No Reason to Panic

13 february 2016

What the Trans-Pacific Partnership Really Means

Sergei Afontsev is Head of the Economic Theory Department at the Institute of World Economy and International Relations (IMEMO), Russian Academy of Sciences; Co-Director of the Research and Education Center on World Economy, IMEMO and Moscow State University; professor at the Moscow State Institute of International Relations. He holds a Doctorate in Economics.

Resume: The best strategy towards the TTP would be monitoring and assessing the applicability of its experience to integration projects involving Russia. After all, Russia was not ready to sign it anyway. Neither was China.

The formation of the Trans-Pacific Partnership (TPP) has a good chance to become a turning point in the development of regional economic cooperation. Now that the first wave of both enthusiastic and angry comments on the TPP agreement has subsided, it is time to ask the main question: What is its novelty for the world economy and politics?

In recent years, we have witnessed a series of regional initiatives, ranging from the establishment of the Eurasian Economic Union, which took a very short time by historical standards and which is based on the principles of deep integration, to the extensively discussed Transatlantic Trade and Investment Partnership (TTIP), and to China’s “One Belt, One Road” (New Silk Road) project, whose integration with the EAEU became a priority issue in Russia’s foreign policy and expert discussions in 2015. What makes the TPP so special, compared to these initiatives? And what will it be like?

This issue obviously has two dimensions. On the one hand, it affects the formal status of the TPP agreement, compared with other agreements aimed at stepping up regional economic cooperation. On the other hand, we should take a detailed look at the “continuity” and “novelty” of the mechanisms for governing global economic processes, whose foundation was laid by the TPP agreement. After all, the effectiveness of these mechanisms will be crucial for the future of the TPP itself, for the impact it will have on the formation of regional economic associations, and for the world economy in general.

The answer to the first part of the question may seem surprisingly trivial. Despite the high-sounding name of the “partnership,” the TPP is a standard regional economic bloc built on the “free trade area plus” (FTA+) principle. This means removing the majority of price and quantity barriers to mutual trade in goods (the FTA regime proper), supplemented by an extended set of measures in the field of liberalization of trade in services, investment and technological cooperation, harmonization of standards, etc. In this respect, the TPP is not much different from other blocs based on the FTA+ principle, such as NAFTA or the European Free Trade Association (EFTA). Like them, the TPP is based on WTO rules, provides freedom of action for the member countries in their economic relations with third countries, and does not aim to deepen integration processes in the region through the creation of a customs union or a common market.

These factors are of fundamental importance. At present, FTA+ associations dominate among regional blocs built according to the model described by regional economic integration analysts as “new regionalism.” The characteristic features of this model include the dominance of economic motives in preparing and concluding agreements, a low level of institutionalization, a high degree of autonomy of national governments in decision-making within the regional bloc and complete autonomy in building economic relations with third countries, and the provision of membership to countries with different levels of economic development. These differences are a determining factor in preventing deeper integration within the framework of the “new regionalism” model. The dominance of economic motives makes countries of different economic development levels (and, therefore, with different economic incentives) uninterested in adopting a common customs tariff in trade with third countries (that is, in moving from the FTA+ format to the format of a customs union), not to mention deeper harmonization of norms regulating national economic processes.

The opposite of the “new regionalism” model is the “deep integration” model (also known as “traditional” or “European” model of integration). It provides for successive passage through the main stages of integration (from the FTA through a customs union and a common market to an economic and monetary union, which presupposes the introduction of a common currency, and, in the extreme case, to a political union). This model presupposes a more pronounced role of political motives behind integration, a high degree of institutionalization of decision-making, transfer of the latter to a supranational level, and a coordinated policy of developing cooperation with third countries (including the use of a common customs tariff in foreign trade with them). A close—and very high—level of member countries’ economic development is an important prerequisite for the success of this model, as it allows them to develop common responses to common challenges and, on the other hand, achieve a high level of trade and investment cooperation within the bloc. Therefore, it is not surprising that the European Union for a long time was the only regional bloc that successfully developed according to the “deep integration” model. As many analysts believe, the problems it has faced in the last decade were caused by a growing heterogeneity of its member countries as less developed countries joined the EU during several waves of enlargement.

