Mega-regional Trade Agreements Game-Changers or Costly

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Global Agenda Council on Trade & Foreign Direct Investment
Mega-regional Trade
Agreements
Game-Changers or Costly
Distractions for the World
Trading System?
July 2014
© World Economic Forum
2014 - All rights reserved.
No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying
and recording, or by any information storage and retrieval system.
The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all
participants or of the World Economic Forum.
REF 160414
Contents
6 Executive Summary – Anabel González
11 1. Introduction – Anabel González
13 2. Setting the Stage
13 2.1 Mega-regionals: What Is Going on? – Ricardo
Meléndez-Ortiz
14 2.2 The Trans-Pacific Partnership (TPP) and the
Trans-Atlantic Trade and Investment Partnership
(TTIP) – Key Issues and Potential Impact on
Members – Peter Draper and Ricardo MeléndezOrtiz
18 3. The Rationale behind Mega-regionals – Two Views
18 3.1 Why Mega-regionals? – Susan Schwab and
Karan Bhatia
20 3.2 The Political Economy of the Rise of Megaregionals – Wang Yong
22 4. The Impact of Mega-regionals
22 4.1 Discriminatory and Multilateralizing Potential of
TPP and TTIP Provisions – Ricardo Meléndez-Ortiz
23 4.2 The Economic Impact – Richard Baldwin
25 4.3 The Systemic Impact – Richard Baldwin
28 5. Possible Responses to
Mega-regionals
28 5.1 Potential Responses to Mega-regionals by
Excluded Countries – Uri Dadush
30 5.2 Regional and Country Perspectives – Peter
Draper, Salim Ismael, Sherry Stephenson, JeanPierre Lehmann, Wan Meng, and Beatriz Leycegui
42 6. Facilitating the Relationship between Mega-regionals
and the Multilateral Trading System – Robert Lawrence
45 7. Thinking about Failure – Gary Hufbauer
46Appendix
47References
48Endnotes
Game-Changers or Costly Distractions for the World Trading System?
3
Abbreviations
AGOA APEC ASEAN BITs BRICS
CJK FTA COMESA DDA EAC
EAFTA EBA EU FDI FTA FTAAP GATS
GATT
GDP
GVC
IIA IPR
LDCs MFN
OECD
RCEP
RTA SADC SPS STE
TBT
TPP
TRIMs
TRIPs TTIP
UNCTAD US WTO 4
African Growth and Opportunities Act
Asia-Pacific Economic Cooperation
Association of Southeast Asian Nations
Bilateral investment treaties
Brazil, Russia, India, China and South Africa
China-Japan-South Korea Free Trade Agreement
Common Market for Eastern and Southern Africa
Doha Development Agenda
East African Community
East Asia Free Trade Area
Everything but Arms
European Union
Foreign direct investment
Free trade agreement
Free Trade Area of the Asia-Pacific
General Agreement on Trade in Services
General Agreement on Tariffs and Trade
Gross domestic product
Global value chains
International investment agreement
Intellectual property rights
Least developed countries
Most favoured nation
Organisation for Economic Co-operation and Development
Regional comprehensive economic partnership
Regional trade agreement
Southern Africa Development Community
Sanitary and phytosanitary standards
State trading enterprise
Technical barriers to trade
Trans-Pacific Partnership
Trade-Related Investment Measures
Trade Related Aspects of Intellectual Property Rights
Trans-Atlantic Trade and Investment Partnership
United Nations Conference on Trade and Development
United States
World Trade Organization
Mega-regional Trade Agreements
Global Agenda Council on Trade & Foreign Direct Investment
Chair
Anabel González, Senior Director, Global Practice on Trade
and Competitiveness, World Bank Group
Vice-Chair
Uri Dadush, Senior Associate, International Economics
Program, Carnegie Endowment for International Peace,
USA
Jonathan T. Fried, Ambassador and Permanent
Representative of Canada to the World Trade Organization,
Geneva
Council Manager
Caroline Galvan, Economist and Manager, Global
Competitiveness and Benchmarking Network, World
Economic Forum
Forum Lead
Margareta Drzeniek Hanouz, Lead Economist and Director,
Global Competitiveness and Benchmarking Network, World
Economic Forum
Members
Richard Baldwin, Professor of International Economics,
Graduate Institute of International and Development Studies,
Switzerland
Karan Bhatia, Vice-President and Senior Counsel, Global
Government Affairs and Policy, General Electric, USA
Jean-Pierre Lehmann, Emeritus Professor of International
Political Economy, IMD Business School, Switzerland
Beatriz Leycegui Gardoqui, Partner, SAI Law and
Economics, Mexico
Christopher Logan, President US, Livingston International,
USA
Mario Marconini, Managing Director, Teneo Strategy, Brazil
Ricardo Meléndez-Ortiz, Chief Executive, International
Centre for Trade and Sustainable Development (ICTSD),
Switzerland
Susan C. Schwab, Professor of Public Policy, University of
Maryland, and Strategic Advisor, Mayer Brown, USA
Sherry Stephenson, Senior Fellow, International Centre for
Trade and Sustainable Development (ICTSD), Switzerland
Guillermo Valles-Galmés, Director, International Trade in
Goods, Services and Commodities Division, United Nations
Conference on Trade and Development (UNCTAD), Geneva
Wan Meng, Dean, School of Law, Beijing Foreign Studies
University, People’s Republic of China
Wang Yong, Director, Center for International Political
Economy Research, Peking University, People’s Republic of
China
Peter Draper, Senior Research Fellow, Economic Diplomacy
Programme, South African Institute of International Affairs,
South Africa
Salma Hareb, Chief Executive Officer, Economic Zones
World, United Arab Emirates
Gary C. Hufbauer, Senior Fellow, Peterson Institute for
International Economics, USA
Salim Ismail, Group Chairman and Chief Executive Officer,
Groupe Socota, Mauritius
Selina Jackson, Special Representative to the World Trade
Organization and the United Nations, World Bank Group,
Washington DC
Alejandro Jara, Senior Counsel, King & Spalding,
Switzerland
Robert Z. Lawrence, Albert L. Williams Professor of Trade
and Investment, John F. Kennedy School of Government,
Harvard University and Senior Fellow at the Peterson
Institute for International Economics, USA
Game-Changers or Costly Distractions for the World Trading System?
5
Executive Summary
Anabel González
The World Economic Forum’s Global Agenda Council on
Trade & Foreign Direct Investment is pleased to present the
report Mega-regional Trade Agreements: Game-Changers
or Costly Distractions for the World Trading System? In
continuing with the aim to inform the policy debate on critical
issues to shape the global trade agenda, the objective of this
document is to explore the impact mega-regionals may have
on countries that are not part of the negotiations. It highlights
opportunities and challenges in promoting the coexistence of
these agreements – should they come to fruition – with the
multilateral trading system.
This is probably the most important topic in the international
trade scenario today. If current negotiations are successful,
there is great potential for unleashing new opportunities and
bringing about more growth to the world economy, while
injecting dynamism into the multilateral trading system.
But there is also concern that the discrimination they entail
may increase friction in trade relations, fostering greater
fragmentation and the weakening of the multilateral trading
system. Moreover, there is concern about the geopolitical
impact of these agreements.
There is no single view on the impact of mega-regionals
on non-members and it is not the purpose of this report to
present one. Rather, it showcases different angles of the
discussion while highlighting the relevance of consciously
facilitating the relationship between mega-regionalism and the
multilateral trading system, for the benefit of all countries.
This is a comprehensive report organized in six sections,
each drafted by different Council Members. Below is a brief
summary of each section.
Section 2. Setting the Stage
2.1. Mega-regionals: What Is Going on? – Ricardo
Meléndez-Ortiz
World Trade Organization (WTO) members have been
active in negotiating regional trade agreements (RTAs),
among which mega-regional RTAs (mega-regionals) now
occupy centre stage. Mega-regionals are deep integration
partnerships between countries or regions with a major share
of world trade and foreign direct investment (FDI), and in
which two or more of the parties are in a paramount driver
position, or serve as hubs, in global value chains. Beyond
6
Mega-regional Trade Agreements
market access, emphasis in this integration is on the quest
for regulatory compatibility and a rules basket aimed at
ironing out differences in investment and business climates.
This report’s focus is on mega-regionals, and on the TransPacific Partnership (TPP) and the Trans-Atlantic Trade and
Investment Partnership (TTIP) in particular. They are singled
out given their conformity with criteria that profiles them as
a potential new pillar of trade governance, complementary
to the multilateral trade system: the agreement would affect
a share of at least a quarter of world trade in goods and
services and of global FDI; at least two economies party to
the agreement are hubs in global value chains (GVCs) as
evidenced by their share of trade intermediate goods and
tasks in the regions involved; the agreement’s coverage goes
deeper and beyond the WTO, RTAs and bilateral investment
treaties (BITs), addressing a minimum of areas and regulatory
reform essential to 21st century world markets; and parties
to the agreement are engaged in multiple RTAs with thirdparty economies and enjoy extensive trade and investment
exchange with a significant number of non-members, making
the partnership a potential reverse trade-diversion scheme.
2.2. The Trans-Pacific Partnership (TPP) and the TransAtlantic Trade and Investment Partnership (TTIP) – Key
Issues and Potential Impact on Members– Peter Draper
and Ricardo Meléndez-Ortiz
Originally, a four-way FTA between Brunei, Chile, New
Zealand and Singapore, the TPP now encompasses eight
additional countries: the US, Australia, Canada, Japan,
Malaysia, Mexico, Peru and Vietnam. South Korea might join
the group. The TPP aims to achieve extensive liberalization
of both goods and services, and entails comprehensive
coverage of trade in services, investment, government
procurement, non-tariff measures and many regulatory
topics. The TPP can significantly impact on global trade
dynamics, given that goods trade among TPP partners
amounted to more than $2 trillion in 2012. Estimates vary
as to the impact of TPP on member countries. Many see
the TPP as a stepping stone to the creation of a Free Trade
Agreement among all Asia-Pacific Economic Cooperation
(APEC) members.
The TTIP negotiations, launched in June 2013, aim for
a far-reaching trade agreement between the US and the
EU, focusing on trade liberalization and behind-the-border
and other non-tariff barriers, as well as seeking a “high
standards” approach to alignment, compatibility and possible
harmonization of regulations and standards governing
the goods, services, investment and public procurement
markets. Most estimates indicate that the more significant
gains from TTIP will not come from tariff reduction, but rather
from the elimination of non-tariff measures and ex-ante and
ex-post compatibility and alignment of standards regulation
and systems that act as barriers to trade, investment and
public procurement.
could help them tap the potential of trade and investment.
And, fifth, they symbolize the interest of the US and the EU
to keep a decisive say in the rules applicable to trade and
investment in the 21st century.
Section 3. The Rationale behind Megaregionals
The deal struck in the Bali WTO ministerial meeting in
December 2013 is a positive development as this package
helped save the WTO from marginalization. The deal allows
developing economies to relax about the future of the
multilateral trading system, and succeeds in creating an
easier and amicable atmosphere.
3.1. Why Mega-regionals? – Susan Schwab and Karan
Bhatia
The motivation behind any given mega-regional depends
on the nature of the agreement being negotiated, on the
particular countries involved, and on the point in time
the decision is being made to engage or close the deal.
Often, the decision to launch a mega-regional agreement
is informed by geopolitical considerations. However, the
ultimate success of the negotiation and the long-term viability
of the arrangement turn more on strong economic and
commercial considerations. While geopolitical motives may
inform a decision to launch mega-regionals and other serious
trade agreements, they are not sufficient to conclude or
implement them.
The main affirmative reasons propelling governments to enter
into mega-regionals include improved and/or preferential
access to new markets; economic stimulus in an era
of tight budgets; upgrading, refreshing and building out
“old” agreements; achieving higher ambition agreements;
addressing new issues and creating potential precedents for
future multilateral agreements; improving competitiveness;
and “keeping the bicycle moving forward”.
While commercially viable and economically valuable trade
agreements are too difficult to negotiate to be concluded on
the basis of defensive fuel alone, defensive reasons, including
fear of being locked out or protection of existing preferential
agreements, do inform some countries’ decision to engage
and may ultimately slow down or even bring down the higher
ambition results sought by others.
3.2. The Political Economy of the Rise of Mega-regionals
– Wang Yong
The rise of mega-regionals may be explained by several
factors. First, the TPP and TTIP can be perceived as the
continuation of the regional cooperation trend that began
by the mid-1990s, with the US and the EU as the driving
nations. Second, the lack of agreement on the Doha
negotiations reinforced the perception of inefficiency of policymaking at the multilateral level. Third, geopolitics contribute
in part to mega-regionalism, in particular with US proponents
of the TPP seeing it as a way of thwarting the emergence
of a China-centred East Asia economic bloc. Fourth, megaregionals aim to meet the liberalization needs of developed
countries, promoting the creation of high standards that
To deal with the potential trade-diverting effects of TPP and
TTIP, some developing countries have begun to build their
own arrangements. Mega-regionals could trigger fierce
competition among different trading blocs and damage the
reputation and authority of the multilateral trading.
Section 4. The Impact of Mega-regionals
4.1 Discrimination and Multilateralizing Potential of TPP
and TTIP Provisions – Ricardo Meléndez-Ortiz
In evaluating the impact of RTAs on non-members, the
discussion normally centres on their potentially discriminatory
effects. In the case of the TPP and TTIP, though negotiations
have not yet concluded, it is possible to get a sense of their
potential impact by looking at the nature of their provisions.
