implies not only trade. U.S. Assistant Secretary of State Victoria Nuland said that “the TTIP is so much more than a trade agreement. It is a political and strategic bet we are placing on each other and our shared future.” Brussels declaratively supports this approach, but in practice it expresses its concerns from time to time and speaks of the impossibility of compromise on a number of issues.

The U.S.-EU TTIP negotiations began in July 2013. Their ultimate goal was to facilitate market access for goods and services, and create the largest free-trade area between the two most important economic regions of the world. Two other important elements of the proposed agreement are a comprehensive investment protection agreement, including the investor-state dispute settlement (ISDS) mechanism intended to stimulate foreign investment, and a Regulatory Cooperation Council to enable permanent close cooperation on regulatory issues. The TTIP is expected to become the most comprehensive and far-reaching regional free trade agreement to date, which will have a major influence on international trade. No doubt, the TTIP will have a huge potential, but this advantage may not safeguard it against potential risks.

The aim of the TTIP is to promote development, employment and prosperity on both sides of the Atlantic. For Washington, the partnership with the EU is part of its plan to double exports and speed up economic recovery after the crisis. Further international division of labor and specialization may lower companies’ production costs and, therefore, consumer prices, while raising productivity. In the long run, the incomes of private households could increase, as well. Growth in foreign direct investments and a wider range of products and services can have an additional positive impact on prosperity.

The negotiations on both agreements have not been easy, sometimes evoking strong public reactions. For example, protests against the TTIP were held in several EU countries in the spring of 2015. However, these protests and heated discussions about the TTIP, held at various levels, are a normal phenomenon for democracies. It is a major lesson of European integration that all important supranational decisions must be subject to broad public discussions, and street actions can be viewed as part of them. Only after that do decisions made become strong, and no one will try to challenge them afterwards. This lesson has not been learned in the post-Soviet space—no serious discussions have been held on the Eurasian Customs Union. As a result, various problems arise in the Eurasian Economic Union now and then, which should not have happened in principle because these problems should have been solved at earlier stages.

Many studies on the TTIP predict its very favorable impact on economic growth, employment and prosperity in both the U.S. and the EU, depending on the degree of trade liberalization. Other studies, however, warn about negative consequences for European countries. Most independent studies on the TTIP’s effects give the following figures: the EU economy will grow by 120 billion euros a year; the U.S. economy will increase by 90 billion euros; and other economies in the world will grow by 100 billion euros. According to preliminary estimates, U.S. exports will increase by 4.58% and imports by 3.11%, and EU exports and imports will grow by 3.17% and 2.02%, respectively. U.S. GDP will grow by 0.37%, and that of the EU by 0.28%. In addition, the TTIP will create an additional two million jobs in the world. Nevertheless, criticism of the TTIP grew in EU countries in 2014-2015, as people feared that the project would result in the domination of U.S. companies, unemployment growth, and the introduction of U.S. regulatory standards in many industries.

The reality may prove different from forecasts. Multinational corporations will undoubtedly be beneficiaries of the TTIP. But benefits for private households are difficult to estimate—at least, the experience of two other well-known integration associations, the North American Free Trade Agreement (NAFTA) and the European Economic Community, gives grounds to assume that the anticipated positive effect on the growth of prosperity may be overestimated. U.S. Tufts University in 2014 issued a negative forecast for the TTIP’s effects on the EU. The university’s research said Europe might face many adverse effects of its trade and investment partnership with the U.S., including: a decrease in net exports and GDP in a decade; a decrease in workers’ incomes and the number of jobs; a reduction of the amount of taxes collected by the government; and the emergence of imbalances and financial instability. These conclusions are a far cry from forecasts made within the TTIP.

The harmonization and removal of non-tariff barriers is an important, if not the main, priority of the TTIP, because tariff barriers to trade between the EU and the U.S. have long been significantly lowered—to about five percent in the EU and 3.5 percent in the U.S. According to studies, about 80 percent of the projected growth of well-being will stem from the harmonization, mutual recognition or liquidation of regulations, standards and norms. The main problem is how to distinguish unnecessary regulations from those that are really needed. Experts recognize that there remain risks in the sphere of regulation. The regulatory approaches of the EU and the U.S. in many areas differ greatly. In the EU the precautionary principle prevails with regard to consumer and environmental protection, under which products (for example, chemicals and foodstuffs) or production processes (for example, fracking) are permitted only if it has been proved scientifically that they are environmentally friendly. The United States has a different approach: products or production processes are permitted without restrictions unless the existence of hazards has been proved scientifically.