With an almost tenfold gap in GDP per capita between the United States and Vietnam (U.S. $52,100 and U.S. $5,400 at purchasing power parity in 2014, respectively), it is not surprising that the “new regionalism” model is the best possible option for the TPP. Like other agreements on regional blocs based on this model, the TPP agreement does not contradict WTO rules and does not impose on its member states any obligations that would be inconsistent with their obligations to this international organization. Therefore, there is no reason to believe that the TPP may somehow undermine or devalue WTO principles underlying the TPP agreement itself. Experience shows that significant risks to the WTO regime much more often come from regional projects based on the “deep integration” model, especially when duty rates provided for under the common customs tariff are higher than the rates WTO members pledge to adopt when they join the organization. For example, this problem will have to be solved in the EAEU now that it has been joined by Kyrgyzstan and Armenia, which in some cases will have to violate their WTO obligations on the maximum level of import customs duties after they adopt the EAEU Common Customs Tariff. As a side note, the gap in GDP per capita between Russia and Kyrgyzstan (7.3 times) is only slightly smaller than the gap between the U.S. and Vietnam, which gives food for thought as to whether the EAEU integration format is optimal from the point of view of developing economic cooperation in the post-Soviet space.

New Guidelines in Global Economic Governance

Whereas formally the TPP agreement is nothing extraordinary, it is an unprecedented step forward in terms of meaningful innovations, and its significance goes far beyond regional economic cooperation. Although it is based on the WTO rules, the TPP agreement imposes additional requirements on its member countries and covers a wide range of regulatory issues that do not belong to the WTO competence. It is in this sense that one should interpret apprehensions that the TPP may deprive the WTO of its leading role in regulating world trade. It seems, however, that it would be more correct to speak of the emergence of new guidelines in the regulation of global economic processes, from which the WTO (and other international economic organizations) will inevitably have to take the lead in the future. What are these innovations?

Firstly, the TPP agreement provides for a much higher level of protection of intellectual property rights (the so-called TRIPS+ provisions). On the one hand, this factor reflects the leading role of assets based on intellectual property (trademarks, patents, know-how, software, media products, etc.) in the modern processes of international trade (particularly trade in services) and cross-border investment. On the other hand, the emphasis on the protection of intellectual property rights reflects the real problems of the region where a freewheeling attitude to intellectual property traditionally poses a very painful problem for copyright holders.

Secondly, the TPP provides for an unprecedented high level of the protection of investor rights. For example, investors have the right to use dispute settlement proceedings against a foreign government in an international arbitration tribunal. Attitudes to these innovations are polar opposites, ranging from applause for the end of the era of “unpunished confiscations of private assets by irresponsible governments” to emotional protests against “the triumph of international corporations over the public interest.” The effect of the above provisions can be judged only in several years, particularly upon analyzing court practices involving investment disputes, but one can say already now that the higher protection of investor rights allows TPP countries to consolidate their positions in international competition for investment resources.

Thirdly, the TPP agreement is the first regional bloc where labor and environmental standards are included in the context of economic regulation. Of particular importance is the direct ban on the use of lower standards for creating artificial advantages in trade (for example, by using low wages in industries where independent trade unions are banned) and increasing investment attractiveness (for example, by not introducing an effective system of penalties for air and water pollution). These norms have long been advocated by companies operating in developed countries and by environmental and humanitarian NGOs worldwide. The TPP was the first to translate their proposals into reality.

The list of regulatory spheres where the TPP agreement has allowed substantial advances is very long—from e-commerce and information exchange mechanisms to liberalization of agricultural trade, and from trade in financial services to support for small and medium-sized businesses. However, as the fourth key novelty of the TPP, I would like to mention not them but something less obvious—namely, the masterly manner in which issues of interest or concern to each member country were handled. Indeed, the TPP is unparalleled in coordinating the interests of its members, which was a major factor behind its fast-tracking (just a year ago, most experts believed that a TTIP between the United States and the European Union would be created sooner than the TPP; in practice, however, things went the other way around).