For this purpose, issues were divided between WTO-plus
and WTO-extra and then assessed based on two criteria:
the potential risk for discrimination against outsiders; and
the potential for “multilateralization”, which is based on the
intrinsic characteristics of the provisions or chapters in an
agreement and their relative impact beyond the economies
involved.
The results of applying the information available on the
negotiations, the best judgement of a group of analysts
is presented to conclude that provisions where limited
risk of discrimination exists and with high potential for
multilateralization should be encouraged from a global
governance perspective.
4.2 The Economic Impact – Richard Baldwin
RTAs create different types of preferences, including: hard
preferences that imply discrimination like in the case of
tariff elimination; soft preferences, where discrimination
is unfeasible in practical terms like in telecoms, given the
porous nature of the rules of origin identifying the nationality
of firms; and non-preferences, i.e. reforms that act like
multilateral liberalization, for example the commitment to
adhere to an international convention on intellectual property.
Mega-regionals like the TPP and TTIP will create some
new tariff discrimination, but not much. Deeper-than-tariff
provisions in deep RTAs like the TPP or TTIP need not
create hard discrimination. This is particularly the case with
regulatory convergence, where firms outside the megaregional also benefit from accessing all member markets with
one standard.
Game-Changers or Costly Distractions for the World Trading System?
7
Recent evidence shows that most RTAs seem to be creating
soft versus hard preferences. The evidence is that almost all
RTAs have led to “reverse trade diversion”. That is, while the
preferences increase trade among partners, RTA imports
from excluded nations also rise – just not as much. This is
why they are called “soft” as opposed to “hard” preferences.
The RTAs create trade for members and non-members alike,
but the liberalization is slanted towards members.
4.3. The Systemic Impact – Richard Baldwin
Mega-regionalism is good news and bad news for the world
trade system. The good news is that mega-regionals will tidy
up the “spaghetti bowl” of RTAs. The bad news is they may
undermine world trade governance, eroding WTO centricity
as the forum for creating new trade rules, with worrisome
consequences.
Without reform that brings existing RTA disciplines under the
WTO’s aegis and makes it easier to develop new disciplines
inside the WTO system, the trend towards eroding WTO
centricity will continue and possibly take it beyond the tipping
point where nations ignore WTO rules since everyone else
does. There is the risk of drifting back towards a 19th century
“Great Powers” world.
The systemic impact of regulatory convergence deserves
special mention due to its unusual effects. Both megaregionals are likely to lead to an outcome where poor nations
are induced to adopt at least some rich-nation standards. In
some cases this may be good for them, but in others it may
involve inappropriate restrictions.
Section 5 – Possible Responses to Megaregionals
5.1. Potential Responses to Mega-regionals by Excluded
Countries – Uri Dadush
The TPP and TTIP intend to reshape world trade rules for
the 21st century. However, the negotiations exclude some
160 countries, which are home to over 80% of the world’s
population. Thus, how the excluded countries respond to the
rise of the mega-regionals is an important question.
The starting point for formulating an appropriate response
to the mega-regionals is how the agreements are likely to
affect the excluded country’s defensive and offensive trade
interests. While much of the impact on excluded countries
will occur in specific sectors, the systemic implications of
the mega-regionals cannot be ignored. If successful, the
agreements could set up new benchmarks and approaches,
which will either supersede WTO or eventually become
integrated into WTO.
Excluded countries could in theory pursue several strategies
to respond to the mega-regionals; however, the only realistic
response for those worried about the systemic implications
for the global trade system are “plurilateral”, or flexible
geometry approaches within the WTO. Such approaches
would probably form an important part of their overall national
response to mega-regionals, which could also include
8
Mega-regional Trade Agreements
autonomous trade reforms and the initiation of new bilateral
or regional negotiations with the contracting parties to TPP
and TTIP as well as with other important trading partners,
enabling them to raise the competitiveness of their productive
apparatus.
5.2. Regional and Country Perspectives
5.2.1. The Potential Impact of Mega-regionals on SubSaharan Africa and Least-Developed Countries in the Region
– Peter Draper and Salim Ismail
Sub-Saharan Africa does not have a seat at the megaregional negotiating tables. Yet, the region has a stake.
Although the final substance and eventual ratification of
TPP and TTIP negotiations remain uncertain, the ability of
African nations to diversify market opportunities, integrate
their economies in global value chains and attract sustainable
investment could be affected. The long-term balance of
benefits against risks will depend on the design of these
agreements, supportive international policies and the
strategic response of African policy-makers and firms. Four
issues are relevant: new compliance measures; geopolitical
dynamics; preference schemes; and international production
networks. Transparency and monitoring will be an important
basis on which sub-Saharan African nations can frame a
proactive response.
One of the consequences of mega-regional activity is that
the influence of sub-Saharan Africa on the global trade and
investment agenda will diminish – the region relies on the
WTO to be heard and has little bargaining power to promote
its interests outside of the organization. Nevertheless, subSaharan African policy-makers can devise strategies aimed
at building on the opportunities and curtailing the risks
caused by the mega-regional agreements, including closely
monitoring the negotiating chapters, working with partners to
ensure that the potential for discrimination is minimized and
creating a domestic and regional economic environment that
invites confidence.
5.2.2. The Potential Impact of Mega-regionals on the AsiaPacific Region and China
5.2.2.A. The Mega-regional Dynamic in Asia-Pacific and
Its Potential Impact on the World Trading System – Sherry
Stephenson
The TPP will have a large impact on the conclusion of other
RTAs, as well as on the Asia-Pacific region itself. It should
provide a stimulus for the Regional Comprehensive Economic
Partnership (RCEP) and the China-Japan-South Korea (CJK)
FTA talks to move forward with more vigour. It should also
be a strong catalyst for the US-EU TTIP efforts, and should
push China to reflect on its ultimate goals in the Asia-Pacific
region. As a regional leader, China should logically wish to be
a member of both, but currently only Japan is in this position.
China may or may not choose to be one of the driving forces
in consolidating the TPP with the RCEP provisions to move
towards a Free Trade Area of the Asia-Pacific (FTAAP).
These RTAs, when concluded, will change the panorama
of the world trading system. They will draw more economic
activity into the region by further enhancing its dynamism
and attractiveness. As they will have relatively less explicitly
discriminatory effects on the rest of the world, trade diversion
should not be a major worrying factor for countries outside
the region. To the extent that they are “deep” agreements,
they will impact patterns of trade and FDI through reinforcing
and expanding existing supply chain operations. And, from
an institutional perspective, a potential future TPP and RCEP,
and possibly a CJK FTA, could serve as models for the WTO
to draw upon to reflect on future reform, especially as the
organization approaches its 20th year mark.
5.2.2.B. A Geopolitical Perspective – Jean-Pierre Lehmann
While the Asia-Pacific economies are highly and tightly
integrated in the contemporary international economic
system and with main actors through global value chains,
the politics and geopolitics of the Asia-Pacific region are
reminiscent of those in Europe of the late 19th and early 20th
centuries in that they are characterized by power rivalries,
trade and investment in part driven by arms races and strong
currents of nationalism.
In such a context, priority must be given to the rules-based
multilateral trade system. Other initiatives, like the CJK
FTA, the Association of Southeast Asian Nations (ASEAN)
and the RCEP are to be encouraged, but a TPP is much
more contentious. Even though the intention may not be
geopolitical, it is impossible, given the realities in AsiaPacific, to ignore geopolitical considerations and possible
ramifications. Creating a dynamic, open, inclusive and solid
trade regime in Asia-Pacific is very important but should best
be left to Asian initiatives and leadership, with international
support.
5.2.2.C. TPP and China’s Response – Wan Meng
The TPP, which mainly includes Asian participants, ironically
appears to disconnect with the regional initiatives, as it is
not in the Asian integration style and as China, the trading
powerhouse of Asia, is excluded from the TPP. For the US, it
is a means of leveraging power and represents an alternative
for developing the governance framework for international
trade.
The TPP poses some concerns for China, in particular as it
may result in trade diversion and its norm-setting scheme
may undermine China’s leading role in Asia’s regional
integration. However, China should wait for a better time to
join the TPP negotiation, as the TPP confronts a number of
problems and, in any case, a successful TPP calls for China’s
participation.
If the TPP is not well received by participating members,
China would be in a comfortable position to build on its
economic leverage to participate in norm setting, and
to channel the TPP into an RTA based more on a set of
compromised terms. This may lead to the rise of a politically
driven divergent dual-track: China taking the lead through
the Asian track and the US taking the lead through the TPP
track.
5.2.3. Mega-regionals – How “Mega” Will Their Impact Be for
Latin America? – Beatriz Leycegui
The impact of the TPP and TTIP on Latin American countries
is complex and relates to whether each country has trade
agreements with TPP or TTIP negotiating parties and how
important those markets are for their exports, as well as their
degree of participation in the mega-regionals.
In the case of the TPP, only Chile, Mexico and Peru are
part of the negotiations. For Central Americans and
Colombia, participating in these negotiations could be
important because they have FTAs with the US and have
important exports to that country. For other countries that
are less dependent on the US, have a relatively small trade
relationship with TPP Asian countries and have closer
economies, the TPP is less attractive.
Regarding the TTIP, the greater risk of trade diversion is
for the Mercosur countries, as the competitiveness of their
agricultural products in the EU could be eroded as a result of
the market access preferences that the EU could grant to the
US. For most other countries in the region, if the TTIP were
to include cumulation of origin provisions with common Latin
American FTA partners, this would diminish trade-diversion
effects and take trade relations to a higher level. Moreover,
the TTIP could eventually converge with NAFTA and FTAs
that the US and the EU have in common with Latin America,
creating one of the largest mega-regional agreements.
Section 6 – Facilitating the Relationship
between Mega-regionals and the Multilateral
Trading System – Robert Lawrence
Several measures could help ensure that mega-regional
agreements complement rather than undermine the
multilateral trading system. First, parties should consciously
craft agreements that are open to additional members and
that create more integrated and contestable markets for
firms based in both member and non-member countries.
This could also be made if mega-regionals implement
general rules that improve regulatory transparency and allow
full participation by all foreign firms in the development of
standards, liberalize services on a most favoured nation
(MFN) basis and adopt trade facilitation measures that apply
to all their trade.
Second, information and assessments on the mega-regionals
could be provided by the WTO and by official institutions and/
or think tanks to encourage arrangements that lead to a more
open international trading system. This should be achieved
by improving transparency, exchanges on best practices and
reviews of the systemic impacts of these agreements.
Finally, countries could strengthen the role and maintain the
centrality of the WTO in the trading system. This could be
achieved by moving towards a variable geometry, in which
obligations to which all members adhere are complemented
by deeper, open plurilateral agreements that members are
obliged to join. Innovations in mega-regionals could serve
as models for negotiating plurilaterals with broader WTO
membership.
Game-Changers or Costly Distractions for the World Trading System?
9
Section 7 – Thinking about Failure – Gary
Hufbauer
Success in TPP and TTIP negotiations cannot be taken for
granted as they both face tremendous challenges. In the
case of the TPP, the two main obstacles are the possibility
that Japan may not be able to agree to significantly
liberalizing agriculture and services – which may then have
agricultural and service exporters within the TPP threatening
to walk out of the negotiations – and the domestic opposition
to the TPP in the US Congress, from both Democrats and
Republicans. In the case of the TTIP, the sheer complexity of
the deal, the resistance of independent regulatory agencies
on both sides, and the opposition of states to federal
mandates either to open procurement or to harmonize
product regulations and professional standards, are the main
roadblocks to the success of the negotiating process.
If the two mega-regionals either fail outright or do not
deliver as expected, and if the WTO stumbles as a serious
negotiating forum, the years 2013-2015 might well be
called the Great Turning Point in post-Second World War
policy liberalization, when fresh policy liberalization, on the
scale enjoyed from 1950 to 2000, ceased to be part of the
picture. In this setting, it seems unlikely that global trade and
investment can serve as the great drivers of world growth
and prosperity that they were in the half-century after the
Second World War.
10
Mega-regional Trade Agreements
1.Introduction
Anabel González
A lot is happening on the trade negotiations front in almost
every corner of the world. Countries have been active and
prolific at the bilateral and regional levels for some time – 432
RTAs have been notified to the WTO. But the key ongoing
negotiations are of a different dimension: they involve more
partners, from different levels of development and different
regions, covering larger volumes of trade, and aiming at
reaching agreements of a deeper nature on a wide scope
of issues. These are the mega-regionals, of which the
Trans-Pacific Partnership and the Trans-Atlantic Trade and
Investment Partnership are in a category of their own by virtue
of their scope and impact.
If current negotiations are successful, new rules will shape
trade and investment flows, underpin global governance on
21st century trade issues and facilitate the proliferation of
global value chains. Their purported emphasis on promoting
broad liberalization, reducing non-tariff barriers and addressing
regulatory hurdles through greater convergence would unleash
new opportunities and bring about more growth to the
world economy. They may also contribute to bringing more
dynamism to the multilateral trading system, spearheading a
virtuous circle of enhanced rule making and trade liberalization.
Or they may not. Much will depend on the specific provisions
to be agreed upon and the type of preference they will create.
Not all preferences are equal. Some of them carry a larger
potential for discrimination than others. The greater their
discriminatory nature, the higher the friction and fragmentation
risks they entail. On the contrary, provisions with low or no
discriminatory potential actually may be quite beneficial for
non-members.