Even the closest U.S. ally in Europe, Britain, is not willing to accept U.S. regulatory standards. Regulatory differences are not the only stumbling block between the parties. Europe is not ready to sacrifice its standards in healthcare, social policy, etc. This has been made perfectly clear by the current European Commission president and the EU chief negotiator for the TTIP, Jean-Claude Juncker. He has said that “the safety of the food we eat and the protection of Europeans’ personal data will be non-negotiable for me as Commission President.” Brussels will not accept that “the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes,” as is done in the TPP.

Serious problems and differences also persist in traditional areas, such as trade in goods. For example, in February 2015, the EU complained to the WTO’s Dispute Settlement Body about WTO-incompatible record-high subsidies to Boeing, granted by the U.S. government. The litigation between the parties over government support for their aerospace industries has been going on for at least ten years.

Another source of deep differences between the Old and the New World is trade in GMOs, where the expansion of U.S. companies has encountered the more stringent EU standards in this area. Indicative is the position of David Cameron, the prime minister of the United Kingdom, the most faithful U.S. ally in Europe. He said last summer that his government would not allow the TTIP deal to undermine the UK’s welfare and regulatory standards.

Obviously, the above differences between the partners are the main reason for the secrecy surrounding the TTIP negotiations (which drew strong criticism from various social forces in EU countries in recent years) and the ambiguity as to when they can be completed. Meanwhile, U.S. administration officials said late last year that the TTIP agreement should be signed before Obama’s term of office ends. However, statements like that are too bold, considering the aforesaid. Given the abundance of differences between the parties, the final TTIP agreement should contain a long list of exceptions. Will Washington and Brussels agree to that? It is highly unlikely, which means there are intriguing developments ahead.

And yet, despite the justified criticism of the current state of the TTIP, we should assume that this project will materialize anyway, sooner or later. So it is better to be prepared for that. Some countries, including Turkey, Georgia, and Moldova, have already declared their interest in the partnership and desire for cooperation when the project is implemented. The number of such countries will certainly grow.

How to React to Megaregional Challenges?

How should Russia position itself with regard to these new challenges of the global economy—TPP and TTIP? First of all, it should not treat them with bias and should not criticize and denounce them without a good reason. Learning lessons from the past would be useful in this regard. In 1947, for some economic and political reasons, the Soviet Union did not join the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO. Two years later, in 1949, Moscow initiated the establishment of a separate economic organization—the Council for Mutual Economic Assistance (also known as Comecon). But in 1979, Moscow firmly decided that it should join GATT. However, by that time the Soviet Union had already fallen far behind GATT processes, and this gap kept widening. In 1991, Comecon was disbanded. Russia joined the WTO in 2012, but it has never overcome its economic lag. Another example also relates to the postwar period and the processes of European integration. The official Soviet propaganda interpreted the creation of the European Communities as a clear sign of exacerbation of the general crisis of capitalism. Today, such ideas can evoke a smile, but the arguments used now to criticize the TPP and the TTIP inevitably prompt analogies with the past.

In this regard, it would be useful to take a look at the reaction of neighboring China to the TPP. Despite the obvious anti-China context of the partnership and last year’s strained relations with the United States, Beijing has declared its readiness to seek a rapprochement with the TPP. It looks like healthy and justified pragmatism, which Moscow should also use.

The TPP is open to accession by countries and customs territories that are already members of APEC; so Russia formally has the right to join the TPP. However, it would not be easy to use this right. According to the TPP’s accession procedures, a candidate for membership must accept the commitments set forth in the TPP agreement and other provisions, which are to be negotiated by the candidate and the initial partnership members. The latter clause may imply special conditions for the admission of Russia and China. Russia already faced something of this kind when it held lengthy negotiations on accession to the WTO—the mechanisms are generally similar. But in the case of the TPP things may prove to be more difficult and biased.

In the meantime, it would be appropriate to ask whether Russia would be ready to join the TPP if it were invited to do that on most favorable terms. The answer is “No”—for purely economic reasons. The partnership’s terms were developed without Russia, that is, without taking its interests into account. The norms and rules adopted by the TPP members in many areas are much more liberal than those of the WTO, like, for example, rules regarding import customs duties; or the WTO does not even have such rules yet, for example, investment rules or labor standards. Therefore, one should first thoroughly analyze the text of the TPP agreement in order to work out a strategy and tactics for interacting with the partnership. The same is true for the TTIP, but one should closely watch the further development of the negotiations between Washington and Brussels, so as to be able to determine reasonable and acceptable forms of interaction with this partnership.