The success of negotiations on the TPP is in the close linkage between concessions made by some countries to their partner countries and benefits by which these concessions were reciprocated. This logic is seen in intra-industry trade (the most illustrative example of that is the liberalization of car trade between the United States and Japan) and in more complex inter-sectoral benefits-for-concessions deals, tracing which sometimes is like puzzling out mysteries in detective novels (as is the case of Vietnam, whose concessions on environmental and labor standards and the protection of investor and intellectual property rights have been generously compensated for with counter-concessions on market access, trade in textiles and the duration of the transition period during which the country can preserve its former regime of regulating some aspects of its economic activity). The analysis of the logic of this bargaining, as applied to concrete countries and regulatory spheres, deserves a separate article, but even a cursory glance at the content of the TPP agreement’s chapters and member countries’ obligations refutes the trite statement that the agreement “meets exclusively U.S. interests.” The TPP agreement provides for mutual benefits; otherwise, it would never have been signed.

In many ways, this is because for the United States the TPP agreement is part of a broader strategic plan aimed at strengthening the American leadership in governing international processes. The famous statement by President Obama as to who should—and who should not—“write the rules for the global economy” fully explains Washington’s readiness to strike bargains with TPP partners (who, in turn, are guided solely by economic interests and are ready to recognize U.S. claims to leadership—for a good reward). Therefore, it is not surprising that Vietnam has become the main beneficiary of these bargains (and, as some experts believe, the main beneficiary of the TPP in general). It is believed that the TPP can wrest Vietnam from the sphere of China’s strategic influence. However, these considerations apply to TPP member countries. But what about those not included?

Is It Hard to Be an Outsider?

The decision not to invite two major economies in the Asia-Pacific region—China and Russia—to participate in the TPP negotiations is often seen as a reason to accuse the TPP project of being exclusive and confrontational. It should be noted, however, that much of the criticism from China and Russia against the TPP is groundless.

First of all, the secrecy that surrounded the TPP negotiations, which was so much discussed in recent months, is in fact the standard practice in international trade negotiations. Suffice it to recall the years-long negotiations on Russia’s accession to the WTO, which were also described as secret and smoke-filled. The EAEU negotiations and negotiations on China’s trade agreements (for example, the free trade agreement with South Korea, signed in June 2015) cannot be described as models of openness and transparency, either. However, there is a reason for such secrecy. Information leakage during negotiations may cost very much, sometimes causing the parties to start discussing issues, thought of as almost agreed, anew.

Second, complaints that China and Russia were not invited to the negotiations obviously ignore the very nature of the negotiations in question. Unlike negotiations on a broad range of political and security issues, trade negotiations, by definition, involve only those parties that intend to sign the final agreement. The analysis of the TPP agreement inevitably leads to the conclusion that, as of the fall of 2015, neither Russia nor China were ready to put their signatures to this text; nor were they ready to offer the negotiating parties arguments that would have caused them to change the format of the agreement. In those conditions, inviting Russia and China to join in the TPP talks would have meant an invitation to “come and leave”—a scenario that would have been a much more painful blow to both countries’ image than the actual “We Were Not Invited” scenario.

And, third, many commentators say that the TPP inflicts economic damage on Russia and China (and other “outsider countries”), as their goods and services will be in a less privileged position in TPP countries. However, two important things should be said here. On the one hand, potential market access privileges in TPP countries have a price, and that price is strict obligations (protection of investor rights, environmental and labor standards, etc.) which neither Russia nor China were interested to assume from the very beginning. On the other hand, the effect of trade reorientation towards partners in the newly established regional bloc to the detriment of non-members is a standard consequence of the conclusion of regional trade agreements. At present, there are neither effective mechanisms, nor, most importantly, international legal basis for challenging such agreements. No matter how annoying this may be for non-members, this state of things serves an important function in the international system, as it does not allow outsiders to torpedo unwanted integration initiatives (it is easy to imagine how many countries would like to torpedo the EAEU project pleading “detriment to third countries”). There is not much sense in trying to achieve something by persuasion or protest, either—to see this, it suffices to recall Russia’s attempts to have its economic interests met in the context of the Association Agreement between the EU and Ukraine. If even Russia’s closest trade partners are not ready to show goodwill, there is even less reason to expect goodwill from the leading economies of the Asia-Pacific region.