This is no minor issue. While mega-regional negotiations
encompass a large number of countries, they exclude an
even larger group. About 160 nations, home to over 80% of
the world’s population, are sitting on the sidelines while these
discussions take place. The way in which countries choose to
react to these developments may determine, at least in part,
the impact of these pacts on individual non-members and
on different regions, as well as on countries that are party to
the mega-regionals. The broader question of the geopolitical
impact that mega-regionals may have in today’s world is an
issue that demands great reflection.
whether they are crafted with an inclusive perspective and are
open to new members. Much will also depend on whether
WTO members opt to advance an ambitious post-Bali
multilateral agenda, which could include plurilateral agreements
as a way to proceed in consolidating the WTO’s centrality.
All of this presumes that mega-regionals will come to fruition
as planned, but this cannot be taken for granted. There are
big negotiating challenges ahead, and domestic political
divisions in participating countries to be bridged. If the megaregionals fail, the consequences on the potential of trade and
investment to continue driving world growth and prosperity will
be considerable.
While there is a lot of uncertainty regarding the future and
impact of mega-regional agreements, it is clear that this is the
topic of choice in the global trade agenda today. This is why
the World Economic Forum’s Global Agenda Council on Trade
& Foreign Direct Investment decided to dedicate its work this
year to Mega-regional Trade Agreements: Game-Changers or
Costly Distractions for the World Trading System?
Extensive discussions, with the participation of all Council
Members, showed that this is a rich subject that poses
important questions and ignites strong debates. A consensus
was not reached on all its angles, nor was that the main
purpose. Instead, the aim was to explore the impact that
mega-regionals may have on non-members, highlighting
opportunities and challenges in promoting the coexistence
of these agreements – should they materialize – with the
multilateral trading system.
The report benefited from the written contributions of many
Council Members, to whom the Council is grateful. The
Council also thanks Caroline Galvan for her support to the
group. As Chair of the Council, I bear full responsibility for any
mishaps in editing and putting these contributions together.
The report is organized into six sections:
– In section 2, Ricardo Meléndez-Ortiz sets the stage by
presenting a set of criteria to define mega-regionals, while
Peter Draper and Ricardo Meléndez-Ortiz describe the
main features and potential impact on member countries of
the ongoing TPP and TTIP negotiations.
The multilateral trading system is not exempt from the impact
of mega-regionals. Much will depend on the specifics of the
agreements that are finally concluded, and in particular on
Game-Changers or Costly Distractions for the World Trading System?
11
– Section 3 presents two views regarding the rationale for
mega-regionals, with Susan Schwab and Karan Bhatia
exploring the offensive and defensive economic and
commercial motivations that propel governments to pursue
these negotiations, and Wang Yong focusing on the
geopolitical reasons underlying the initiatives.
– In Section 4, two contributions analyse the impact of
mega-regionals, with Ricardo Meléndez-Ortiz looking at
the discriminatory and multilateralizing potential of TPP
and TTIP provisions, and Richard Baldwin exploring the
economic and systemic impact of mega-regionalism.
– Section 5 centres on the possible responses that megaregionals may elicit from non-member countries, with Uri
Dadush shedding light on the type of responses that may
be pursued, and several GAC participants reflecting on
the impact that mega-regionals may have in different parts
of the world: Peter Draper and Salim Ismail looking at the
consequences for sub-Saharan Africa and least-developed
countries (LDCs); Sherry Stephenson, Jean-Pierre
Lehmann and Wan Meng looking in individual pieces at the
effects on Asia; and Beatriz Leycegui exploring the impact
on Latin America.
– In section 6, Robert Lawrence proposes measures
that could help ensure that mega-regional agreements
complement rather than undermine the multilateral trading
system.
– In section 7, Gary Hufbauer reflects on the consequences
should mega-regionals fail to conclude.
With all the uncertainties and caveats surrounding the
negotiation of mega-regional agreements, there is a strong
case to be made on the importance of consciously working
to facilitate the relationship between them and the multilateral
trading system, for the benefit of all countries.
12
Mega-regional Trade Agreements
2. Setting the Stage
2.1. Mega-regionals: What
Is Going on? – Ricardo
Meléndez-Ortiz
For decades, but with particular impetus since the inception
of the World Trade Organization in 1995, many of the
WTO’s members have enthusiastically embarked in selective
associations with other members, aimed at more deeply
integrating their economies. These schemes vary in nature,
scope and effectiveness and range from free trade agreements
to custom unions to common markets.
The General Agreement on Tariffs and Trade (GATT) defines
free trade areas as those in which two or more custom
territories agree to eliminate duties and other restrictions
“on substantially all the trade” between them on products
originating in their territories.1 Colloquially and in WTO practice
and law, such agreements are referred to as regional trade
agreements (RTAs) to differentiate them from unilateral
preferential schemes. By the end of 2013, 432 RTAs had been
notified to the WTO, of which 238 were in force.2
In addition, countries have been prolific in establishing bilateral
investment treaties containing rules and commitments that
significantly affect trade in goods, services and technologies,
as well as other terms of further integration of national
economies into global markets. At last count, the world had
in place 3,196 international investment agreements (IIAs):
BITs and “other IIAs”.3 Moreover, over 30 new RTAs, involving
more than 110 countries, are currently under negotiation,
with some of them geared to constitute a new order in
international economic governance given their design, content
and quantitative and qualitative weight in the global economy.
Significantly, they involve all the important poles of trade and
investment in the evolving global economy.
Several of these innovative agreements take place between
two or more countries in different regions, or between
countries with RTAs among them and individual countries or
groups of countries in other RTAs. This type of composition is
not unprecedented, but the trend is now affecting more parties
and happens at a time when the Organisation for Economic
Co-operation and Development (OECD) estimates that
RTAs and IIAs already “cover among their member countries
90% and 60% of cross-border trade in goods and services,
respectively”.4 The last wave of agreements, in addition to
establishing lower applied tariff rates between parties (with the
collateral effect of generally lowering MFN applied rates), have
also added a universe of contractual commitments among
parties on provisions concerning mostly behind-the-border
regulatory matters that go deeper than their WTO obligations
(WTO-plus) or that extend the coverage of WTO disciplines
(WTO-beyond or WTO-extra obligations).
The economic significance of RTAs has also been in
crescendo. RTAs of the past may have been defined more
by geopolitics, but the new trend is for a greater emphasis on
commercially meaningful associations that address several
emerging policy concerns. Also, new RTAs are organized
around a set of deeper integration issues that fosters
transnational collaborative production and global value chains.
They could be termed production-sharing RTAs or regulatory
integration RTAs given their emphasis on an increasingly
common and extensive package that in addition to market
access includes services, competition policy, investment
(including capital movement provisions), technical barriers and
regulatory compatibility, intellectual property protection and
customs cooperation. By their nature, at this time, trends in
integration reflect three types of dominant RTAs:
a. FTAs of substantive current or potential trade and FDI
value. Examples under negotiation or recently concluded
include US-South Korea; EU-Singapore; EU-Canada; EUJapan; EU-India; EU-Mercosur; Australia-China; CanadaKorea; Canada-India; the embryonic CJK; and BITs
between the US and China and the EU and China.
b. Consolidation RTAs, in which existing RTAs are expanded
through new membership or by merging with other
RTAs. An example of a recent effort is the novel Pacific
Alliance which practically fuses and further integrates six
pre-existing FTAs among Mexico, Colombia, Peru and
Chile, with possible extension to Costa Rica and Panama.
The emphasis is on tariffs, services and cumulation of
imports for rules of origin. Another example is the Tripartite
Free Trade Area in Africa, aimed at consolidating three
subregional agreements, i.e. the East African Community
(EAC), the Common Market for Eastern and Southern
Africa (COMESA) and the Southern Africa Development
Community (SADC).
c. Mega-regional RTAs, deep integration partnerships in the
form of RTAs between countries or regions with a major
share of world trade and FDI and in which two or more of
the parties are in a paramount driver position, or serve as
hubs, in global value chains (i.e. the US, the EU, Japan,
China). This category includes ongoing negotiations in the
TPP; the emerging TTIP between the EU and the US; and
potentially the RCEP, between the 10 ASEAN5 countries
and six of its RTA partners: China, India, Japan, South
Korea, Australia and New Zealand. Beyond market access,
emphasis in this integration is on the quest for regulatory
compatibility and a rules basket aimed at ironing out
differences in investment and business climates.
Game-Changers or Costly Distractions for the World Trading System?
13
This report’s focus is on this last category, and on the TPP
and the TTIP in particular. They are singled out given their
conformity with criteria that profiles them as a potential new
pillar of trade governance6, complementary to the multilateral
trade system:
a. The agreement would affect a share of at least a quarter
of world trade in goods and services (TPP: 26.3%; TTIP:
43.6%)7 and of global FDI.
b. At least two economies party to the agreement are hubs
in GVCs as evidenced by their share of trade intermediate
goods and tasks in the region or regions involved.8
c. The agreement’s coverage goes deeper and beyond
existing – 2013 – contractual obligations and disciplines of
the WTO, RTAs and BITs. In this context, the agreement
addresses a minimum of areas and regulatory reform
essential to 21st century world markets such as services,
investment, competition policy, regulatory convergence, the
digital economy and customs cooperation.
d. Parties to the agreement are engaged in multiple RTAs
with third-party economies and enjoy extensive trade
and investment exchange with a significant number of
non-members, making the partnership a potential reverse
trade-diversion scheme.9
2.2 The Trans-Pacific
Partnership (TPP) and the
Trans-Atlantic Trade and
Investment Partnership
(TTIP) – Key Issues and
Potential Impact on
Members – Peter Draper
and Ricardo MeléndezOrtiz10
2.2.1 TPP
The TPP encompasses a number of East Asian and North
and South American countries. In 2006, Brunei, Chile, New
Zealand and Singapore initiated a four-way FTA, termed the
Pacific-4, with a vision of comprehensive trade liberalization
being implemented by 2015. By 2010, an additional five
countries, the United States, Australia, Malaysia, Peru and
Vietnam, signalled their intention to join the agreement,
leading to the creation of the TPP. Since then, Mexico,
Canada, Japan and South Korea have requested to join
the TPP, and during 2013, existing members approved
participation of the first three candidates in the expanded
TPP (often referred to as the TPP-12).11 By mid-March
2014, South Korea completed the first round of bilateral
consultations with each of the 12 parties. However, at this
14
Mega-regional Trade Agreements
stage, no additional member would be expected to join before
an agreement is first finalized by the TPP-12.12
The TPP aims to achieve extensive liberalization of both
goods and services, and entails comprehensive coverage
of trade in services, investment, government procurement,
non-tariff measures and many regulatory topics, as indicated
in Box 1. However, as highlighted by the Congressional
Research Service, the 12 countries are economically and
demographically diverse. The US is more than twice as
large as any other TPP country in terms of its economy
and population; there is wide variation in levels of economic
development between member states, and each has
significantly different strategic and economic interests.13
Box 1 – The Content of TPP
The following topics are reported to be included in the
ongoing TPP negotiations:
– Market access for agricultural and industrial products.
Parties aim for duty-free access for trade in goods.
They are also dealing with export and import licensing
procedures, customs issues and trade facilitation.
–Services. The agreement would employ a negative list
approach and cover financial services, including insurance
and insurance-related services, banking and related
services, as well as auxiliary services of a financial nature,
to be addressed in a separate chapter.
– Government procurement. Agreement states common
principles and procedures, as well as specific obligations
for conduct of procurement; it aims at comparable
coverage by all members, while recognizing transitional
measures for procurement markets of developing
countries.
– Agriculture, other than market access. It will deal with
sanitary and phytosanitary standards (SPS); tobacco
regulation; and agricultural competition.
–Rules. The TPP will include chapters and provisions
that build on disciplines contained in the WTO’s Uruguay
Round agreements on Technical Barriers to Trade (TBT)
and intellectual property rights (IPR) enforcement. For
example, the TPP TBT text introduces provisions that
would remove restrictions for testing, inspection and
certification of services providers, such as in-country
presence requirements. On IP, it would agree to a shared
commitment to the Doha Declaration on TRIPs and Public
Health and include innovative provisions, particularly on
(i) Patents (e.g. available for plants and animals and for
diagnostic, therapeutic and surgical methods for the
treatment of humans and animals and adjustment of the
duration of patents to compensate for delays occur in
the granting process); (ii) Undisclosed data (e.g. exclusive
protection for five years of the pharmaceutical safety
and efficacy information, from the date of marketing
approval, in the territory of a party including similar
protection for safety and efficacy of a product previously
approved in another territory; further protection for at least
three years on new clinical information for the approval
of a pharmaceutical product containing a previously
approved chemical entity including those previously
approved in another territory); (iii) Copyright (e.g. term
of protection in the case of juridical persons of 90-120
years compared to the standard of 70 years in TRIPS;
improved legal remedies against the circumvention of
effective technological measures); and (iv) Enforcement
measures (e.g. expansion of existing standards in TRIPS,
ACTA and KORUS on civil and administrative procedures,
including provisional and border measures and criminal
procedures and penalties, namely, in cases of trademark
counterfeiting and copyright or related rights piracy and
misappropriation of trade secrets and a section on internet
service providers). TPP would also include provisions on
biologics and transparency and procedural fairness in
healthcare technologies.
