The Surprise End Game in Global Trade

With President Obama looking on, China orchestrated the launch of negotiations for a tripartite free trade deal with Korea and Japan during last week’s East Asia Summit. But as much as China is assumed to be the new powerbroker in global commerce, Beijing’s moves are reactionary. The end game in world trade politics is controlled by the three economies that brokered deals also in the 20th century: United States, Japan, and European Union.

There are more than one pathway to get to economists’ panacea of global trade liberalization. Until the mid-1990s, the multilateral path was the beaten one. Eight successive global trade rounds successfully brought tariffs down around the world and culminated in the launch of the World Trade Organization (WTO). But barricading progress in the 11-year old Doha round are deep disagreements among large emerging markets like China, India, and Brazil that protect their goods and services sectors, and the United States and EU that hold on to their agricultural subsidies.

As hopes for a grand Doha bargain have withered, practically all action in the global trade has shifted to free trade agreements. Struck among two or a few countries committed to getting to a deal, most of the over 200 free trade agreements criss-crossing the world are far more liberalizing than multilateral deals negotiated with 157 countries could ever be, and they are also encompassing, regulating such areas as investment, competition policy, e-commerce, intellectual property, and government procurement. Most WTO members now belong to several FTAs at once – the most promiscuous ones, Singapore to 18, Chile to 16, United States to 13, Mexico to 11.

 FTAs are the center of gravity in global commerce. They are also the likeliest pathway to multilateral trade liberalization. 

Consider the evolution of the FTA ecosystem. In the 1990s, FTAs were struck mostly with nearby countries, and born were such deals as NAFTA. In the 2000s, countries forged bilateral accords with partners across the oceans, often a large economy with a smaller one – think US-Australia, Chile-Japan, and EU-South Africa FTAs. Today, the FTA panorama is metamorphosing toward “megaregionals”, deals subsuming multiple bilateral deals and connecting the big time traders. 

The frontrunning megaregional is the Trans-Pacific Partnership (TPP) agreement currently under negotiation among the United States and 11 Pacific Rim economies – including US NAFTA partners Mexico and Canada, and four countries with which the United States has a bilateral FTA already, Singapore, Australia, Peru, and Chile. Korea, the latest US FTA partner, may be next in line to join the megadeal. The real linchpin, however, is Japan. Tokyo’s joining the TPP talks will transform the Asia-Pacific economic architecture and strategic landscape. It will free trade between US and Japan, world’s first and third largest economies that have still much to gain from freer bilateral trade and investment. Even more importantly, a TPP with such trade mights as the United States, Japan, Korea, Mexico, and Canada will do what it is meant to do, put pressure on China to join, open its markets further, and play by common rules of the game.  

 Now come to the Atlantic, where Europe and the United States are readying to start talks for a bilateral FTA, a groundbreaking deal that would connect the world’s two largest markets. 

The transatlantic FTA becomes the point of no return in world trade. Much like the US, the EU has deals with Mexico, Canada, Colombia, Peru, Korea, Australia, and Chile, and it is currently completing bilaterals with Singapore, Malaysia, Vietnam, and Japan, all future US TPP partners. Once wedded to each other, the US and EU have all the reason to weave all these common deals into one mammoth FTA.   

In this new giant trade zone thus are such powers as United States, EU, Japan, Korea, Canada, Mexico, Malaysia, Australia, Singapore; out remain the largest emerging nations, India, Brazil, and China. Though now corned into term-takers, these emerging nations should have every incentive to dock to the TPP-US-EU zone. With all heavyweights joining the charmed circle, multilateral talks in Geneva will no longer be needed: rather than arriving at a big bang deal at the WTO, global trading powers will have arrived at a multilateral deal through the back alley, the colorful field of free trade agreements. This is great news: the giant FTA is far more liberalizing and comprehensive than could ever be attained in Geneva. Provided the members to this megascheme do not raise barriers to third parties, the deal will also be good cholesterol to worldwide commerce.

What could derail this sequence of events? Japan, torn between America and China, might bail out of TPP and focus on building an intra-Asian bloc with China. However, anti-China sentiments are at all-time high in Japan and Tokyo is more likely to play a balancing act, engaging in the TPP while for appearances sake continuing to talk trade with China and Korea and the so-called Asean+6 talks among 16 Asian nations. The United States and EU may not be able to iron out their differences on regulations or overcome the endless tug of war between their aerospace giants, America’s Boeing and Europe’s Airbus. But at the same time, business lobbies are driving hard for a deal to fire up the sluggish US and European economies and expand transatlantic trade in services. Still another possibility is that China, Brazil, and India, worried about remaining outside megaregionals, may end up conceding more at the multilateral level so as to get Doha back on track. But for now, a grand bargain seems beyond reach. 

Of course, the WTO’s consensus-based decisionmaking rules may be altered to enable members to strike plurilateral deals among “coalitions of the willing” – subsets of the 157 WTO members – in such areas as trade in services. However, all Doha issues can unlikely be dealt with through plurilaterals. In addition, struck sectorally, plurilateral will undermine opportunities for horse-trading across such sectors as services (where US and Europe want concessions from emerging markets) and agriculture (where Brazil wants deeper liberalization from US and Europe). As such, plurilaterals will not be as liberalizing and comprehensive as the TPP and US-EU FTA – they could complement not substitute megaregionals. 

As disappointing as the Obama administration’s record on leadership in global trade has been, recent US moves on the global trade chessboard with America’s allies can be transformative for the global trading system. Both the administration and Congress must keep the broader significance of the new deals in mind. This is America’s chance to get it right for America and world trade – and it is America’s game to lose.   


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