Trade blocs world

We will soon see the cre­ation of the first glob­al-scale trade-blocs: exclu­sive inter­na­tion­al trade zones. What will it be like? The short answer (if you want to stop read­ing here) is: the direct eco­nom­ic impact will be rather mod­est but the blocs will be a dis­as­ter for rules-based WTO trad­ing sys­tem. That could have much more seri­ous eco­nom­ic con­se­quences.

[Note: I wrote this essay almost a year ago in the sec­ond half of 2015 but did not post it then. I sus­pect­ed it was pre­ma­ture: it already seemed unlike­ly that the TPP would be signed and rat­i­fied before the end of the Oba­ma Pres­i­den­cy and the fate of the TPIP was still more uncer­tain. So there seemed time to reflect a lit­tle fur­ther on the rela­tion­ship between the blocs and the WTO, and per­haps to take account of the WTO Min­is­te­r­i­al meet­ing in Nairo­bi. In the time since I wrote this, noth­ing much has moved for­ward save that Aus­tralia and Chi­na reached a bilat­er­al agree­ment that may make a small open­ing between ‘blocs’. The WTO still looks to be in indif­fer­ent health. As for the ‘ecol­o­gy’ of WTO, I sus­pect nei­ther Mrs Clin­ton nor Mr Trump will care much. ]

The Unit­ed States, Aus­tralia, Japan, Cana­da and eight oth­er coun­tries will soon cre­ate a trade agree­ment that dis­crim­i­nates against the exports, invest­ments (and investor rights) of the largest econ­o­my in the Pacif­ic basin.1 In Australia’s case, we will be dis­crim­i­nat­ing against our most impor­tant trad­ing part­ner. The Unit­ed States is also plan­ning to join with the Euro­pean Union in a sec­ond mega-region­al agree­ment that will dis­crim­i­nate against the rest of the world. There are hun­dreds of oth­er dis­crim­i­na­to­ry trade agree­ments agreed in the past twen­ty years. But none has been pro­mot­ed as “rewrit­ing the rules of trade” on the scale of the TTP2 or the TTIP. None has been sold as a means of pre-empt­ing the poli­cies of a major trad­ing nation.3

The eco­nom­ic impacts of the TPP4 and TTIP5 will be mod­est. In the case of TPP, the val­ue of mar­ket-access pref­er­ences implied will like­ly be small rel­a­tive, for exam­ple, to oth­er trade costs such as trans­port, port and logis­tics costs. For­mal bar­ri­ers to trade in man­u­fac­tured and resource goods are already low, on aver­age, through­out the region so mov­ing clos­er to ‘free trade’ in these goods is not a giant step. There are no signs that the USA or Cana­da or Japan are plan­ning to remove their peak trade bar­ri­ers (or sub­si­dies) on food and agri­cul­ture as part of the pref­er­ence deal and it is unclear how much progress will be made on open­ing ser­vices mar­kets in the TPP. Eco­nom­ic mod­ellers project big­ger gains from increased invest­ment oppor­tu­ni­ties than from exports fol­low­ing the TPP. They say, too, that the poten­tial loss­es from the ‘diver­sion’ of TPP mem­bers’ imports to oth­er mem­bers and away from Chi­na (or India etc) are small.

The exclu­sive mega-region­al pref­er­ences will not over­ride WTO oblig­a­tions to non-mem­ber coun­tries and, in the case of the TPP, some mem­ber coun­tries may act inde­pen­dent­ly to dull their dis­crim­i­na­to­ry impact.6 They may decide to extend some of the ben­e­fits in their own mar­kets to Chi­na (or oth­er non-mem­bers) on a nego­ti­at­ed or uni­lat­er­al basis, weak­en­ing the pref­er­ence perime­ters of the bloc. Some mem­bers of the TTP bloc (Aus­tralia) may also join the pro­posed Region­al East Asian Com­pre­hen­sive Eco­nom­ic Part­ner­ship — a mega-region­al pref­er­en­tial agree­ment that would include Chi­na and India — cre­at­ing over­lap­ping ‘geome­tries’. It is even pos­si­ble, although not like­ly, that APEC’s ambi­tious Free Trade Area of Asia and the Pacif­ic, bring­ing togeth­er all of the coun­tries of the Pacif­ic basin includ­ing Chi­na, will find its legs and bring all Pacif­ic coun­tries under the same free-trade umbrel­la.