– Rules of Origin: Cumulation of origin. Since many of the
parties to the TPP are trading partners in FTAs, being
part of the TPP implies that inputs originating from a TPP
country that are included in a final good exported by
another TPP nation to a third TPP member are regarded
as originating in such nation. This fosters the participation
of TPP members in regional production networks.
–Investment: Provisions of investment protection, ensuring
non-discrimination, a minimum standard of treatment,
rules on expropriation and prohibitions on specified trade
distortive performance requirements. Also, provisions for
investor-state dispute settlement subject to safeguards to
protect the rights of TPP countries to regulate in the public
interest.
– Competition Policies: Establishment and maintenance
of competition laws and authorities, procedural fairness
in competition law enforcement, transparency, consumer
protection, private rights of action and technical
cooperation.
– Trade Remedies
– Separate chapters on labour and environment. On
the latter, it may contain substantive provisions on new
issues, such as marine fisheries and other conservation
issues, biodiversity, invasive alien species, climate change,
and environmental goods and services, in addition to
cooperation for capacity building.
– Other new and cross-cutting issues will include regulatory
coherence; state-owned enterprises; e-commerce;
competitiveness and supply chains; and small and
medium-sized enterprises.
Given the significant economic diversity of member states in
terms of wealth, production structures and strategic goods,
the TPP’s wide coverage requires extensive negotiations
between member states in order to achieve the goal of a
significant and far-reaching agreement. In addition, the goods
sector is being negotiated based on the existence of current
bilateral FTAs. Thus, where FTAs exist between countries,
they are likely to be adopted within the TPP, while countries
without an existing FTA between them have entered into
negotiations on a bilateral basis.14 Meanwhile, other issues are
being negotiated among all participants; yet, the goal remains
a single agreement applicable to all members. This complexity
has some implications for the eventual outcome, and is
discussed further below.
Figure 1. Trade among TPP Member Countries ($ billion), 2012
2200
9%
10%
1700
11%
12%
1200
58%
700
200
0
Trade among TPP Member Countries ($ billion), 2012
Intra-NAFTA trade
TPP-NAFTA*
NAFTA-Japan trade
TPP-Japan*
Intra-TPP trade*
* Excludes USA and Japan
Source: Draper et al., P10-11.
The TPP can significantly impact on global trade dynamics,
given that goods trade among TPP partners amounted
to more than $2 trillion in 2012 (see Figure 1). The North
American Free Trade Agreement (NAFTA) (Canada, Mexico
and the US) and Japan nevertheless accounts for the
largest proportion of this trade, with intra-NAFTA trade alone
amounting to nearly $1.2 trillion in 2012. Bilateral trade
between Japan and NAFTA accounted for close to $250
billion (over 80% of which was between the US and Japan)
of total intra-TPP trade, with Japanese exports to NAFTA
countries accounting for $160 billion.
Trade flows between the remaining TPP-12 members made
up only $180 billion of total TPP trade. Trade between the
remaining TPP-12 members and NAFTA, and between the
rest of the TPP-12 and Japan amounted to $233 billion and
$204 billion respectively.15 Clearly, the NAFTA countries,
particularly the US, and Japan are the key drivers of the
TPP. Indeed, the US and Japan, in line with what has been
suggested by Baldwin (2014) and with evidence generated by
estimating shares of trade in intermediate goods and services
for the US and Japan and partners in the TPP and other
economies in the Pacific basin, drive supply and transnational
organization of production and serve as regional hubs.16
The large number of FTAs being implemented between
Asian and Pacific states also suggests that the effects of tariff
liberalization may be low despite the significant share of global
trade accounted for in this region. Cheong (2013) underlines
the extent to which FTAs may dilute the effect of liberalization
on goods trade, with countries in the Asia-Pacific region
having signed close to 100 FTAs (either bilateral or regional)
between themselves. Cheong (2013) further notes that many
previous studies estimating the effects of regional FTAs in the
region may have therefore over-estimated the gross domestic
Game-Changers or Costly Distractions for the World Trading System?
15
product (GDP) and trade gains likely to be achieved through
greater regional integration in this region by not taking into
account that goods trade is already significantly liberalized
through the numerous FTAs already being implemented.17 In
terms of goods trade, the TPP faces a similar situation, with
many countries within the TPP already trading under free
trade arrangements.
Cheong (2013) suggests that the gains for member states
from goods trade liberalization through the TPP are likely to be
negligible for most member countries. All countries, with the
exception of the US, Chile and Peru, are likely to experience
a marginal increase in their GDP. However, for all members,
this increase is less than 1%, with New Zealand experiencing
the greatest gain (0.97%) and Canada the lowest (0.02%).
Conversely, the results suggest that the US is unlikely to
experience any change, while Chile and Peru are likely to
experience negligible GDP declines of 0.13% and 0.04%
respectively.18
Estimates from the Peterson Institute for International
Economics suggest the potential impact of the TPP may be
somewhat larger, when including the impact of reducing nontariff measures.19 The model assumes a staggered approach
to the implementation of the TPP, with an agreement among
the nine original members by 2013 and the three additional
members (plus South Korea20) one year later. Enforcement
occurs one year after the agreement is signed, followed
by five years of implementation. The study finds that by
2025, real GDP will increase by 0.75% for TPP members.
The potential impact on individual countries ranges from
a positive 0.4% impact on GDP for the US to a 13.6%
improvement in GDP for Vietnam. Similarly, exports could
increase significantly, from 2.5% for Chile to 37% for Vietnam.
Vietnam’s gains are expected to arise through its expanded
role as a manufacturing centre of textile and garment
industries.
Cheong (2013) and Williams (2013) both note that many
see the TPP as a stepping stone to the creation of a free
trade agreement among all APEC members, given that
TPP members form a sub-set of APEC. As Williams (2013)
highlights, TPP country trade with the other APEC members
not currently party to the TPP negotiations is larger than
intra-TPP trade, amounting to over $2.7 trillion in 2012, with
China accounting for over 50% of this trade. The creation of
an APEC free trade area (also known as the Free Trade Area
of the Asia-Pacific) would be the largest single market on the
planet, bringing significant gains to member states. Petri and
Plummer (2012) estimate that these gains could amount to
an additional $2 trillion (2007 dollars) by 2025, or an increase
in APEC GDP by 3.5%. The long-term gains from the TPP
for member states may therefore be substantially greater if
this agreement creates a domino effect where all other APEC
members subsequently “fall” into the TPP.
Box 2 – The Content of TTIP
TTIP negotiations are organized in three baskets, each
encompassing the following set of issues:
a. Market Access
– Removal of all duties in industrial and agricultural
products, with special treatment for the most sensitive
products
– Rules of origin
– Trade in services, which seeks liberalization in new
sectors, e.g. transport, excluding audio-visual services.
b. Regulations and Non-Tariff Barriers
Parties aim at regulation system compatibility and
alignment, to be achieved by a combination of
simplification and harmonization of procedures for
compliance and regulation-making, and the establishment
of a standing scheme for regulatory cooperation towards
the future. Such a scheme would built on the existing High
Level Regulatory Cooperation Forum (HLRCF) and involve
regulators, the regulated community, technical experts
and other stakeholders. An innovation will seek a common
framework approach on emerging technologies, namely,
e-mobility, nanotechnology and smart grid, and eventually
health IT and cybersecurity.
c. Rules
– Trade defence measures to establish a systematic
dialogue on anti-dumping and countervailing duties
– Investment, with guarantees of protection against
expropriation, free transfer of funds, fair and equitable
treatment and a level playing field for investing
companies, investment protection, including investorto-state dispute settlement, relevant safeguards and
right to regulate
– Public procurement
– Financial regulation rules
– Intellectual property rights, including geographical
indications – reportedly aiming at further promoting
robust IP frameworks and effective levels of
enforcement with emphasis on the digital environment
and attempts to reconcile their respective regimes on
geographical indications and data flows
– Labour and the environment – innovation includes
illegal logging and illegal, unreported and unregulated
fishing (IUU)
2.2.2 TTIP
In addition to the above, the agreement would include new
“21st century” issues, e.g. modernization and simplification
of trade-related aspects of customs and trade facilitation;
competition policy; state-owned enterprises; raw materials
and energy; small and medium-sized enterprises; forced
localization of production; and transparency.
The TTIP negotiations, launched in June 2013, aim for a
far-reaching trade agreement between the US and the
EU, focusing on trade liberalization, behind-the-border
and other non-tariff barriers as well as seeking a “high
standards” approach to alignment, compatibility and possible
harmonization of regulations and standards governing the
goods, services, investment and public procurement markets,
as shown in Box 2.21
MFN tariff regimes in the EU and the US are comparatively
low, as noted by Ecorys (2009), Rollo et al. (2013) and
Fontagne et al. (2013). Fontagne et al. (2013) estimate that
the average tariff protection on EU goods imported by the
US amounts to only 2.2%, while US goods imported by
the EU attract an average tariff duty of 3.3% in ad valorem
equivalent terms.22 It is clear that tariff liberalization, while
forming an important component of TTIP negotiations, is
unlikely to achieve significant economic gains for either the
16
Mega-regional Trade Agreements
US or the EU, with the exception of the removal of duties on a
comparatively small number of sensitive products.
More significant gains are likely to be made through the
elimination of non-tariff measures and ex-ante and expost compatibility and alignment of standards regulation
and systems that act as barriers to trade, investment and
public procurement. Many of the non-tariff impediments and
frictions cannot be completely removed (such as geographic,
cultural and language barriers) and both the US and the EU
recognize that there are legitimate philosophical, structural,
institutional and legal differences that have resulted in different
approaches to risk and regulation across the Atlantic.
Still, any progress on compatibility of regulation, through
harmonization or mutual recognition of technical standards,
facilitation of conformity assessments, pre-market or postmarket oversight, or addressing market access impediments
to providers of testing, inspection and certification services,
can bring about significant reductions in the costs of trade
and investment in both markets and for third-party providers.
Compared to low tariff barriers, Ecorys (2009) and Fontagne
et al. (2013) estimate that bilateral ad valorem equivalent
protection between the US and the EU from non-tariff
measures was significantly higher and ranged between 19%
and 73% across the agriculture, manufacturing and service
sectors. Ecorys (2009) estimated that roughly 50% of nontariff measures and regulatory differences between the US
and the EU could be eliminated.
The potential impact of the TTIP on the US and the EU
has been evaluated by a number of studies. The earlier
Ecorys (2009) study suggests that the reduction of nontariff measures would produce modest improvements in
national income and real wages for the US and the EU,
while changes to total exports could be more substantial. In
an “ambitious” scenario, where 50% of non-tariff measures
and regulatory divergence are eliminated, real income could
increase by 0.3% and 0.7% in the long run for the US and
the EU respectively. In a “limited” scenario (where 25% of
non-tariff measures and regulatory divergence is eliminated),
real income in the long term could increase by 0.1% for the
US and by 0.3% for the EU. In the long term, total exports by
the US could increase by 6.1% and 2.7% in the ambitious
and limited scenarios, while EU exports could increase
by 2.1% and 0.9% respectively. More recently, a study
commissioned by the EU, effectively updating and using
a similar methodology to that of Ecorys (2009), produced
similarly modest results.23
Fontagne et al. (2013), using a different computable general
equilibrium modelling technique and an alternative estimation
of non-tariff measures, finds that a 25% reduction in non-tariff
measures coupled with a full reduction in tariff duties could
produce a 0.3% increase in the GDP of both the EU and
the US over the long run. The volume of total exports could
increase more significantly in the long run, by roughly 10%
for the US and by approximately 8% for extra-EU exports.24
In contrast to these studies, Felbermeyr et al. (2013) use for
the Bertelsmann Institute a gravitational econometric model
approach to estimate the size of protection from non-tariff
measures. They find that the implementation of the TTIP may
produce substantially larger economic gains.25 They find that
tariff liberalization could result in a real per capita income
increase of 0.27% for the EU (unweighted mean) and 0.8% for
the US. The impact is much larger under a deep liberalization
scenario, with the full reduction of non-tariff measures. Under
this scenario, real per capita income increases by 13% for
the US and 5% for the EU. However, the vast difference
in estimated impacts between this study and those noted
previously (including the study commissioned by the EU)
has resulted in the EU suggesting that the Bertelsmann
Institute’s study is based on an untested methodology “that
departs from the standard approach used so far in other
similar studies” and that some of the results produced are
“unreasonable and inconsistent” and “unrealistically high”.26
Regardless of one’s view on modelling techniques and
associated results, it is clear that a reduction of non-tariff
measures and regulatory differences will play a much more
significant role in unlocking economic gains for both the US
and the EU than a reduction in traditional tariff duties.
Figure 2: TTIP and TPP membership
TTIP
TPP
Game-Changers or Costly Distractions for the World Trading System?
17
3. The Rationale behind
Mega-regionals – Two Views
3.1. Why Mega-regionals? –
Susan Schwab and Karan
Bhatia
The motivation behind any given mega-regional depends
on the nature of the agreement being negotiated, on the
particular countries involved, and often on the point in time
the decision is being made to engage or close the deal.
Often, the decision to launch a mega-regional agreement
is informed by geopolitical considerations. However, the
ultimate success of the negotiation and the long-term viability
of the arrangement turn more on economic and commercial
considerations. This is true, for example, with the European
single market – arguably the original mega-regional. While
geopolitical considerations were at the heart of its formation,
economic considerations now lead as its principal impetus.
In the case of NAFTA, the original rationale might have been
briefly geopolitical, but rapidly became more commercial as
the negotiations were launched and progressed.
