From VoxEU, 20 December 2012
Free trade agreements are now the centre of gravity in global commerce. This column says they are also the likeliest pathway to multilateral trade liberalisation. With the US negotiating two mega deals – the Trans-Pacific Partnership and a US-EU free-trade agreement – China and other emerging economies will have no choice but to play by common rules of the game. It concludes that with all heavyweights joining the charmed circle, multilateral talks in Geneva will no longer be needed.
With President Obama looking on, China orchestrated the launch of negotiations for a tripartite free trade deal with Korea and Japan during the recent 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, i.e. the US, Japan, and the EU.
There is more than one pathway to get to economists’ panacea of global trade liberalisation. Until the mid-1990s, the multilateral path was the beaten one. Eight successive global rounds successfully brought tariffs down around the world and culminated in the launch of the World Trade Organisation. 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 US and EU that hold on to their agricultural subsidies.
As hopes for a grand Doha bargain have withered, practically all action in 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 liberalising than multilateral deals negotiated with 157 countries could ever be. They are also encompassing, regulating such areas as investment, competition policy, e-commerce, intellectual property, and government procurement (WTO 2011). Most WTO members now belong to several free trade agreements at once – the most promiscuous ones being Singapore to 18, Chile to 16, the US to 13, and Mexico to 11.
Free trade agreements are the centre of gravity in global commerce. They are also the likeliest pathway to multilateral trade liberalisation.
Consider the evolution of the agreements’ ecosystem. In the 1990s, agreements were struck mostly with nearby countries, and deals such as NAFTA were born. 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. Today, the panorama is metamorphosing toward “megaregionals”, deals subsuming multiple bilateral deals and connecting the big-time traders.
The front-running mega-regional is the Trans-Pacific Partnership agreement, currently under negotiation among the US and 11 Pacific Rim economies – including NAFTA partners Mexico and Canada, and four countries with which the US has a bilateral agreement already (Singapore, Australia, Peru, and Chile). Korea, the latest US partner, may be next in line to join the megadeal. The real linchpin, however, is Japan. Tokyo’s joining the Trans-Pacific Partnership talks will transform the Asia-Pacific economic architecture and strategic landscape. It will free trade between US and Japan, the world’s first and third largest economies that have still much to gain from freer bilateral trade and investment. Even more importantly, a deal with such trade mights as the US, 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 to the Atlantic, where Europe and the US are readying to start talks for a bilateral FTA, a groundbreaking deal that would connect the world’s two largest markets.
The transatlantic free trade agreement 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 Trans-Pacific Partners. Once wedded to each other, the US and EU have all the reason to weave all these common deals into one mammoth free trade agreement.
In this new giant trade zone are therefore such powers as the US, 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 Trans-Pacific-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 colourful field of free trade agreements. This is great news. The giant free trade agreement is far more liberalising 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 the Trans-Pacific Partnership and focus on building an intra-Asian bloc with China. However, anti-China sentiments are at an all-time high in Japan and Tokyo is more likely to play a balancing act, engaging in the Partnership while for appearances sake continuing to talk trade with China and Korea and the so-called Asean+6 talks among 16 Asian nations. The US 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. Yet another possibility is that China, Brazil, and India, worried about remaining outside mega-regionals, 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 decision-making rules may be altered to enable members to strike plurilateral deals among “coalitions of the willing” – subsets of the 157 WTO members – in areas such as trade in services.
However, all Doha issues can unlikely be dealt with through plurilaterals. In addition, struck sectorally, plurilaterals will undermine opportunities for horse-trading across sectors such as services (where the US and Europe want concessions from emerging markets) and agriculture (where Brazil wants deeper liberalisation from the US and Europe). As such, plurilaterals will not be as liberalising and comprehensive as the Trans-Pacific Partnership and US-EU Agreement – they could complement not substitute mega-regionals.
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.