Russia in Global Affairs

“It is the Romano-Teuton who in later times embarked upon the ocean;

it was the Graeco-Slav who rode over the steppes, conquering the Turanian.

Thus the modern land-power differs from the sea-power no less in the source of its ideals than in the material conditions of its mobility.”

Halford John Mackinder. The Geographical Pivot of History, 1904

At the beginning of October 2015 the world map of trading and economic alliances underwent an unprecedented transformation with the conclusion of the Trans-Pacific Partnership (TPP) agreement. The Trans-Pacific Partnership is the largest regional integration group in the Pacific region built on the basis of a free trade zone. The TPP accounts for almost 40 percent of the global GDP and for nearly a third of world trade flows. Using the term coined by Vladimir Lenin, the TPP can be described as “the highest stage of regionalism,” for it heralds the emergence of the first transcontinental integration group. The event will have drastic effects on trade and investment flows, and not only those in the vast expanses of the Pacific, but also on the global scale.

The agreement envisages not only the creation of a free trade zone incorporating the group’s member countries (for the U.S. this is the largest free trade zone agreement), but also improvement of the investment and business climate and compliance with labor and environmental standards. Like other free trade zone agreements to which the United States is a party, the TPP includes provisions for the observance of intellectual property rights, as well the liberalization of investment regimes, especially those in the services sector.

Among the Trans-Pacific Partnership members there are countries in the Americas – the United States, Canada, Mexico, Peru, and Chile; Australia and New Zealand; and also countries in Southeast Asia, such as Singapore, Brunei, Vietnam, Malaysia, and Japan. The Trans-Pacific Strategic Economic Partnership Agreement, founded by Brunei, Chile, New Zealand, and Singapore was the TPP’s predecessor. That agreement was concluded in 2006, and in 2008 talks were launched on its expansion within the framework of a broader Trans-Pacific Partnership involving the United States.

In a word, the Trans-Pacific Partnership was not built from scratch. This alliance is an aggregate product of the already existing bilateral and regional associations in the Pacific region. It is noteworthy that among the countries that originally formed the core of the Pacific Partnership within the Trans-Pacific Strategic Economic Partnership there were such world leaders in building bilateral and regional alliances as Chile, New Zealand, and Singapore. All these countries, being leaders in their respective sub-regions (Latin America, Australia/New Zealand/ Polynesia, and Southeast Asia), managed to create a vast network of bilateral alliances which often spread far beyond the bounds of the Pacific region. When the United States and Australia joined in, bilateral agreements within the Pacific Partnership grew still more diversified.

TPP AS PART OF THE UNITED STATES’ STRATEGY OF COMPETITIVE LIBERALIZATION

The sub-regional participants in the TPP are the United States, Southeast Asian countries, Japan, Australia, and New Zealand. And within the regional groups that make up the TPP one can distinguish ANZCERTA (Australia and New Zealand Closer Economic Relations Trade Agreement), NAFTA (North American Free Trade Agreement) countries, as well as the free trade area of Peru and Chile. The TPP enables its member countries to use the accumulated regional and bilateral agreements in the Pacific Region for their transfer to the multilateral level within the entire Pacific region.

For the United States, this scenario is a logical consequence of the “competitive liberalization” strategy which has been pursued for several decades. By combining globalization (multilateral liberalization) with regional and bilateral trade liberalization, the U.S. seeks to increase the openness of foreign markets, enhance competition for access to its market, and re-orientate trade and investment flows in its favor. As the multilateral trade liberalization incentives are weakening, greater emphasis in the U.S. foreign policy strategy is being made on the optimal combination of regional and bilateral trade liberalization. From this perspective the creation of the TPP for the U.S. is a kind of mélange of bilateral (in this respect the U.S. is one of the world leaders) and regional agreements (APEC and NAFTA).

Countries that participate in a major integration group may find themselves more limited in building future alliances, especially if this group is integrated on the basis of common regulatory standards, which may vary considerably from region to region. Countries that are integration leaders in their respective regions in these circumstances enjoy “the first-mover advantage.” Priority in concluding trade agreements limits the other competitors’ room for maneuver. This system results in what may be called a “regionalization race.” The world’s leading powers seek to be the first to extend their own rules and standards in trade to the regions crucial to trade flows and economic growth. The Pacific is precisely this type of region.