But even if their impacts on trade flows are mod­est and their dis­crim­i­na­tion incom­plete, the blocs will have great poten­tial to harm the WTO sys­tem of trade rules. That sys­tem, which has been in place since the late 1940s has so-far sur­vived the explo­sion in bilat­er­al and region­al agree­ments over the past twen­ty years. But the TTP and TPIP trade blocs have a much greater scale and scope than any of the oth­er region­al ‘free trade’ agree­ments (with the excep­tion of the Euro­pean Com­mu­ni­ties). The rules and stan­dards of the TTP or the TTIP will become bind­ing con­straints on mem­ber gov­ern­ments’ com­mer­cial poli­cies, enforced by con­tracts with key trad­ing part­ners. If we are to believe the slo­gans, they will be rules for “21st cen­tu­ry” trade.

The rules of WTO will con­tin­ue to bind, too. But some of WTO’s rules are out of date and more are head­ed that way. Today’s WTO rules arise from agree­ments reached twen­ty years ago. They were made to address still ear­li­er com­mer­cial envi­ron­ments and chal­lenges from the 1980s (the orig­i­nal CAP, TRIMS, tex­tile quo­tas…). The obso­les­cence of one such rule was the ori­gin of a spat between India and her WTO trad­ing part­ners over the imple­men­ta­tion of the only new set of rules (in fact, not rules but ‘best efforts’ under­tak­ings) WTO mem­bers have nego­ti­at­ed in the past twen­ty years: the 2013 Trade Facil­i­ta­tion Agree­ment (TFA). India want­ed an old rule on account­ing for pub­lic food sub­si­dies updat­ed before the new agree­ment was made final. That dis­pute was papered-over on the sec­ond or third attempt, but it has not gone away.

Of course, there’s noth­ing wrong with the trade blocs adopt­ing new stan­dards, or being more up-to-date or adopt­ing entire­ly new oblig­a­tions on e.g. invest­ment. The rules they devel­op might not be con­gru­ent with WTO rules, but its unlike­ly they will be incon­sis­tent. In fact the TTP and TTIP rule-sets will be incom­plete. They will depend on the basic rules, con­cepts and process­es of WTO — such as those in Part II of the GATT for exam­ple that guar­an­tee MFN and nation­al-treat­ment rights and the appli­ca­tion of his­tor­i­cal GATT com­mit­ments — to make up the full suite.

The prob­lem real­ly lies in the WTO. A decade of attempts to equip it with updat­ed rules failed when the Doha Round col­lapsed in 2008. That frus­trat­ing expe­ri­ence cer­tain­ly played a part in the USA’s deci­sion to pur­sue mega-region­al agree­ments with coun­tries more sym­pa­thet­ic to its objec­tives or who would at least hum-along when the USA called the tune. Now, with the focus of North Amer­i­ca, Europe, the Pacif­ic and even Chi­na on rule-mak­ing any­where oth­er than WTO, the prog­no­sis for the ‘rules based’ inter­na­tion­al trade sys­tem, so painstak­ing­ly con­struct­ed in the sec­ond half of the 20th cen­tu­ry, is poor.

Is this a big deal? Yes; it is fun­da­men­tal. James Mad­di­son, who draft­ed much of the USA con­sti­tu­tion and each of its first ten amend­ments, wrote that the essen­tial chal­lenge of a con­sti­tu­tion was to “first enable the gov­ern­ment to con­trol the gov­erned; and in the next place oblige it to con­trol itself”. In the gov­er­nance of the world econ­o­my, the WTO rules sup­ply this sec­ond role. They oblige gov­ern­ments to gov­ern them­selves as they seek to con­trol mar­kets. For­mer WTO Chief Econ­o­mist Patrick Low calls them WTO’s most impor­tant “gift to glob­al order and pre­dictabil­i­ty…”.

What will hap­pen to these rules once the world is divid­ed into trade blocs? As in the case of pro­ject­ed trade flows, there may not be any dra­mat­ic changes. Gov­ern­ments will con­tin­ue to pay their WTO mem­ber­ship dues because the basic trade guar­an­tees it offers are, for the present, irre­place­able. But, the out­look is for insid­i­ous dete­ri­o­ra­tion.7

We will wit­ness a sort of slow-motion train-wreck in which many of the WTO rules still func­tion as they have always done. But oth­er rules — espe­cial­ly among the most recent­ly-made (in the mid-1990s) — have already lost salience and will soon no longer make sense. The cir­cum­stances they address, the thresh­olds and pro­ce­dures they impose, will be by-passed by the every-day tumult of con­tin­u­al­ly reshap­ing inter­na­tion­al trade.

