The Obama administration is charting a radically different course in trade policy. The path is now clearly marked by last week’s announcement of the nomination of deputy national-security advisor Mike Froman, the architect of the new policy, as U.S. Trade Representative.
Until quite recently the United States was focused on the quest for a comprehensive multilateral trade round, the Doha Development Agenda, while also pursuing a handful of bilateral trade deals of minor importance. Today, Washington has essentially written Doha off, and is instead pursuing two giant regional deals: one with countries of the Pacific Rim, the Trans-Pacific Partnership (TPP), whose importance has been enormously enhanced by the recent addition of Canada, Japan and Mexico to its participants; and the other with Europe, the Transatlantic Trade and Investment Partnership (TTIP).
Both negotiations are widely supported by business interests and even the trade unions have voiced support for TTIP. The negotiations are intended to achieve “gold standard” deep and comprehensive trade agreements, a familiar objective of recent bilateral negotiations involving the United States. However, since the TPP and TTIP combined would comprise thirty-nine countries that account for over 60 percent of world trade, the new megaregional negotiations resemble in scope and ambition those of a multilateral trade round rather than a traditional regional deal. In fact, taken together, they bring to mind the early GATT (General Agreement on Tariffs and Trade) Rounds whose negotiations were dominated by the advanced countries, with the United States in the lead.
Twenty-six countries, nearly all advanced economies, took part in the Geneva and Dillon GATT Rounds. Only one, the United States, positioned once again at the center of the system, is participating in both TTIP and TPP. As was the case under the GATT, and in stark contrast to the WTO arrangements, developing countries are likely to play a largely subsidiary role in the TPP and TTIP negotiations, while advanced countries will lead. Only a handful of participating TPP and TTIP countries are classified as developing by the World Bank, and they represent just a small fraction of the deal participants’ combined GDP.
Far from the grand multilateral design of John Maynard Keynes and Harry Dexter White at Bretton Woods in 1944, which paved the way for the IMF, the World Bank and eventually for the GATT system and subsequently for the WTO, the new policy has a troublingly makeshift character. The new U.S. trade policy originated in an invitation by four small countries to join the then-minuscule TPP, but which then generated its own momentum as Doha faltered, concerns about China’s territorial disputes in Asia escalated, and European allies worried about being left behind by the United States’ trumpeted “pivot” to Asia insisted on getting more attention.
The Best of All Possible Worlds
To misquote Carl von Clausewitz, trade policy is the pursuit of diplomacy by other means. Accordingly, a central aim of the impending trade negotiations across both the Pacific and the Atlantic is to cement alliances between countries that share interests in security, democracy promotion, and many other areas. It is no accident that U.S. trade policy is largely run out of the National Security Council in the White House. While this lends the new policy weight within the administration, it also carries the risk of political considerations getting far ahead of economic realities—such as the ability to actually deliver on trade reforms—and to do so while promoting America’s enormous economic interest in China, and in a dozen other large emerging nations that are shaping up to be the trade giants of the twenty-first century.
Still, if it succeeds, the new trade policy may not only consolidate alliances but also impart new momentum to the trading system and help the United States to reassert its leadership in economic relations after the debacle of the Great Recession. Together with the European Union (EU) and its TPP partners, the United States can essentially eliminate tariffs, free foreign direct investment, make government procurement more competitive, raise the bar on the many standards, regulations, and disciplines governing trade and intellectual property, and harmonize and rationalize domestic regulations in areas ranging from competition to government procurement. Moreover, if they succeed, the negotiations could provide a platform from which to effectively determine global standards for everything from car safety, fuel economy, and emissions to accounting and insurance regulation, sanitary and phytosanitary standards, and patent and copyright law.
In addition, the new strategy could trigger a new wave of global liberalization through bilateral trade agreements by countries trying to avoid exclusion or seeking to exploit the new opportunities presented by more closely integrated megaregional markets.
The Feasibility Question
Despite the announcement of tight deadlines to complete negotiations when—and, indeed, whether—the agreements will be concluded is highly uncertain, and their liberalizing effects are likely to be more modest than the sanguine estimates suggest. This should not be surprising, since trade among the parties already flows freely and, where it does not, it is usually because the resistance of vested interests has proven impassable.
The points of greatest contention in the TPP and TTIP represent a long history of well-documented disagreements and disputes. For example, over the last few years, there have been rows between the US and EU over animal welfare, privacy laws, defense contracts, subsidies for aircraft manufacturers, and genetically modified food, to name only a few. In agriculture, the irresistible force of powerful U.S. export interests will meet the immovable obstacles of the EU’s Common Agricultural Policy and of Japan’s LDP farmer constituency.
Tariffs will be harder to reduce than imagined. High tariffs in textiles and garments, steel, trucks, sugar and cotton, have existed for so long because there are powerful interests behind them.