The TPP’s further expansion is aimed, above all, at South-East Asia and the ASEAN countries. Among the countries that have initiated talks with the TPP on their possible participation in the TPP are the Philippines (consultations launched in September 2010), Thailand (consultations began in November 2012), and also Indonesia (consultations started in June 2013). With the inclusion of these countries in the TPP it will be possible to speak of a “friendly takeover” of a large share of ASEAN – a strategic group in the Pacific.

Other key observers and potential TPP members are also Taiwan (talks with the TPP were initiated in September 2013) and South Korea – a regional heavyweight in its own right (consultations with it were commenced in November 2013). South Korea is not only one of the most successful countries in the region in terms of economic modernization, but also one of the world economy leaders in building a diversified network of bilateral alliances on the basis of the FTA. In addition, the inclusion of these countries in the TPP may raise China’s concerns regarding the risks of its greater isolation in regional alliances in the Pacific in view of the political tensions with Taiwan and economic rivalry with South Korea.

Finally, there is Colombia that has displayed interest in joining the TPP. It initiated consultations on that score in January 2010. Like many other members of the TPP, Colombia is considered most loyal to the United States. Suffice it to recall the free trade zone agreement between Colombia and the U.S. which entered into force in 2012, and the fact that the U.S. plays the key role in the Colombian economy and trade and in the flow of migrants’ remittances. For the U.S., the use of such a powerful regional group as the TPP may be an effective tool for bolstering its role in Latin America, which has been noticeably declining in recent decades.

PROS AND CONS FOR THE WORLD ECONOMY

The emergence of the TPP will be followed by a second transcontinental link in the global chain of potential alliances – a trans-Atlantic partnership that will bring together the EU and U.S. markets. As a result, the world will have two giant trading blocs with the United States as their backbone. In these circumstances the emergence of the two transcontinental chains between the Americas and Asia, as well as between Europe and the Americas, will leave a gaping void in the transcontinental links between Europe and Asia.

The establishment of such a powerful regional alliance at the heart of the most dynamic region of the world economy can be viewed as a tool helping the world economy out of a period of chronically low growth rates. Moreover, given the fact that the liberalization in the framework of the TPP goes beyond standard reduction of customs tariffs and also includes the liberalization of investment flows, the impact on the economic growth of Pacific countries during the slowdown may be significant.

However, the growth of regionalism to transcontinental dimensions has its negative sides, too. Specifically, there may be the so-called trade deflection effect for those countries and regions which have remained outside of this integration group. In other words, while TPP members will be making gains from attracted trade and investment flows in the global economy, the other regions may see these flows run dry.

Another risk stemming from the spread of regionalism in the global economy is that it undermines the role of the World Trade Organization in the regulation of world trade: the emergence of hundreds of regional integration groups reduces the interest of the countries in multilateral liberalization, and the opening of markets becomes preferential and exclusive. In many respects the WTO crisis in the past few decades has been associated with the active advance of regionalism and the developed countries’ transition to the use of preferential agreements in the context of a better balance of power between developed and developing countries within the WTO.

Under the achieved agreement on the TPP there are no plans for trade liberalization with regard to third countries, contrary to the World Trade Organization’s principle of “openness of regional integration groups.” By excluding such major players in the region as China and having no clear strategy of building cooperation with them, the TPP produces the impression that it is an exclusive regional group rather than an inclusive one. In these circumstances it is very likely that the integration group’s positive effect on trade with third countries and, consequently, on their economic rates will be moderate. The less open to the outside world an integration group is and the wider the preferential margin its member countries enjoy, the smaller the returns from the creation of this group for world economic growth.

Alongside soaring contradictions between regionalism and multilateral regulation of international trade within the WTO, the TPP can also complicate the commencement and implementation of such a large-scale agreement for a variety of reasons, including internal political confrontation in its member countries. Suffice it to mention legislative debates in the United States on the feasibility of the TPP. In countries such as Japan, Chile or Peru there are forces that may oppose the implementation of this agreement. Demonstrations against the Trans-Pacific Partnership took place in the fall of 2015 in New Zealand. The same can be true of a possible Transatlantic Partnership, which has already triggered mass demonstrations in such European countries as Germany and Spain.

Another potential negative factor associated with the TPP is the creation of common rules and standards in trade and economic activity, which may be in conflict with or hinder the creation of alliances or other multilateral agreements. Uniform standards facilitate trade within an integration group, while beyond its boundaries the effect on trade may be negative. A similar effect was observed in creating the EU. Some East European countries (such as Slovakia) which wished to create a free trade zone with Russia faced restrictions.