What reaction can be expected to the challenges caused by the establishment of the TPP? For Russia, joining this regional bloc in the coming years is impossible both politically (due to its priority orientation to a “multipolar world”), and economically—given the growth of protectionist tendencies and the official fashion for import substitution. Importantly, the TPP rules apply only to economic relations between the signatories and not to their relations with third countries. This means that Russia will be able to continue to cooperate with TPP countries on the basis of its previous bilateral agreements with them.

Speaking of China, if we consider only the economic (or rather technocratic) aspect, during the next three to five years there is a nonzero probability that Beijing may decide to start negotiations on joining the TPP to step up reforms in the national economy—as it did in the past when it used WTO negotiations to achieve the same purpose. However, if we leave aside technocratic illusions, it must be admitted that China’s participation in the project of governing international economic processes, initiated by the United States and openly positioned by it as an alternative to Chinese influence in the Asia-Pacific, is a political and economic fiction.

Most likely, China will respond by trying to boost its own regional initiatives, of which there are many. The most ambitious project of China—the establishment of a Free Trade Area of the Asia Pacific (FTAAP)—is the least likely now. One has to admit that after the establishment of the TPP any economic cooperation project with pretensions to being “regional” on an Asia-Pacific scale one way or another will be oriented towards the TPP standards and, therefore, will hardly be able to play the role of its alternative. There are more chances for “less inclusive” projects in the format of a trilateral free trade area, for example, China-Japan-South Korea, as well as within the ASEAN Plus Three or ASEAN Plus Six (which China prefers to call Regional Comprehensive Economic Partnership) formats. Finally, there is also the New Silk Road project which does not provide for the formation of a full-fledged regional bloc but is intended to complement China’s “Pacific” initiatives with a western vector of economic expansion.

Unlike China, Russia has a narrower choice of possible active responses to the TPP. On the one hand, Russia has no projects of its own for developing multilateral cooperation in the Asia-Pacific region. Over the past five years (in fact, since preparations for the APEC summit in Vladivostok), Russia has only expressed readiness to participate in the discussion of possible approaches to trade and investment liberalization in the region but not propose draft agreements or work towards getting them signed. The current growth of positive comments about the FTAAP rather reflects a desire to “make friends against the TPP” and does not alter the fact that Russia today is not ready to sign multilateral free trade agreements with Asia-Pacific countries. In these circumstances, President Putin’s decision to annul his visit to the APEC summit in November 2015 was quite logical—the signing of the TPP agreement put an end to the strategic integration agenda which could have been discussed with the Russian president.

On the other hand, in the conditions of a severe economic crisis and a sharp drop in foreign trade volumes (Russian exports to APEC countries in January-October 2015 fell by 26.8 percent, compared to the same period of last year; and imports decreased even more—by 35.2 percent), regional initiatives, which require years of meticulous preparations, obviously yield priority to short-term initiatives that promise a quick political payoff. In these circumstances, Russia’s recent habit to instantly respond to each and every more or less significant international challenge can backfire at it. This also applies to the proposal Putin made in early December to “hold consultations, in conjunction with our colleagues from the Eurasian Economic Union, with the SCO and ASEAN members, as well as with the states that are about to join the SCO, with a view to potentially forming an economic partnership.” Those who interpret this proposal literally should know that in the case of the TPP the word “partnership” stands for an agreement on the establishment of a regional bloc in the FTA+ format, which presupposes, above all, maximum liberalization of trade in goods. It is highly questionable that Russia is ready to sign such an agreement with any of its partners in the SCO or ASEAN. This issue should be resolved on a bilateral, rather than multilateral, basis—in the same manner the issue of free trade between the EAEU and Vietnam was resolved in 2015. Supporting Russian investments in Vietnam for creating competitive industries that will operate in TPP markets would now be the best response from Russia to the emergence of the new regional bloc. In the future, it may think of concluding free trade agreements with other TPP countries, such as Singapore and Malaysia, which, among other things, can be useful technological cooperation partners for Russia constrained by economic sanctions.

As for the TPP itself, the best strategy towards it would be monitoring and assessing the applicability of its experience to integration projects involving Russia. After all, there was nothing negative about not inviting us to the negotiations on the TPP agreement, which we were not ready to sign anyway. We are “strangers at this celebration of life,” but nothing prevents us from watching fireworks and learning practices that may be useful to us in organizing a “celebration” of our own.

} Page 1 of 5