Like the food-sub­sidy rules India cit­ed, these rules will look dat­ed at first and then fool­ish and then infea­si­ble. Mem­ber gov­ern­ments are very like­ly sim­ply to ignore them while the breach­es are not ‘glar­ing’. They will bank on the dis­cre­tion (or dis­trac­tion) of their trad­ing part­ners not to bring their non-com­pli­ance to a WTO dis­pute. But as the pro­por­tion of obso­lesc­ing WTO rules mounts — both because of pass­ing time and because the new more-rel­e­vant rules of the mega-region­al agree­ments over­shad­ow or even by-pass them — the prob­lem will become ‘sys­temic’. The WTO and its cru­cial dis­putes set­tle­ment sys­tem will loose cred­i­bil­i­ty.

Although the dete­ri­o­ra­tion will be grad­ual, the speed of the change is still like­ly to sur­prise. I spec­u­late that the mech­a­nism will be a dete­ri­o­ra­tion in the ecol­o­gy of the WTO, brought about by the trade-blocs, that will accel­er­ate prob­lems of the Organization’s rel­e­vance. Although it has an his­toric rep­u­ta­tion of being “closed” to busi­ness and to non-gov­ern­men­tal orga­ni­za­tions, WTO is strong­ly con­nect­ed to the inter­na­tion­al polit­i­cal-econ­o­my of trade. This com­plex envi­ron­ment com­pris­es gov­ern­ments, nation­al and inter­na­tion­al busi­ness groups and and many oth­er NGOs whose inter­ac­tion — indi­rect­ly through pub­lic diplo­ma­cy or direct­ly through nation­al gov­ern­ment rep­re­sent­ed at WTO — is an impor­tant index of the system’s con­tin­ued health.

The ideas, ini­tia­tives and even dis­putes that, in a prag­mat­ic way, dri­ve the WTO sys­tem for­ward in the long peri­ods between nego­ti­at­ed agree­ments, do not come from its mem­ber gov­ern­ments alone or even prin­ci­pal­ly from gov­ern­ments. They come from many groups whose inter­ests are pri­vate (or aca­d­e­m­ic), not pub­lic. Trade is, after all, a pri­vate activ­i­ty. So the demand for new rules or the revi­sion of rules at least since the 1960s Kennedy Round of GATT nego­ti­a­tions, typ­i­cal­ly begins with pres­sure from so-called ‘stake­hold­ers’. The inno­va­tions of the Uruguay Round in the mid-1980s, for exam­ple, in extend­ing the GATT rules to ser­vices trade and inte­grat­ing con­cepts and rules on the treat­ment of intel­lec­tu­al prop­er­ty in trade were devel­oped and pressed on gov­ern­ments specif­i­cal­ly by inter­na­tion­al busi­ness groups. The ener­gy of agri­cul­tur­al exporters and importers who demand­ed change to the GATT rules on agri­cul­tur­al sub­si­dies and mar­ket access in the 1980s was due to polit­i­cal­ly effec­tive coali­tions of farm­ers’ groups. More recent­ly, the adop­tion of the TFA agree­ment at the WTO Min­is­te­r­i­al meet­ing in Bali in 2013 was the result of relent­less pres­sure from busi­ness groups, espe­cial­ly the Inter­na­tion­al Cham­ber of Com­merce (ICC) that had been pur­su­ing for­mal rules on trade facil­i­ta­tion for almost a cen­tu­ry.

The inter­ests, oblig­a­tions and shift­ing coali­tions that link pri­vate stake­hold­ers, nation­al gov­ern­ments and WTO in the cre­ation and main­te­nance of the trad­ing sys­tem are well described else­where (Hudec, Hoek­man and Kostec­ki, Van Grasstek). But it is impor­tant to note, now, that dilu­tion of gov­ern­ments’ com­mit­ment or atten­tion in favour of the trade blocs will impact not only on WTO itself but also on the oth­er inter-con­nect­ed parts of the WTO ecol­o­gy, espe­cial­ly busi­ness. This in turn weak­ens WTO’s impor­tance to busi­ness whose inter­ac­tion with gov­ern­ment — and with the WTO itself — will now reflect a re-esti­ma­tion of the WTO’s influ­ence on gov­ern­ment pol­i­cy (and vice ver­sa). The ener­gy con­tributed by any one of the ‘influ­encers’ depends to some extent on the per­ceived ener­gy of the oth­ers. There is a sort of feed-back rela­tion­ship between each of them that can accel­er­ate a trend once it takes hold.

