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.[^Fn10] 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 TTP[^Fn12] or the TTIP. None has been sold as a means of pre-empting the policies of a major trading nation.[^Fn11]
[^Fn10]: 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.
[^Fn11]: “…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.
[^Fn12]: 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.
The economic impacts of the TPP[^Fn1] and TTIP[^Fn9] 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.
[^Fn1]: 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)
[^Fn9]: 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
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.[^Fn2] 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.
[^Fn2]: 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.
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.[^Fn3]
[^Fn3]: 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.
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.[^Fn4] 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.[^Fn5] 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.[^Fn6]
[^Fn4]: 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).
[^Fn5]: 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.
[^Fn6]: See the [final chapter](http://petergallagher.com.au/index.php/site/article/draft-history-of-icc#chapter69:futurechallenges “Draft history of ICC: final chapters – Peter Gallagher”) of my draft history of ICC.
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?