The TPP’s composition is extremely heterogeneous, and this is its weakness too. This group incorporates such well developed countries as the U.S. and Japan, on the one hand, and countries with much lower levels of per capita income, like Vietnam. In addition, many TPP countries have their own regional projects, in particular, ASEAN, and also bilateral free trade agreements with large countries that are not TPP members. The divergent economic and political impulses of the member-states of such a cumbersome group will increasingly affect its political and economic stability.

The enlargement of regional integration groups, lack of coordination and the ensuing “race of regional projects” is fraught with the risk that the globalization process will get ever more politicized and the interests of the leading world powers involved in the establishment of regional blocs will be clashing over and over again. This is borne out by the origin of the crisis in Ukraine and its existential choice between the Customs Union and the Western vector of integration with the EU. In this respect, the creation of the TPP can prompt China to respond. If left outside of the Trans-Pacific Partnership, it will attempt to create alternative economic and political projects on the Asian and Eurasian tracks.

Finally, the creation of such large groups as the TPP may not just politicize the process of regional integration, but geopoliticize the process of globalization. The degree to which the current world economy, with its variety of regional alliances, meets the criteria of economic efficiency in comparison with the criteria of geopolitical expediency is still to be explored. To date it is clear that regionalism often oversteps the borders drawn solely by economic factors.

WHO STANDS TO GAIN AND WHO REAPS DIVIDENDS

As far as the balance of losses and gains is concerned, it is the United States that will benefit significantly from the creation of the TPP, and these benefits will be both economic and geopolitical. First of all, manufacturers in the U.S. and other developed countries will benefit from preferential access to the relatively closed markets in Southeast Asia, such as Vietnam, where the import duty rate reached almost 6% in 2011, and Malaysia, where the rate was 5% in contrast to 2% in the U.S. Besides, investment agreements will provide more opportunities for American companies to enter the lucrative Asian markets than for competitors from Europe or China.

Secondly, a better investment climate that the TPP is expected to bring about in Malaysia and Vietnam will provide additional opportunities for investment projects. Lastly, there are also dividends that are less quantifiable and strongly associated with geo-economic dividends: creation of a more extensive system of alliances will help attract still greater trade and investment flows. On the whole, according to Petri and Plummer estimates (2012), the U.S. export dividends after the formation of the TPP will reach $124 billion a year. In other words, its exports will go up by more than 4% per year.

Canada’s benefits are estimated at $10 billion a year, and the growth of its exports, at $15.7 billion. Canada’s business community notes the importance of the TPP for expanding the volume of export, and also for diversifying its geography. One of the key factors for Canada in strengthening integration ties in the Asia-Pacific region through the TPP will be a limited number of bilateral alliances with Asian countries on the basis of a free trade zone, as well as a growing share of the global middle class concentrated in the Asia-Pacific region. It is expected that by 2030 this share will increase to 66%. This means that the Asia-Pacific region will accumulate the main potential for growth in investment and trade flows, and in household consumption.

Table 1: TPP-related growth of the GDP and export in some countries

Source: http://www.iie.com/publications/pb/pb12-16.pdf

Among the developed countries the greatest benefit from the creation of the TPP will be derived by Japan, whose export may increase by 14%, and GDP, by more than 2% per year. This will largely reflect how much room there still remains for Japan to tap the potential of the integration projects in Asia and how the creation of the TPP will help Japan eliminate its lagging in the integration processes in the Asia-Pacific region.

Among the countries left overboard China will sustain the greatest losses – about 0.3 % of the GDP a year, and 1.2 % of exports a year. Other countries and regions vulnerable to future losses from the trade deflection effect are Europe, India, and Russia. Their losses look rather moderate against the backdrop of extremely high positive estimates for the TPP member countries, in particular, Vietnam and Malaysia. The Petri and Plummer study (2012) forecasts their GDP growth by 2025 at more than 6% and 13%, respectively. Although the liberalization of trade and investment and a better investment climate will yield a certain positive effect for the world economy as a whole, it is essential to project these dividends to multilateral trade liberalization scenarios, as well as the scenarios of more open liberalization, which somewhat extends the opening of markets of a particular integration group to third countries.