Indeed, the economic calculus is increasingly critical to a
country’s decision whether to join a mega-regional. In an
era when most trade issues that are easy to negotiate were
disposed of during the first eight multilateral rounds under the
GATT or in early bilateral free trade arrangements, the items
left to be negotiated tend to be new or the more difficult ones
left over from earlier negotiations. Therefore, for most serious
trade agreement negotiations today to succeed – and this
is certainly the case with mega-regionals – strong economic
and commercial motivation on the part of all parties is the
real prerequisite. While geopolitical motives may inform a
decision to launch mega-regionals and other serious trade
agreements, they are not sufficient to conclude or implement
them.
So, what are the economic and commercial motivations that
propel governments to pursue mega-regionals? They can be
both offensive and defensive in nature.
Affirmative/Offensive reasons
The last major market access agreement under the auspices
of the GATT/WTO was the Uruguay Round, which concluded
two decades ago. The WTO’s last significant market opening
agreement was the Information Technology Agreement in
1996. The trade facilitation agreement concluded at the
18
Mega-regional Trade Agreements
December 2013 WTO Ministerial could prove important
– depending on implementation. Beyond that, countries
interested in trade liberalization have largely had to rely on
their own initiative. Traditional neomercantilist motives, the
search for growth markets, the use of trade agreements to
self-impose domestic economic reforms, diversification of
markets and risk, economies of scale, the enhancement
of competiveness, export-led growth, and the building of
global supply chains are all examples of public and private
sector motives for using trade agreements to expand access
to international markets. As the WTO stalled as a venue
for trade-liberalizing negotiations, the vehicle for achieving
these goals has increasingly shifted to bilateral and regional
agreements. In particular:
Improved and/or preferential access to new markets. The
most obvious reason for pursuing trade agreements is to
achieve improved market access for exports of goods and
services and foreign direct investment. Even after eight
rounds of multilateral agreements under the auspices of the
GATT/WTO, there remain tariff peaks, border measures and
behind-the-border measures that, if eliminated or reduced,
can provide a beneficiary country’s exporters with improved
and potentially preferential access. In the case of the TPP,
all participants would come away with improved access
to at least one new country market, and in some cases,
several new markets. To the extent that enhanced access
arrangements are limited to a finite number of countries
or exclude a country’s principal competitors, the trade
agreement also provides a measure of preferential access.
For some countries involved in the TPP negotiations, like
Vietnam and Malaysia, enhanced access to the US market is
an attraction; for the US, access to the Japanese market in
particular could be interesting. RCEP’s origins in ASEAN+1
negotiations, and initiatives involving ASEAN+3 and then
ASEAN+6, were heavily influenced by market access
motivations.
Economic stimulus in an era of tight budgets. This was one
of the principal motivators behind the TTIP – an opportunity
to give an economic boost to industries on both sides of the
Atlantic at a point when both the US and the EU economies
were in the doldrums and neither side could indulge in
heavy financial stimulus packages or had additional room for
monetary stimulus. While low tariffs already apply on transAtlantic trade and significant FDI already exists, removing
basic barriers at the border and eliminating regulatory friction
promises to leave billions of dollars/euros in the pockets
of small, medium-sized and large importing and exporting
enterprises.
Upgrading, refreshing, building out “old” agreements. The
TPP was launched when the “P4” – Brunei, Chile, New
Zealand and Singapore – approached the US about joining
their goods-only agreement. For them, it was an opportunity
to grow and expand the scope of an existing negotiation and
gain critical mass. When the US initially raised the opportunity
with Canada and Mexico, it was to update and upgrade their
older free trade agreement, NAFTA.
In this regard, it is worth noting that these affirmative
motivations appear to have little to do with the level of
development or size of an economy, since the countries
involved in mega-regional negotiations to date come in all
varieties. Instead, they appear to have as much to do with
economic philosophies, leadership and national priorities as
any other identifiable factor. And it is premature to know what
characteristics may or may not correlate with success.
Achieving higher ambition agreements. With the WTO
seemingly stymied by a governance structure that enables
a handful of members to impede consensus and block all
but the lowest common denominator outcomes, megaregionals – together with bilateral free trade agreements
and sectoral and other forms of plurilateral agreements –
provide the opportunity for like-minded countries to work
together to achieve higher order agreements. These may
involve provisions that deliver more market access than their
WTO counterparts by cutting tariffs further or offering more
generous non-tariff concessions or putting in place more
practical rules of origin.
Defensive reasons
Addressing new issues and creating potential precedents
for future multilateral agreements. This clearly informed the
US decision to join the P4, an otherwise modest agreement.
With the slow pace of WTO negotiations, the rules-based
multilateral trading system has fallen woefully behind the
reality of global trade and emerging protectionist practices.
The longer a given set of trade-distorting practices has to get
entrenched, the greater the challenge of creating disciplines
to address them later. Issues related to e-commerce, forced
localization, data privacy, competition policy, levelling the
playing field between state-owned and private enterprises are
all examples of topics under consideration in various megaregionals, with a view to finding potential formulations that
might eventually be adopted by a broader WTO membership.
Improving competitiveness. In the case of TTIP, there has
been an explicit desire to use a trans-Atlantic agreement to
leverage an enhanced competitive outcome for industries
on both sides of the ocean. The stated goal of achieving
some measure of regulatory convergence is consistent with
traditional trade agreement desires to enhance economies
of scale, but in this case with the added implications for
competing with standards being developed elsewhere. There
is also a tradition of using trade agreements and the promise
of new market access opportunities as a means to leverage
sometimes difficult domestic economic policy reforms. In
the case of both the TPP and the TTIP, various government
leaders are on record expressing an interest in using the
agreements to this end.
Keeping the bicycle moving forward. Trade mavens who
share the values of open markets, open trade and open
institutions are fundamental believers in momentum, and the
absence of progress on the multilateral front until late 2013 left
a painful vacuum. Chile responded by negotiating dozens of
bilateral free trade agreements, the P4 and more recently the
Pacific Alliance, along with Colombia, Mexico, Peru and Costa
Rica. Looking at the 20+ country observer list, the Pacific
Alliance may be the next mega-regional to succeed.
Some might argue that defensive reasons are at the heart of
several mega-regional initiatives today. While commercially
viable and economically valuable trade agreements are
too difficult to negotiate to be concluded on the basis of
defensive fuel alone, clearly defensive reasons do inform
some countries’ decisions to engage and may ultimately slow
down or even bring down the higher ambition results sought
by others.
Fear of being locked out. Behind the concept of “competitive
liberalization” is the notion that countries will ultimately
cooperate in trade-liberalizing negotiations when they see
negotiations going on around them that create the risk they
will ultimately find themselves on the outside at a competitive
disadvantage. In fact, one of the original motives for the US
to agree to launching the TPP with the P4 in September
2008 was concern about being locked out of an ASEAN+3
agreement, whose negotiation was already underway. For
New Zealand, the TPP was an opportunity to address the
challenge of having two main markets and allies – Australia
and the US – share an FTA with each other.
Protecting existing preferential trade arrangements. For
Canada and Mexico, whether updating and upgrading
NAFTA was a main motivator to join the TPP, not letting
the benefits from the new agreement erode the benefits
of the old probably was more important. Interestingly,
with the proliferation of bilateral, regional and plurilateral
agreements, erosion of preferences generated by bilateral
trade agreements is more commonplace – making some
of the newer, more innovative provisions of plurilateral and
mega-regional agreements that much more interesting. It is
also worth noting that some important issues that remain –
such as involving subsidies and other rules – often only lend
themselves to multilateral solutions.
Easier to help write rules now than to accede to them later.
This motivation is a variation on the fear of being locked out,
but relates more to rules – particularly the newer ones – than
to market access. Like all of the defensive motivators, once a
country is inside the negotiation, it can as easily be satisfied
by slowing down or dumbing down the negotiation as by
acting as a constructive participant.
Conclusion
Even though the jury is out on when and whether the
mega-regionals currently under negotiation will conclude
successfully, absent a reinvigorated agenda at the WTO,
mega-regionals and other forms of plurilaterals may be
the inevitable direction taken by likeminded countries in
a globalized world. They provide a means for facilitating
existing patterns of commerce and building new ones. They
Game-Changers or Costly Distractions for the World Trading System?
19
enable businesses and governments to respond proactively
to competitive challenges and create higher common
denominator trade agreements. And if designed with open
architecture, they hold open the option of building out
eventually to a healthier multilateral outcome.
3.2 The Political Economy
of the Rise of Megaregionals – Wang Yong
Several key reasons account for the rise of mega-regionals,
according to the discussions among scholars and experts.
RTAs have become an important trend since the mid-1990s,
as a parallel development accompanying the strengthening
of the WTO authority. Since the mid-1990s, while a WTO
with more “teeth” than the GATT was established, NAFTA
and many other PTAs have caught the attention of the world.
NAFTA symbolized the great changes in the US approach
towards regionalism, and these changes prompted the wave
of so-called “new regionalism” (UNCTAD, 2007). For example,
the EU entered into different forms of FTAs with developing
countries and transition economies (UNCTAD, 2007). Since
the Asian financial crisis of 1997-1998, the major economies
in East Asia, ASEAN, China, Japan and South Korea worked
to catch up with this new wave of regionalization. As a result,
more RTAs were signed, and more developed and developing
countries became involved. These arrangements do not limit
themselves to reducing border barriers, but also include “deep
integration” measures engaging partners in opening up the
areas of services, energy, industrial policy, and so on. The rise
of the TPP and the TTIP can be perceived as the continuation
of the regional cooperation trend that began by the mid1990s, with the US and the EU as the driving economies.
Lack of agreement on the Doha negotiations reinforced the
perception of inefficiency of policy-making at the multilateral
trading system. There are a number of factors that explain
this, including: the increasing number of new WTO members,
which makes it more difficult to coordinate and compromise;
the global financial crisis of 2008, which has put the Doha
negotiations in a more challenging – and protectionist –
context; the lack of support from the business community in
developed countries; the different views among developed
and emerging economies on the balance of concessions to
be made and results to be achieved; the dichotomy among
emerging economies themselves; and the restructuring of the
negotiating powers, with emerging economies like Brazil, India
and China exercising more influence but at the same time
being reluctant to make market access concessions to meet
the demands of some developed countries.
Geopolitics also contribute in part to the rise of megaregionals. The decade following the events of 11 September
2001 witnessed a transition period in world politics. The
US experienced relative decline after it reached its peak of
influence in the late 1990s, while at the same time emerging
economies accelerated growth and began to rise. Although
Washington policy circles tend to deny US geopolitical
considerations in engaging in TPP negotiations, more people
believe the US is concerned about the loss of power and
20
Mega-regional Trade Agreements
influence in Asia, possibly caused by the rise of Chinacentred cooperation in the region. In this context, the Obama
administration announced its pivot to Asia shortly after it came
to power (Wang, 2013).27
US proponents of the TPP see it as a way of thwarting the
emergence of a China-centred East Asia economic bloc. The
US also sees the TPP as a useful way of constraining the
centrifugal tendencies of its allies Japan, South Korea and
Australia, which are attracted by China’s growing economic
power. With China now their largest trading partner, the future
prosperity of all three will depend more and more on the
Chinese market. Closer economic interdependence has also
encouraged US allies and friends in East Asia to pursue more
ambitious blueprints for regional cooperation that exclude the
US. In this light, it is understandable that the US is eagerly
seeking the full participation of Japan in the TPP talks, as
together, the US and Japan would account for about 90%
of the total GDP of all TPP members. Japanese involvement
would also help tighten the security alliance between the US
and Japan, and would likely bring along South Korea (Wang,
2013).
Recently, Taiwan, China has sought to join the TPP, and the US
government is reported to have extended a positive welcome
(Bush, 2013). For some, if Taiwan, China were to join the TPP, it
could be a good policy tool to check the rising influence of
China in Taiwan, China.
Mega-regionals aim to meet the liberalization needs of
developed members of the WTO. By adopting high standard
deals, developed economies can tap the potential of trade
and investment constrained by the existing rules and
regulations imposed by the WTO and bilateral arrangements.
According to one study, if the TTIP is realized, the US and the
EU will greatly benefit from deeper integration arrangements.
The Centre for Economic Policy Research in the United
Kingdom estimates that 80% of the potential economic gains
from the TTIP agreement depend on reducing regulatory
discrepancies derived from EU and US rules on issues
ranging from food safety to automobile parts, including
increasing market access to each other in pharmaceuticals,
agricultural products and financial services (Bollyky and
Bradford, 2013).
According to the Centre for Economic Policy Research, a
comprehensive agreement will result in annual GDP growth
in the EU of 68 billion to 119 billion euros by 2027 and
annual GDP growth of 50 billion to 95 billion euros in the US.
A limited agreement focusing only on tariffs would result in
annual GDP growth in the EU of 24 billion euros by 2027
and annual growth of 9 billion euros in the US. The maximum
GDP growth estimates could possibly translate into additional
annual disposable income of 545 euros for a family of four in
the EU and 655 euros for a family of four in the US (Francois
et al., 2013).
Mega-regionals symbolize the will and determination of the
US and the EU to keep a decisive say on the rules applicable
to trade and investment in the 21st century. Many analysts
point out that the TTIP and TPP will ensure that the US
and Europe remain “standard makers, rather than standard
takers” in the global economy, subsequently ensuring that
producers worldwide continue to gravitate towards joint USEU standards, and that they would set the international “rules
of the road” (Bollyky and Bradford, 2013; Kaeser, 2014).