Theoretically, there may be one more strategy to counter the challenges of the mega-regional TPP and TTIP agreements. This could be a “symmetric response”—the establishment of an economic partnership among the Eurasian Economic Union (EAEU), the Shanghai Cooperation Organization, and ASEAN. This idea was proposed by President Putin in his December 2015 address to the Federal Assembly. At first glance, the idea seems sound. The question is whether such a partnership is realistic nowadays.

To initiate consultations on the possible establishment of such a partnership, it would be highly desirable (if not necessary) to take as a premise the economic attractiveness of one’s integration association. But is the EAEU economically attractive now?

After the break-up of the Soviet Union, Moscow sought to create a strong integration association in the post-Soviet space, which would be comparable in weight to the main geo-economic centers, such as the U.S., the EU, or East Asia. However, the problem turned out to be much more complicated than it had seemed. The Eurasian Economic Union, which came into being in January 2015, has not fully lived up to initial expectations and intentions. Apart from the fact that the EAEU began to operate amid Western sanctions and a serious economic decline in Russia, trade and economic differences among its members, far from disappearing, are increasing. During the first half of 2015, trade within the EAEU decreased by more than a quarter. The structure of mutual trade is changing for the worse due to significant cuts in mutual deliveries of machinery, equipment, vehicles, metals and metal products. Before last year’s downturn, in 2014, the total foreign trade turnover of the EAEU stood at U.S. $1 trillion, which is much lower than in the TPP.

This does not mean that the EAEU is not attractive to potential external partners—for example, it has established a free trade area with Vietnam and plans to sign similar agreements with other countries. Yet this is not enough to expect a significant growth of the trade and economic potential of the EAEU+ in the foreseeable future, which would bring it closer to the TPP.

Also, there is little chance that partners in the SCO and ASEAN will display active interest in a joint integration project. China is busy looking for ways to cooperate with the TPP. In addition, the Regional Comprehensive Economic Partnership is being negotiated in the region, in which Beijing wants to play a key role. As regards ASEAN, some of its members have already joined the TPP, and some others have expressed their desire to do the same.

The conclusion is obvious: Russia should adapt to the reality and look for ways to establish advantageous cooperation with the TPP.

The desire of politicians and diplomats to give a “symmetric response” to the mega-regional deals implemented without Russia by initiating their own partnership project is understandable. But it does not necessarily mean that such a project will materialize. Meanwhile, Russia and China have already agreed to go ahead with the integration of the EAEU and the Silk Road Economic Belt projects—in May 2015, Vladimir Putin and Xi Jinping signed a joint declaration to this effect. If this idea is successfully implemented, it can become Russia’s real response to the TPP.

Returning to the global aspect of the problem, it would be safe to assume that mega-regional trade agreements, like the TPP and the TTIP, will significantly surpass the previous regional/preferential trade agreements in terms of their share in world trade. According to general estimates, the TPP will account for about 30 percent of world trade, and the TTIP, if successful, will account for 40 percent or more. Both associations will cover at least 65 percent of the global exchange of goods and services. This factor may have serious consequences for the existing international trade rules, which are now mainly set by the WTO. The TPP and the TTIP will set their own rules and norms in trade. Considering the volume of trade exchanges, to which these rules will apply, they will inevitably come into conflict with the WTO norms and rules. Also, TPP and TTIP rules will be introduced in regions not covered by multilateral trade regulations. In addition, mega-regional trade rules will be more liberal, but on the other hand, they will be more stringent and competitive than the WTO ones. Many countries have already expressed their concern over that.

The next few years may bring intensive discussions on the rules of the WTO and mega-regional trade agreements and their comparison. However, this does not mean undermining the WTO, as some believe—there are no serious players in the world that would have such plans. The problem’s solution lies in gradual harmonization of the multilateral (WTO) format, on the one hand, and regional/preferential and mega-regional formats (TPP and TTIP), on the other. No one can say how long this process will take and whether it will be painless. But it would be safe to say that the TPP and, possibly in the near future, the TTIP are objective realities of today’s global economy and trade, which cannot be ignored. Therefore, we should look for ways to cooperate with them in order not to miss the train of history again.

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