As for Russia, the emergence of the TPP and the risk of losing trade and investment flows (which this group will attract) is likely to increase the need for intensifying the Eurasian integration with the immediate neighbors and with key players in Asia, above all, China. Russia will also have to look for ways to revitalize the western track of Eurasian cooperation with the EU with a view to creating a tangible counterweight to trans-Pacific integration. More resolute strides must be taken along the path of trade and investment integration with the BRICS countries. So far Russia has left this aspect of integration practically unexplored.

In addition, Russia will have to look for ways to cooperate with the TPP and find other formats within the Asia-Pacific region, which would in due time bring Russia’s integration projects closer with the TPP. APEC may be one of such forums, while closer relations with ASEAN countries may be another objective to pursue. In more general terms, it will be necessary to seek alliances in the Asia-Pacific region that agree with the WTO standards. This work should proceed in parallel with efforts within the WTO to formulate rules or perhaps even a kind of “code of conduct” for regional integration groups to follow. This kind of “code of conduct” might include requirements for regional integration groups regarding compliance with the WTO rules, ??openness and transparency of the negotiation process, as well as the proliferation of liberalization to third countries.

A WORLD OF GEOPOLITICS INSTEAD OF ECONOMIC WORLD ORDER

What are the contours of the future world economy after the formation of the Trans-Pacific Partnership? Once the TPP has been formalized as a leading regional integration group in the world, the next phase of this mega project for world regionalism will be revolving around the Trans-Atlantic axis, which aims to connect the U.S. and the EU into a trans-Atlantic partnership on the basis of a free trade zone. This bloc will account for almost one-third of world trade in goods, for nearly 40% of trade in services and for almost 50% of the world’s GDP. European investment will constitute almost 70% of all foreign direct investment flows into the United States.

The combination of these two U.S.-led oceanic groups – Trans-Atlantic Trade and Investment Partnership and Trans-Pacific Partnership – will encompass almost two-thirds of world trade. This potential may claim a global status as a worthy rival of such global institutions as the WTO. Although the WTO accounts for more than 90% of world trade, its effectiveness in terms of giving new impetuses to trade liberalization will be increasingly challenged by dynamic regional mega-entities, which not only trade in goods, but also liberalize investment flows.

In other words, the tandem of two transcontinental alliances – the TPP and the TTIP – will in fact herald the emergence of a WTO-2, which may be complemented with coordinated monetary policies and joint development institutions. As a result, regionalism will actually reach its conceivable limits, competing in scale with other global institutions. What distinguishes this system from the current system of international institutions is the preferential nature of economic relations, as well as the United States’ central role in this system of regionalism.

Quite unexpectedly, the world economy today is faced with a paradoxical reality: it is not so much economic factors as geopolitical ones that keep the world of “triumphant capitalism” going. Indeed, the world of today surprisingly looks more like the world of Mackinder and Haushoffer, and not of Keynes or Mundell (the author of the optimum currency area theory).

• Instead of multilateral trade liberalization the world is increasingly ruled by protectionism (the competitive devaluation of currencies being one of its tools), which was advocated by such classics of geopolitics as Haushoffer:
• The formation of regional blocs proceeds along the path of “spheres of influence” and super-regions (Haushoffer’s Pan-regions, or Pan-Ideen), and not by the criteria of Mundell’s optimum currency areas.
• Instead of uniform trade liberalization within the WTO or coordinated evolution of a regional group, with due regard for the influence on third countries (spillover effects), the world map of contemporary regionalism has a striking resemblance to Mackinder’s sketch – oceanic powers of the Trans-Pacific Partnership and the Trans-Atlantic Partnership are strangling in their embrace the continental/land powers of Eurasia.

Mackinder said that the world would belong to the country that controlled Eastern Europe. In today’s context this is true of the Pacific region – a geo-economic pivot, a key factor in the competition among various regional projects in the world economy. It is no accident that the first transcontinental trade liberalization project is being created in the Pacific region.

With the formation of the TPP, regionalism is advancing to a new, trans-continental level and turning into mega-regionalism, which to an ever greater extent undermines the basis for multilateral liberalization of world trade. It brings to the fore the right of the strongest and most prosperous countries to identify the vectors of economic integration. This “megalomania of mega-regionalism” can push the world economy towards a mono-polar economic order, a “new Washington Consensus.” The building blocks for this new edifice will be provided not so much by the Bretton Woods institutions as by the largest regional integration groups.