For years, the US and the EU, as the most important
players in the multilateral trading system, exercised the final
influence in negotiations over trade rules, as was the case
in the Uruguay Round, whose results mainly reflected the
interests of the US and other developed nations. When the
Doha Round was launched in 2001, however, developing
nations pointed out that developed countries had not yet
fully implemented their existing WTO obligations to open their
markets, and therefore insisted that the Doha Round focus on
development issues. Since then, the deadline for concluding
the Doha Round has been postponed several times, and the
US has accused emerging economies such as China, India
and Brazil of creating a deadlock in the negotiations because
they will not make more market-opening concessions.
reminiscent of the Cold War in Asia. Only this time, because
so many are benefiting from their economic ties with China,
Asian countries will be reluctant to take sides between the US
and China.
A positive development lies in the early harvest deal struck
in the Bali WTO ministerial meeting in December 2013. This
package, which narrows the gap between the developing
and developed members, helped save the WTO from
marginalization. Some analysts argued that this is the latest
example of the rising power of developing members in the
WTO (Zhang, 2014), but others may contend that the US
and the EU sought to improve their image tarnished by
pushing ahead with mega-regional arrangements. This deal
allows developing economies to relax about the future of the
multilateral trading system, and succeeds in creating an easier
and amicable atmosphere for the TTP and TTIP negotiations.
Learning from its experience in using the APEC forum to
pressure the EU for concessions during the Uruguay Round,
the US has deliberately adopted a radical approach to trade
negotiations in Asia, entering into bilateral FTAs and the
TPP. The US government is now aiming to shape future
trade rules by focusing TPP talks on topics such as the
environment, protection of labour rights and the role of stateowned companies. Not surprisingly, this time the US and
the EU have found more common ground on these issues
and on dealing with competition from emerging economies,
which are challenging their domination of trade rule-making
authority. It is within this broader context that President
Obama announced in his State of the Union address in 2013
the start of the TTIP with the EU, an initiative that has been
warmly received by the EU. Both the TPP and the TTIP follow
the same logic, and they provide a way for the US to have a
decisive say over the trade rules of the 21st century (Wang,
2013).
Furthermore, the TPP and TTIP also represent something
of an ideological or soft power contest between the US and
China. In the aftermath of the global financial crisis, some
observers hailed the “China model” as an important guide
to finding a post-crisis development model for the world,
especially for developing countries. The US, for its part, has
been critical of China’s so-called state capitalism, where stateowned enterprises play a large role in the economy. Both
arrangements will include a strict standard to limit the role of
state-owned enterprises in trade and economy (Wang, 2013).
Conclusion
The launch of mega-regional FTAs, especially the TPP and
TTIP, has caused wide concerns. Developing countries
are worried that they will be left outside the mainstream of
the global economy. As some analysts argue, the global
economy may be fragmented and break into two separate
blocs (Aggarwal and Evenett, 2013). To deal with the potential
trade-diverting effects of the TPP and TTIP, some developing
countries have begun to build their FTA arrangements. Megaregionals could trigger fierce competition among different
trading blocs and damage the reputation and authority of
multilateral trading. More seriously, if the US implements the
TPP in tandem with a significant redeployment of US military
forces in the Asia-Pacific region, it could create tensions
Game-Changers or Costly Distractions for the World Trading System?
21
4. The Impact of
Mega-regionals
4.1. Discriminatory and
Multilateralizing Potential
of TPP and TTIP
Provisions – Ricardo
Meléndez-Ortiz
In evaluating the impact of RTAs on non-members, the
discussion normally centres on their potentially discriminatory
effects. In the case of the TPP and TTIP, though negotiations
have not concluded yet, it is possible to get a sense of their
potential impact by looking at the nature of their provisions.
For this purpose, issues were divided between WTO-plus
and WTO-extra and then assessed based on two criteria:
the potential risk for discrimination against outsiders (making
a distinction between de jure discrimination and de facto
discrimination); and the potential for “multilateralization”,
roughly based on the criteria developed by the OECD.
Such potential for multilateralization is reflected as much by
the intrinsic characteristic of the provisions or chapters in an
agreement as by their relative impact beyond the economies
involved. Parameters to take into account in assessing
this potential for each provision or chapter would include
representativeness (whether a provision is common to a
considerable number of RTAs already, and use in agreements
involving countries at different levels of development);
homogeneity (the similarity between the provision across
RTAs); and, enforceability (whether the provision is contractual
and, furthermore, whether it may be enforceable through
WTO dispute settlement).
The results are presented in Table 1. The assessment
under criteria 1 and 2 for each type of provision is based on
limited information on the detailed outcome of negotiations
and best judgement by analysts at the International Centre
for Trade and Sustainable Development (ICTSD) and not
on any scientific method or research. Provisions where
limited risk of discrimination exists and with high potential
for multilateralization should be encouraged from a global
governance perspective.28
22
Mega-regional Trade Agreements
4.2. The Economic Impact –
Richard Baldwin
Mega-regionals should not be thought of as big free trade
agreements. In the terms of Lawrence (1996), mega-regionals
are “deep” agreements; FTAs are “shallow” agreements.
That is, free trade agreements are mostly about tariffs, while
mega-regionals cover a vast spectrum of deeper-than-tariff
measures. Of course, mega-regionals will change some tariffs,
but most of the provisions go much deeper into writing rules
that underpin global value chains.
The hard edge of the shallow versus deep distinction is the
type of preference that is created. Preferential tariff-cutting
inevitably creates discrimination against third nations. Deeperthan-tariff reforms have more subtle effects. Three categories
can be distinguished:
– Hard preferences, i.e. preferences imply discrimination
– Soft preferences, i.e. preferences that lack discrimination
technology
– Non-preferences, i.e. reforms that act like multilateral
liberalization
Consider some examples.
Hard preferences, soft preferences and non-preferences
The US tariff on men’s polyester cotton shirt is 25.9%. If
the TPP lowers this to zero for Vietnam but not for China,
Vietnam-based firms will win – in part at the expense of
Chinese-based firms. This is a “hard preference” – the
preference implies discrimination. The gain for Vietnam is
trade creation; the loss to China is trade diversion. This 20th
century thinking is only part of the story when it comes to
mega-regionals.
Mega-regionals like the TPP and TTIP will create some new
tariff discrimination, but not much. Tariffs currently applied
among mega-regional members are already very low, and
where they are still high they cover only modest amounts of
trade and, in any case, are likely to be excluded from the final
deal for political reasons. Tariffs on Japanese rice or US dairy
are unlikely to be eliminated by the TPP.
Table 1: Potential for Discrimination and/or Multilateralization of selected possible provisions in TPP and TTIP
WTO beyond/extra (X
(X)
X)
WTO plus (+)
Type of Provisions
Potential for Discrimination against
Outsiders
(H = high; M = medium; L = low; N =
negative discrimination)
Potential for
Multilateralization
(H = high; M =
medium; L = low)
TPP
TTIP
Industrial tariffs
TPP
De
jure
H
De
facto
M*
Agricultural tariffs
Export restrictions
SPS
TBT
Services (GAT
A
ATS+)
Investment (T
( RIMs+)
AD-CVD
TRIPs
STE
Government procurement
Trade facilitation
Investment
H
L
L
L
M**
L
H
LM
L/
L
H
n. a.
M
Competition policy
IPRs
Regulatory coherence
Labour
Environment
E-commerce
Labour mobility
Anticorruption/transparency
L
L N***
L/
L
n. a.
M*****
H
H
L
TTIP
De jure
De facto
H
M*
L
L
H
L
L
LM
L/
M
LM
L/
M
LM
L/
LM
L/
H
n. a.
M
H
L
L
L
M**
L
H
LM
L/
L
H
n. a.
M
H
L
L
LM
L/
M
LM
L/
M
LM
L/
LM
L/
H
n. a.
M
L
M
H
H
L
M
L/
LM
M
L
L
n. a.
M
L
M
H
H
M
M
M
M
M
L
n. a.
M
L
L N***
L/
L
n. a.
LM
L/
L (?)
H
L/
LM
L
L
L
n. a.
L
H
H
L
L
L
M****
n. a.
LM
L/
L (?)
H
L/
LM
L
M
M
L
L
H
L
H
L
M
H
L
L
H
L
H
* Most industrial tariffs in participating countries are already low and covered in a wide range of RTAs/GSP schemes.
** With negotiations covering market access in addition to regulatory measures, there is a potential for discriminatory measures.
*** An example is the possibility of introducing criminal penalties for “wilful” trademark counterfeiting and copyright piracy on a commercial scale.
**** Given the importance of both markets, the way in which such provisions in a number of issues are drafted might de facto discriminate against certain producers.
***** Prospects for reducing tariffs on environmental goods under the TPP and environmental standards might discriminate against outsiders even if, in practice, the tariffs are low.
o
Given the importance of both markets, the potential for multilateralization is important, if not de jure, at least de facto.
Deeper-than-tariff provisions in deep RTAs like the TPP or
TTIP need not create hard discrimination. Take the example
of telecoms in the US-Peru FTA – an agreement that will be
folded into the TPP. “Each Party shall ensure that enterprises
of another Party have access to and use of any public
telecommunications service, including leased circuits, offered
in its territory or across its borders, on reasonable and nondiscriminatory terms and conditions …” This might seem like
a hard preference, but it is not.
The point is, there is no effective way to exclude thirdnation firms from this assurance. What is lacking is a
good “discrimination technology”; it is just legally and
administratively difficult to design rules of origins that identify
the nationality of a modern firms. According to the FTA,
an “enterprise of a Party” is any enterprise constituted
or organized under the law of another Party as well as
enterprises owned or controlled by a person of another Party.
Toyota USA automatically qualifies for the “preference” in Peru
since it is constituted in the US. Plainly, there is a preference,
but very little discrimination; third-nation companies can – at a
cost – benefit from the preference.
This example is not a quirk. Many of the provisions in megaregionals will establish rules for treatment of firms, services,
intellectual property and capital. In most of these cases,
effective discrimination technologies are not available. In
today’s world, it is hard to determine the nationality of firms,
services, capital and know-how. Or more precisely, it is
relatively easy to work around such definitions. Thus, the
advantages created by the mega-regionals on such topics
will entail soft preferences rather than hard. The rules of origin
for deep RTA provisions are easy to skirt and are thus “leaky”.
Many of the commitments in the mega-regionals – indeed, all
deep RTA provisions – resemble unilateral liberalizations that
just happen to be bound by an RTA.
Other provisions in deep RTAs establish no preferences at all.
The IPR chapter in the US-Australia FTA (which will be rolled
into the TPP), for example, requires the parties to accede
to various existing treaties.29 These treaties are open, so the
Australia-US FTA creates no preference. The FTA is merely
a vehicle for locking in domestic reforms that are applied
multilaterally.
While many mega-regional provisions can be thought of in
terms of preferences, understanding the impact of regulatory
convergence requires a very different mindset.
Game-Changers or Costly Distractions for the World Trading System?
23
nations embraced it as well. This helped Nokia and other EU
firms compete in third nations. EU regulatory convergence
helped EU firms win the global standards competition. More
generally, regulatory convergence in areas the size of the
TPP or TTIP tends to bring regulatory practices in line even in
third nations. Switzerland and Norway, for example, are not
members of the EU but adopt EU Single Market standards as
they emerge.
Trade effects of regulatory convergence
Following in the footsteps of the original mega-regional – the
EU’s Single Market programme – the harmonization of many
diverse norms, standards and regulations is a key goal of
both the TPP and the TTIP. Experience with the Single Market
helps in considering the impact of regulatory convergence in
mega-regionals.
Given the size of the EU market, firms must embrace EU
standards. Firms do not want to have to adapt their products
to national standards as well, so they push for unilateral
harmonization with EU norms. Again, using the shallowRTA analogy, it would be as if tariff cutting by shallow-RTA
members induced non-members to lower their tariffs as well.
Differing national standards create extra costs for exporting
firms. Examples include the cost of bringing goods into
compliance with the various national standards and obtaining
certification. In WTO parlance, these are called technical
barriers to trade, or TBTs. Harmonization reduces these costs,
but not equally for everyone. If one standard is adopted,
firms in the standard-setting nation get lower-cost access
to the standard-adopting nations. Firms in other nations
also see lower-cost access, but it may be costly for them to
adapt to the new standard – costs not faced by firms in the
standard-setting nation. In Figure 2, this is show by the arrows
indicating a reduction in regulatory-linked trade costs among
members (taking the US and Japan as an illustration).
Classifying mega-regional measures
Deep RTAs like the TPP and TTIP contain provisions that
affect cross-border flows of goods, services, know-how,
capital and people. There are also provisions that affect
foreign-linked local production. Table 2 presents one possible
classification. Roughly speaking, the hard preferences will
mostly apply to provisions that address policies in box A or
H – goods or people crossing borders. Provisions in boxes C,
E and G tend to create soft preferences, or non-preferences
due to the poor discrimination technology available for such
flows. Provisions in box K also tend towards non-preferences,
since policies that affect productive conditions tend to be
blind to the nationality of the firms. When the nationality of
the firms is identified, the malleability of corporate nationality
weakens the preference.