Changing regulations that impede trade will be even more challenging than tariffs to negotiate. Regulations are highly technical and exist to protect health, the environment, or safety. Tariffs are clearly protectionism, but regulations are more ambiguous. The merits of a particular change in regulation must be agreed by the relevant agency and can be grounds for genuine differences of opinion among experts over what a change will do.
The absence of authority to fast track the agreement through Congress and the fact that the Obama administration has not asked for it (presumably because the White House fears Congress will refuse) could be fatal. The absence of a fast track is also a powerful signal that the political forces in support of such far-reaching negotiations as TTIP and TPP are not aligned.
European negotiators will have to contend with their own internal divisions, aggravated by the chronic Euro crisis. Hypercompetitive Germany enthusiastically supports a deal. But other countries—such as Spain, with a quarter of its population unemployed, or Italy, whose car market has collapsed—will be reluctant to make concessions if doing so would make things even worse on their national economies. And the euro crisis is likely to be with them for years to come.
The Elephant in the Room
Viewed narrowly from an economic perspective, there is a counterhistorical feel to America’s new trade policy. Its two giant regional agreements exclude China, Washington’s largest Asian trading partner and the world’s fastest-growing large trading nation by far, which now accounts for close to 10 percent of global imports. China is already the largest export market for all the TPP countries except for Vietnam and U.S. NAFTA partners Canada and Mexico.
China and other powerful countries left out of the agreements, namely the other members of the BRICS club (Brazil, Russia, India, and South Africa) and other giant economies such as Indonesia, are unlikely to welcome their isolation from the mainstream of global trade reform. If the new American strategy becomes perceived as an attempt to resuscitate a kind of GATT system driven by advanced countries, it is bound to deepen the division between advanced and developing countries that was largely to blame for Doha’s demise.
In pure economic terms, the effect of the TPP and the TTIP on China may be marginal. China may lose some markets as a result from these agreements, especially given that the TPP is set to include countries whose exports often mirror those of China. However, bearing in mind that U.S. and Japanese tariffs as well as EU tariffs are already low, and in most regional trade agreements preference margins tend to be very low anyway, the adverse effects on Chinese exports are likely to be very small.
Shifting global standards may also help rather than hurt China. If an agreed U.S./EU industrial standard is applied, China may simply opt to adopt them, and reduce its cost of serving a world market. China took this approach when it adopted WTO disciplines during its accession process, which helped it to become the world’s most competitive economy.
Or, if it prefers, China is also big enough—and would find enough allies in the other BRICS—to refute new rules regarding intellectual property or state-owned enterprises, for example.
China will also continue to pursue its own free-trade negotiations, marked by modalities and priorities set according to its own agenda. The announcement of the Regional Comprehensive Economic Partnership—a proposed intra-Asian megaregional agreement including the Association of Southeast Asian Nations as well as Australia, India, China, Japan, New Zealand and South Korea—is a step in this direction. The rise of competing megaregionals poses a clear risk of fragmentation and tension throughout Asia.
In the final analysis, the pursuit of megaregional agreements comprising the lion’s share of world GDP is likely to overshadow any liberalization initiatives in Geneva. It will also eliminate any residual pretense that the WTO can develop more effective rules to guide the design of regional agreements. Moreover, the investor-state dispute-settlement mechanisms advocated as part of the TPP could replace the WTO’s system of state-state dispute settlement in a large and growing number of cases.
Yet, the megaregionals would leave some of the biggest remaining impediments to world trade unaddressed. Their participants do not have the highest tariffs or the most freedom to raise them under WTO rules. These distinctions belong to the developing economies, such as India, Brazil, and South Africa. Moreover, crucial issues such as agricultural subsidies—whose reduction has a most-favored-nation effect by definition—are excluded from the regional deals.
Nor will the mega-regionals leave much room for negotiation of issue-centered “plurilateral” agreements among a subset of countries under the WTO. Combined, TPP and TTIP will account for a very large share of world trade in the sectors of greatest interest to their members, greatly reducing the attraction of negotiating plurilateral deals under the aegis of the WTO.
There are two ways to increase the likelihood of success and mitigate the risks associated with Washington’s bold new strategy.
First, a healthy dose of realism about what can be achieved and by when will help manage expectations and retain the credibility of the process. Obtaining fast-track authority will likely be essential to making progress early on and to closing deals.
Second, China should be encouraged to join TPP negotiations—and the sooner the better. The EU, China and the United States also need to make a determined effort to harvest what is possible from Doha and to revitalize the multilateral process. China should take on the sort of greater leadership role in the WTO that it has so far carefully eschewed.
The new U.S. trade policy holds promise, but only if it does not marginalize the WTO and provoke determined resistance by developing countries. And as the world’s largest exporter, China has a big stake in ensuring that multilateral collaboration retains its relevance in the presence of the new megaregionals. Neither the United States nor China can afford a return to an outdated GATT-like system in which the advanced countries are calling the shots while developing countries watch from the sidelines.