Multi­na­tion­al firms — the ini­tia­tors of some two-thirds of world trade through a host of val­ue-adding pro­duc­tion net­works — have been force­ful advo­cates for the lib­er­al trad­ing sys­tem.8 ICC’s lob­by­ing on behalf of the Bali TFA agree­ment is only the lat­est instance in a cen­tu­ry of its inter­ven­tion with gov­ern­ments in sup­port of mul­ti­lat­er­al trade rules.9 But a clear con­clu­sion I drew from work­ing on their his­to­ry is that the effec­tive­ness of their advo­ca­cy depends cru­cial­ly on the effec­tive­ness of col­lab­o­ra­tion with­in inter­gov­ern­men­tal insti­tu­tions.10

Con­sid­er this: ICC was mak­ing the same case on trade facil­i­ta­tion to gov­ern­ments and to the League of Nations in the late 1920s that it put to gov­ern­ments (the G20) and the WTO in Bali in 2013. The case was almost as force­ful then as it is now. The dif­fer­ence? In the late 1920s, the League was unable to put any inter­gov­ern­men­tal under­stand­ing on trade into effect. Its mem­bers, by then divert­ed by pref­er­en­tial arrange­ments (UK Impe­r­i­al pref­er­ences) or nation­al­ist fan­tasies (Ger­many, to a less­er extent France) or a deter­mi­na­tion to ‘go it alone’ (USA), paid the League lip-ser­vice at best. ICC failed in its efforts to bring about the sim­pli­fi­ca­tion of cus­toms for­mal­i­ties and finan­cial instru­ments. Its influ­ence shrank — along with the prospects for inter­na­tion­al trade ‘dis­ar­ma­ment’ — until 1946 when it emerged re-invig­o­rat­ed by a new era of strong inter­gov­ern­men­tal col­lab­o­ra­tion.

The WTO still had the capac­i­ty — just — to reach a col­lab­o­ra­tive deci­sion in 2013. Then it stum­bled over the imple­men­ta­tion of the TFA agree­ment when India again pressed its case against out­dat­ed rules in agri­cul­ture. It is easy to imag­ine a lit­tle more dis­af­fec­tion among WTO gov­ern­ments whose mem­ber­ship of the mega-region­al agree­ments has re-assigned their pri­or­i­ties will see the Orga­ni­za­tion — wal­low­ing for a decade and a half in fruit­less pur­suit of a Doha Round con­sen­sus — stymied on some cru­cial issue (a DSU prob­lem?). At that point the ecol­o­gy becomes fusty; inter­ac­tion debil­i­tates…

What then? Because the mega-region­al rule-sets are incom­plete, the USA, the EU and their bloc-mates will cer­tain­ly want to restore WTO rules to their full oper­a­tion. The dynam­ic growth of Chi­na, India and the oth­er emerg­ing economies over the next decades will shrink the blocs’ shares of world trade and pro­duc­tion. Their need for a robust set of non-dis­crim­i­na­to­ry mul­ti­lat­er­al trade rules will grow stronger.

But, after some peri­od of exclud­ing Chi­na, India and the rest from their coun­cils, what will they need to offer to repair the truce that they jeop­ar­dised by their dis­crim­i­na­to­ry deals?


  1. When its out­put is mea­sured on a PPP basis, Chi­na is said to be the world’s largest econ­o­my. As this paper argues (I agree) there Chi­na is not like­ly to seek an invi­ta­tion to join the Trans-Pacif­ic Part­ner­ship (TPP) mega-region­al agree­ment, but rather to take oth­er steps to elim­i­nat­ed any com­mer­cial dis­ad­van­tage of the dis­crim­i­na­to­ry pref­er­ences. 

  2. The TTIP’s two mem­bers account for about half of cur­rent world out­put. The oth­er mem­bers of TTP about anoth­er 15 per­cent. The two groups there­fore account for some two-thirds of world GDP. Imports and exports of the TTP group rep­re­sents about 25 per­cent of world imports and exports (mer­chan­dise), the EU adds about anoth­er 33 per­cent. So, the two trad­ing blocs account for about 58 per­cent of cur­rent world goods trade. Data is from ITC Trade Map for the year 2013. 