Importantly, this means that firms outside the mega-regional
also benefit from accessing all member markets with one
standard. This is shown in Figure 2 by the blue arrow from
an outside nation (taking Indonesia as an example) to TPP
nations. By analogy, it would be as if shallow-RTA members
lowered tariffs between themselves and simultaneously
lowered them against third nations. This is why regulatory
convergence measures have nothing to do with the hardpreference thinking. They are more like a multilateral
liberalization that benefits the member nations and third nation
alike – even if the member nations gain more. Regulatory
convergence tends to increase both trade among members
and imports from the rest of the world.
Evidence
A recent study by WTO researchers finds evidence that
most RTAs seem to be creating soft versus hard preferences
(Acharya et al., 2011). The evidence is that almost all RTAs
have led to “reverse trade diversion” (Figure 3). That is,
while the preferences increase trade among the partners,
RTA imports from excluded nations also rise – just not as
much. This is why they are called “soft” as opposed to
“hard” preferences. The RTAs create trade for members and
non-members alike, but the liberalization is slanted towards
members.
The unusualness of regulatory convergence provisions
goes one step further – such provisions can actually boost
exports from RTA-based firms to nations that do not join the
agreement (Francois et al. 2013). In Figure 2, this is shown by
the red arrow from TPP nations to third nations like Indonesia.
The usual example of this is the EU’s Global System for
Mobile communications standard. When 300 million
European consumers embraced this standard, many non-EU
Figure 2. Regulatory Convergence: Illustration of Trade Cost Effects
TPP nations
-10%
Regulation costs
Japan
-10%
US
co
n
tio
gu
la
Re
Indonesia
24
Mega-regional Trade Agreements
st
s
io
at
gu
l
-2%
Re
Non-TPP nations
n
co
st
s
Regulation costs
-5%
Table 2. An Economic Classification of Mega-regional Provisions
At-the-Border Barriers (ABBs)
Behind-the-Border Barriers (BBBs)
Cross-border flows
Goods
A
Tariffs, quotas, frictional
barriers
B
Services
C
Rare
D
Intellectual
property
E
Rare
F
Capital
(including FDI)
G
Capital controls (inwards and
outwards)
H
People
H
Visa
I
Professional qualifications,
residency permits, etc.
K
Weak property right assurances;
enforcement or biased
enforcement; poor business
environment
Idiosyncratic regulations, etc.
Idiosyncratic regulations; entry
restrictions; state-sanctioned
monopolies, etc.
Weak protection laws, weak
enforcement, pro-national
enforcement
Weak rights of establishment for
foreigners, ownership restrictions,
sectoral bans
Foreign-linked local production
GVC
production
J
Rare
Figure 3. Trade Creation and Diversion, Selected RTAs
Mercosur
AFTA
NAFTA
EEC
SAFTA
CACM
GCC
CEMAC
Euro-Meds
PATCRA
ECOWAS
CIS
EFTA
Andean
WAEMU
CER
CEFTA
SADC
COMESA
CARICOM
-100%
Source: Acharya et al. (2011).
Extra-RTA imports ("Trade
Diversion")
Intra-RTA trade ("Trade creation")
0%
100%
200%
300%
400%
Estimated extra trade due to RTA
Game-Changers or Costly Distractions for the World Trading System?
25
4.3. The Systemic Impact –
Richard Baldwin
Mega-regionalism is good news and bad news for the
world trade system. Trade liberalization has progressed with
historically unprecedented speed in the 21st century. Trade
volumes are booming; hundreds of millions have been lifted
out of dire poverty. The policy reforms that underpinned this
trade liberalization was implemented by a “spaghetti bowl”
of deep RTAs, unilateral reforms and BITs. The good news is
that mega-regionals will tidy up the spaghetti bowl – making
the spaghetti into lasagne plates, so to speak.
The bad news is mega-regionals may undermine world trade
governance – WTO centricity in particular. Trade liberalization
in the past decades has had three parts: deep RTAs, BITs,
and unilateralism. Unilateralism is not a systemic threat to the
WTO and BITs have long co-existed with the WTO. But deep
RTAs – and even more so mega-regionals – are very likely to
erode the WTO’s central place in world trade governance. The
threat is not on the tariff-cutting front; it is on the rules-writing
front.
The danger is that mega-regionals may enfeeble the WTO
as a forum for agreeing on new trade rules – specifically, the
rules necessary to foster the trade-investment-services nexus
that is the core of today’s international commerce. There are
three main reasons to worry about the WTO being side-lined
on the rule-writing front.
– First, the basic WTO trade norms are almost universally
accepted and respected, but this universality stems
in large part from the way they were promulgated – in
multilateral negotiations where the GATT/WTO consensus
principle held sway.
The new trade disciplines were promulgated in settings of
massive power asymmetries – the deep RTAs signed by the
US, EU and Japan with small to medium-sized developing
nations. The mega-regionals are slightly less asymmetric since
more than one giant is involved in each, but the small member
and third nations still find themselves at a huge disadvantage.
Lacking the legitimacy that comes from multilateralism and
consensus, it is not at all clear that the new norms will be
universally respected.
For example, some emerging markets – China, India and
Brazil – are large enough to attract foreign investment and
technology without signing deep RTAs, and they have so far
shunned them.30 China in particular might decide to reject the
rules – creating something like a “Cold War of deeper trade
disciplines”. This sort of distrust could spread beyond the new
rules, especially if China, India and Brazil believe that the US is
practicing what Fred Bergsten calls “competitive liberalization”
(Bergsten, 1995) – that is, using RTAs to try to encircle them
in a way that eventually confronts them with what might be
seen as an ultimatum.
– Second, a world where the WTO is irrelevant to trade’s
most dynamic developments (GVCs and supply-chain
trade) is not a world that fosters multilateral cooperation on
other issues.
26
Mega-regional Trade Agreements
Without a single forum for all trade and investment issues, it
will be difficult to arrange the trade-offs necessary to make
progress on trade-related policies that help with climate
mitigation and adaption, food shortages linked to drought or
floods, etc. US, EU and Japanese interests may be served
in the short term, and the interests of small to medium-sized
emerging markets will likewise be served (if not evenly), but
where do Brazil, India and China fit in?
These nations are not in a position to set up their own
systems of deeper disciplines for the trade-investmentservices nexus because they do not have advanced
technology factories to offshore in exchange for host-nation
reforms. By the time their multinationals are ready to make
major outward pushes, the rules-of-the-road will have been
written by the deep RTAs of the US, the EU and Japan.
If the mega-regionals conclude, they will have been firmly
embedded in international commerce; the members of TPP
and TTIP account for over half of world trade. More precisely,
they will be embedded in the domestic laws and regulations
of all the host-nations that the Chinese, Indian and Brazilian
companies will be looking at. Like it or not, Chinese, Indian
and Brazilian companies will have to play by the rules that are
now being written by the mega-regionals.
If Brazil, India and China play their assigned roles in this
storyline, it may all work out peacefully. But that is not the
only outcome observed when such tactics were applied
historically. This is a world that starts to resemble the 19th
century Great Powers situation. That episode of globalization
did not end well.
This is not the only scenario, of course – things could turn
out well. A whole system of trade and investment disciplines
has developed in the form of the BITs. Up to now, the BITs
and their system of jurisprudence, negotiations and politics
does not seem to have undermined the WTO’s authority on
the issues covered in the 1995 Marrakesh Agreement. But
as international commerce becomes ever more dominated
by the trade-investment-services nexus, the WTO may be
increasingly side-lined when it comes to trade governance.
– Third, the WTO’s adjudication function is still working well,
but any dispute settlement system must “walk on two
legs”.
The judges can connect the dots for particular cases, but the
basic rules must be updated occasionally to match evolving
realities. If the rules are being written in the mega-regionals,
the only way to update the WTO rules is to multilateralize TPP
and TTIP rules. That may be very difficult politically.
Mega-regionalism is not yet a disaster for the world trade
system. The present trajectory, however, seems certain to
undermine the WTO’s centricity – mega-regionals will take
over as the main loci of global trade governance for beyondWTO issues. Over the past 15 years, WTO members have
“voted with their feet” for the RTA option. Without reform that
brings existing RTA disciplines under the WTO’s aegis and
makes it easier to develop new disciplines inside the WTO
system, the trend will continue, further eroding WTO centricity
and possibly taking it beyond the tipping point where nations
ignore WTO rules since everyone else does.31
This scenario runs the risk that global trade governance drifts
back towards a 19th century Great Powers world. In the best
of cases, the WTO would continue to thrive as the institution
that underpins 20th century trade flows. The Marrakesh
Agreement would form a “first pillar” of a multi-pillar trade
governance system. All the new issues would be addressed
outside the WTO in a setting where power asymmetries
are far less constrained. This is what has happened with
the BITs – they established a parallel system of disciplines
without substantially undermining the WTO’s authority on
the Marrakesh disciplines. But this is not the only scenario.
It is also possible that the WTO’s inability to update its rules
gradually undermines the authority of the Dispute Settlement
Mechanism.
If the RTAs and their power asymmetries take over, there is
a risk that the GATT/WTO would go down in future history
books as a 70-year experiment where world trade was rulesbased instead of power-based. It would, at least for a few
more years, be a world where the world’s rich nations write
the new rules-of-the-road in settings marked by vast power
asymmetries. This trend should worry all world leaders. In the
first half of the 19th century, attempts by incumbent Great
Powers to impose rules on emerging powers smoothed the
path to humanity’s greatest follies – the two world wars.
dependent on the EU market (e.g. Switzerland and Norway)
unilaterally adopt EU standards.
The key point is that mutual recognition is only possible
among nations that trust each other’s governance systems
– basically, rich nations. Consider the TTIP – an agreement
among nations with a high level of regulatory standards,
compliance and enforcement – and the TPP, which involves
nations at very different levels of regulatory sophistication. The
TTIP is more likely to make substantial progress on regulatory
convergence. In any case, both mega-regionals are likely to
lead to an outcome where poor nations are induced to adopt
at least some rich-nation standards. In some cases, this might
be good for them, but in others it might involve inappropriate
restrictions.
The systemic impact of regulatory convergence deserves
special mention due to its unusual effects (Figure 2).
Regulatory convergence: A two-tier world?
Reducing the trade-inhibiting impact of TBTs requires that
fewer norms are binding. Logically, there are only two ways of
accomplishing this – the first approach is harmonization, and
the second is mutual recognition:
– Harmonizing national norms so there is only one set of
norms in the first place
– Recognizing multiple norms so that goods are only
required to meet one set of norms to be sold in all markets
Negotiating harmonization is extremely difficult for political
reasons. Even inside the EU, it proved unworkable (as
evidenced by the failure of the EU’s so-called “Old Approach”
from 1969 to 1984). All firms prefer just one set of norms, but
they all want it to be theirs. Moreover, it is difficult (and timeconsuming) to determine whether each proposed regulatory
modification permits an equal level of regulatory protection
in each nation. Additionally, it is difficult and time-consuming
to determine their commercial impact. Since international
negotiations must strive to balance commercial gains and
each government must align a political consensus behind the
final liberalization package, this second aspect of obscurity
greatly complicates and delays TBT harmonization efforts.
Since negotiated harmonization is impractical, real-world
regulatory convergence has taken the form of mutual
recognition. But this mutual recognition is only extended
to members of the agreement – the EU and the AustraliaNew Zealand Closer Economic Relations Trade Agreement
being the two leading examples. Of course, much more
harmonization has taken place, but it is of the “hegemonic
harmonization” type. In Europe today, nations that are
Game-Changers or Costly Distractions for the World Trading System?
27
5. Possible Responses to
Mega-regionals
5.1. Potential Responses
to Mega-regionals by
Excluded Countries – Uri
Dadush
The TPP and TTIP intend to reshape world trade rules for
the 21st century. However, the negotiations exclude some
160 countries, which are home to over 80% of the world’s
population. These countries typically grow 3% a year or so
faster than those included in mega-regional negotiations
and, on current trends, may well account for over half of
world trade in the not distant future. Thus, how the excluded
countries respond to the rise of the mega-regionals is an
important question not only for their citizens, but also for the
United States, the European Union, Japan and the other 10
countries that are participants in the negotiations.
Uncertainties and possible impact
Very large uncertainty is attached to the content and timing
of the mega-regionals. Indeed, whether these enormously
complex agreements will conclude at all, or whether they are
reduced to a minimum common denominator outcome that
does not commit the parties to much, is unknown. Even if the
TPP, which is by far the most advanced, is agreed on in 2014,
the confidence interval around the “bite” of its provisions
is wide, ratification by the US Congress is uncertain and
implementation of its more significant measures could take
many years. Thus, even though their own policy response
could require long lead times, many of the excluded countries
may decide to adopt a wait-and-see posture. Furthermore,
since any response requires commitment of negotiating
resources and political capital, the excluded countries will
be inclined to look for strategies that are robust to the many
possible outcomes.
The starting point for formulating an appropriate response
to the mega-regionals is how the agreements are likely to
affect the excluded country’s defensive and offensive trade
interests. One can already predict that the vast majority of
export sectors will be little affected by the TPP and TTIP
since tariffs among the contracting parties are already low,
and the reduction of many non-tariff barriers (such as custom
delays and red tape) are likely to have MFN effects. However,
28
Mega-regional Trade Agreements
there will also be instances (garments, autos, sugar, cotton,
etc.) where tariff peaks prevail and significant trade diversion
could occur as a result of their reduction or elimination. And,
while the adoption of common standards could open up
new export opportunities, there will be instances, especially
if the reforms take the form of mutual recognition, where the
new standards provide a significant advantage to firms of the
contracting parties. There will also be instances where importcompeting firms in the excluded countries will be adversely
affected, as firms of the contracting parties that compete with
them will benefit from economies of scale, lower tariffs and
improved cash flow. Many of the effects on both exports and
imports will be indirect, as changes in the competitive position
of one firm will resonate up and down the supply chain.