  3. …But as we speak, Chi­na wants to write the rules for the world’s fastest-grow­ing region. That would put our work­ers and our busi­ness­es at a dis­ad­van­tage. Why would we let that hap­pen? We should write those rules. “Pres­i­dent Oba­ma in his State of the Union Address (2015). See: https://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-union-address-january-20–2015. 

  4. There are sev­er­al eco­nom­ic mod­els of the expect­ed impacts of the TPP. For exam­ple: Li, C, and Whal­ley, J. 2012. “Chi­na and the TPP: A numer­i­cal sim­u­la­tion assess­ment of the effects involved” from http://www.nber.org/papers/w18090 Peter Petri,MG Plum­mer, and F Zhai. sketched their results in “The Trans-Pacif­ic Part­ner­ship and Asia-Pacif­ic Inte­gra­tion: Pol­i­cy Impli­ca­tions”, a Peter­son Insi­tute Pol­i­cy Brief avail­able here: http://piie.com/publications/pb/pb12-16.pdf. In a more recent paper, the same authors esti­mate aver­age gains from the 12-mem­ber TPP by 2025 will be less than one- per­cent of region­al GDP, most of which will accrue to coun­tries such as Japan that do not cur­rent­ly have an FTA with the Unit­ed States. (Petri, Peter A, Michael G Plum­mer, and Fan Zhai. 2014. “The TPP, Chi­na and the FTAAP: The Case for Con­ver­gence” avail­able from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2438725) 

  5. The Euro­pean Commission’s “Impact assesse­ment” of the TTIP projects a region-wide incre­ment of just 0.3 per­cent of GDP as a result of agree­ment on that mas­sive trade bloc. See: http://www.europarl.europa.eu/RegData/etudes/etudes/join/2014/528798/IPOL-JOIN_ET per­cent 282014 per­cent 29528798_EN.pdf. Trade econ­o­mist Alan Win­ters, how­ev­er, puts the like­ly impact at only one-tenth of that. See: http://www.voxeu.org/article/problem-ttip 

  6. The TTIP bloc will be more mono­lith­ic than TPP. Indi­vid­ual Euro­pean mem­ber coun­tries in the TTIP trad­ing bloc will not have the option of grant­i­ng or nego­ti­at­ing the same terms with third coun­tries because they can­not deter­mine their own exter­nal trade poli­cies owing to their mem­ber­ship of the Euro­pean Com­mu­ni­ties. 

  7. The only inter­gov­ern­men­tal organ­i­sa­tion of com­pa­ra­ble scale that has col­lapsed for lack of cred­i­bil­i­ty was the League of Nations. But it was deformed at birth by the USA’s fail­ure to rat­i­fy the Ver­sailles Treaty. The League’s Eco­nom­ic and Finance Office fell into dis­re­gard by gov­ern­ments in its first decade — even before the Great Depres­sion — ten years before the World War crushed what was left of The League. 

  8. Accord­ing to UNCTAD, upwards of two-thirds of world trade now takes place with­in multi­na­tion­al com­pa­nies or their sup­pli­ers – under­lin­ing the grow­ing impor­tance of glob­al sup­ply chains (See the WTO’s World Trade Report 2013, p 54). 

  9. ICC — his­tor­i­cal­ly the prin­ci­pal forum for MNEs — was one of three NGOs invit­ed to attend, and the only NGO to speak at the foun­da­tion meet­ings of the post-war trad­ing sys­tem on behalf of a through-going mul­ti­lat­er­al trade-lib­er­al­ism. Since the ran­corous Tokyo Round of trade nego­ti­a­tions in the 1970s, ICC’s unique rep­re­sen­ta­tion of glob­al firms has secured excel­lent high lev­el access to GATT and WTO. It meets reg­u­lar­ly with nation­al del­e­ga­tions in Gene­va as well as the Sec­re­tari­at. Its trade lead­er­ship includ­ed William Eber­le (Pres­i­dent Nixon’s Trade Rep­re­sen­ta­tive) and Arthur Dunkel, Sec­re­tary-Gen­er­al of GATT after he retired. 

  10. See the final chap­ter of my draft his­to­ry of ICC

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