While much of the impact on excluded countries will occur
in specific sectors and thus calls for careful monitoring of
the provisions being negotiated at a micro level, one cannot
lose sight of the systemic implications of the mega-regionals,
especially as changing the global trade rules is set out as
an explicit objective by US and European negotiators. If
successful, the agreements could set up new benchmarks
and approaches – for example in the life of patents or
in policies governing exchange rates – which will either
supersede WTO or eventually come to be integrated into
WTO. Even if no attempt is made to broaden the reach of
the new standards to other countries, their adoption by
countries representing such a large share of global economic
activity will be of great significance to exporters and importcompeting firms around the world. In practice, this means
that excluded countries will see their influence on the global
trade architecture diminish. Moreover, even for the largest
excluded countries, such as China, an individual response
to the systemic effects of mega-regionals is unrealistic. It is
instead likely to rest in coalition formation with like-minded
countries who want to see different outcomes. A natural place
to seek out such coalitions is in the WTO, but history shows
that the pursuit of parallel or competing regional deals is the
more likely path.
Response
How should excluded countries respond? The tendency is to
think of countries as led by an all-knowing and independent
expert who will choose the public interest. In practice, the
response to the mega-regionals will reflect the weight of
domestic political interests and how they see themselves
affected by the new trends. One implication is that countries
are unlikely to react until an important domestic constituency
sees a clear threat or opportunity. Another implication is that
the largest countries, especially those that see themselves
as rising powers – such as China, India and Brazil – will
probably react faster to the perceived systemic implications
of the mega-regionals, including their geopolitical and security
implications, than will many smaller countries who see
themselves as little able to affect the system.
Following are the pure strategies that can be pursued,
recognizing that they will sometimes be deployed in
combination.
1. Do nothing
This is often a bad strategy but one to which many political
systems naturally converge. In this case, the uncertainties are
so big that it may make sense to wait and see, especially for
small countries that cannot hope to affect the negotiations or
to realistically craft a systemic response. Even then, countries
will want to monitor developments closely and analyse the
impact of alternative scenarios or outcomes on their most
important trade interests. They may begin to devise strategies
and send out feelers to trading partners.
2. Reject, withdraw, obstruct
This is the worst response. Countries are not likely to retreat
into protectionism or obstruct WTO negotiations just because
they do not like being excluded from mega-regionals.
However, where influential domestic constituencies are
hostile to trade anyway, the disappointments with multilateral
approaches and exclusion from the most vital parts of
world trade negotiations can play into the hands of antiglobalization lobbies and of those who argue that the dice
are loaded. Although the modest progress made in Bali may
have mitigated this risk, the shift of focus by the major trading
powers onto mega-regionals will discourage countries that
tend to be inward-looking, such as India, Brazil, Russia and
South Africa, from adopting a more liberal stance.
3. Enact autonomous reforms
This is the best response to mega-regionals but also the
least likely course politically. The mega-regionals do little to
change the political economy of autonomous trade reforms
in the excluded countries, and, if anything, strengthen the
hand of protectionists. Still, if done at the right pace and
with adequate companion measures, unilateral regulatory
reform and trade liberalization can induce a supply response
and reduce distortions, and are an effective way to prepare
firms for the increased competition, tougher standards
and bigger markets that successful mega-regionals would
bring. Moreover, these reforms are robust – worth pursuing
regardless of the shape that mega-regional may take.
4. Join them
One strategy, most likely to appeal to smaller countries eager
to join the TPP, is to use the available “docking stations”.
The downside of this approach for a small country is that it
will mean being subjected to one of the most lopsided trade
negotiation in history. Moreover, this path is very unlikely to
be pursued by large countries, not only because the likes of
China or Indonesia will not accept unconditional adoption of
the TPP “acquis”, but also because the incumbents will be
reluctant to open their doors so wide to a big, new source of
competition without imposing additional conditions.
Given the complexities of joining a mega-regional after their
conclusion has been reached, a more realistic approach is to
enter into a bilateral negotiation with both the US, which is a
way to get a large chunk of the market access under the TPP
and TTIP, and the EU. Such an approach would provide a
window to the regulatory reforms and tougher standards both
trading powers are aiming for. Many smaller countries will be
attracted by this option, even though the negotiations are
likely to be lopsided. Larger countries, with greater bargaining
power, may also pursue this route – as in the Brazil-EU and
India-EU negotiations at present.
5. Compete with them
This strategy consists of joining competing regional
arrangements or forming new ones. There is, however,
nothing on offer that is likely to compare in terms of ambition
or scope with the TPP and TTIP. The prospect of RCEP,
which includes China, India and Japan – geopolitical rivals
with very divergent trade agendas – resulting in a high
ambition agreement is, to say the least, distant. Any number
of other opportunities exist for countries to enter into farreaching trade agreements with neighbours or with their most
important trading partners in other regions, including those
that are set to join the TPP (those joining TTIP are part of the
EU Customs Union) and from whom one can “learn” the new
standards. However, these agreements would be limited in
their reach (proportion of trade covered). They would only be a
very partial response to the mega-regionals and are best seen
as a complement to autonomous trade reforms.
6. Re-engage in the WTO
This strategy could have been considered as pure wishful
thinking before Bali. After the modest success in Bali, and
given the growing realization that successfully negotiating
the TPP and TTIP also presents great challenges, WTO reengagement is perhaps a less far-fetched option for many
countries, including those engaged in the mega-regionals.
Adopting a realistic post-Bali agenda in Geneva is not going
to stop the TPP and TTIP train, but, if done right, could create
a positive dynamic between the regional and multilateral
negotiations. Indeed, the constructive role played in Bali by
many, from the US to China, the LDCs and even India, may
reflect concerns that the mega-regionals could render the
WTO irrelevant and ultimately undermine its acquis. In some
aspects of the mega-regional negotiations, for example
on trade facilitation, the Bali agreement could represent
the minimum denominator starting point, and advances in
regional negotiations could eventually feed back into the
multilateral sphere.
What appears unrealistic after Bali is the pursuit of farreaching WTO agreements based mainly or exclusively on the
single undertaking/consensus rule. To revitalize the multilateral
system, countries involved in TPP and TTIP negotiations
and those excluded will probably have to accept slicing up
the Doha agenda (and the many issues which Doha did not
address) into manageable pieces involving a critical-mass
subset of countries willing to move faster and farther than the
rest.
Game-Changers or Costly Distractions for the World Trading System?
29
Conclusion
For the countries excluded from mega-regionals and worried
about the systemic implications for the global trade system,
“plurilateral” or flexible geometry approaches within the
WTO probably represent the only realistic response. Such
approaches would form an important part of their overall
national response to mega-regionals, which could also include
autonomous trade reforms and the initiation of new bilateral or
regional negotiations with the contracting parties to the TPP
and TTIP, as well as with other important trading partners,
enabling them to raise the competitiveness of their productive
apparatus.
5.2. Regional and Country
Perspectives
5.2.1 The Potential Impact of Megaregionals on Sub-Saharan Africa and
LDCs in the Region – Peter Draper and
Salim Ismail
Sub-Saharan Africa does not have a seat at the megaregional negotiating tables; yet, the region has a stake.
Although the final substance and eventual ratification of
TPP and TTIP negotiations remain uncertain, the ability of
African nations to diversify market opportunities, integrate
their economies in global value chains and attract sustainable
investment could be affected. The long-term balance of
benefits against risks will depend on the design of these
agreements, supportive international policies and the strategic
response of African policy-makers and firms. Four issues are
relevant: new compliance measures; geopolitical dynamics;
preference schemes; and international production networks.
Transparency and monitoring will be an important basis on
which sub-Saharan African nations can frame a proactive
response.32
New compliance measures
The TTIP and TPP differ in their motivating factors and
negotiating dynamics. However, beyond their geographical
spread and respective weights in world economic output and
trade, they hold in common the objective of reaching binding
commitments on “21st century”, or “WTO-Plus”, trade-related
issues.33
The TPP’s main focus is to reach agreement on disciplines
configured to support the formation of transnational
production networks, including intellectual property,
investment, competition policy, services, customs procedures
and investor-state dispute settlement. The TTIP builds on this
with its core ambition of eroding non-tariff barriers to trade
by agreeing to common standards and working towards
regulatory convergence (through harmonization or mutual
recognition). Both sets of negotiations further include chapters
on labour and environmental norms, financial services, public
procurement practices and market access.
30
Mega-regional Trade Agreements
Should new regulatory standards and disciplines emerge from
the TPP and TTIP negotiations, they will, in all probability,
apply to trade and investment relations with the rest of the
world, including sub-Saharan Africa. The ability of African
nations to attract investment and gain reliable access to
mega-regional markets, most importantly the EU and the
US, will progressively depend on compliance with non-tariff
measures – both technical and non-technical – that go
beyond the realm of traditional trade policies.
In the case of standards, meeting higher thresholds will
entail regulatory changes without which African producers
could be shut out of the markets concerned. This raises the
problem of resource constraints and the ability to strengthen
regulatory capacities. In regard to compliance with disciplines
covering investment or intellectual property rules, domestic
policy changes will be expected. This raises the issue of the
appropriateness of adopting “gold standard” policies in weak
institutional settings.
The depth of these behind-the-border requirements will
not be without controversy. Yet, they could be exploited by
African nations as an impetus for reform in areas of domestic
priority. Depending on the nature of institutional and supplyside constraints, as well as the capacity to conform to new
standards and disciplines, targeted assistance under the
aegis of the Aid for Trade programme and broader capacity
building efforts will be required.
Geopolitical dynamics
The geopolitical foundations and possible implications of the
mega-regionals on the international trading system should
not be lost in the discussion on their potential impact on subSaharan Africa.
As other sections of this report explore, there is disagreement
among analysts whether the mega-regionals represent
“building blocks” towards multilateral convergence or
“stumbling blocks” towards fragmentation. Systemic
scenarios will hinge, to a great extent, on how China
responds and whether one of the unstated objectives of
the US-led mega-regional drive, that of not necessarily
excluding China but rather compelling the world’s second
largest economic power towards accepting new norms and
rules on pre-established terms, leads to gradual consent or
contest – particularly in the context of a powerful Asia-Pacific
coalition like the TPP where China is by design an outsider to
negotiations.34
This geopolitical dimension is of relevance to sub-Saharan
Africa at a time when the continent’s trade and investment
patterns are undergoing a profound and seemingly secular
shift from traditional economic partners to intensified relations
with fast-developing centres of world commerce.
The EU as a bloc remains sub-Saharan Africa’s largest trading
partner, yet its share of total trade halved between 1989
and 2011 from 50% to 25%. In 2011, the US accounted
for 12% while China had become sub-Saharan Africa’s
biggest bilateral trading partner with 15% of the region’s total
trade. The speed and scale of China’s engagement with the
continent has been a game-changer.35
The backdrop to the mega-regional effort is one in which
sub-Saharan African nations are concurrently engaged
in discussions with major partners over institutional
arrangements of long-term developmental and strategic
importance. The African Growth and Opportunities Act
(AGOA) – the centrepiece of US economic relations with
the region since 2000 – is up for renewal in 2015 with a
fair degree of uncertainty regarding the terms of any new
agreement. AGOA has been characterized by its unilateral
and non-reciprocal nature, features that are up for discussion,
specifically with regards to sub-Saharan Africa’s biggest
economies and most dynamic markets. An important factor
behind this reasoning is that the EU is hoping to finalize
arduous negotiations on regional Economic Partnership
Agreements – the foundation since 2008 of Europe’s
economic integration with sub-Saharan Africa, which (with the
exception of least developed countries) is built on reciprocity,
hence preferential access to African markets for European
firms.
Since 2000, the Forum on China-Africa Cooperation has
served as the main stage for Sino-African bilateral relations.
Recently, there have been moves to formalize trade and
investment arrangements with African regional groupings
through initial Framework Agreements with the East African
Community (EAC) and the Economic Community of West
African States (ECOWAS). China, too, may start to demand
reciprocity with certain partners.
A question that arises is how sub-Saharan African nations
and regions will react should mega-regional agreements fail
to reach coherence and lead to fragmented governance
structures within the international trading system. The
immediate tendency may be to gravitate towards European
and US partners – especially if existing preference schemes
are strengthened and the EU makes African economic
development a strategic priority. However, the emerging
centres of growth, trade and investment are largely to the
east. While the future velocity of this shift in world economic
gravity can be debated, the expectation is that Asia will
continue to experience significant economic convergence
and that South-South trade and investment dynamics with
Africa will amplify. A discussion on the region’s double-edged
economic relationship with China, including the possibility of
future regulatory demands, would seem to be a priority.
Box 3 – South Africa and the Megaregionals
South Africa is tangential to the new great global megaregionals game. The country accounts for a small share of
global trade and output, although it looms large in the African
context. Nonetheless, with the most diversified economy in
Africa and trading interests that span the US, the EU and
East Asia, it undoubtedly has a substantial stake if these
agreements do come to fruition. But the nature of the stake
depends on which region is in the frame.
South Africa exports a substantial quantum of relatively
advanced manufactures to both the US and the EU, in
addition to its typical resource profile. Furthermore, the great
majority of inward FDI into South Africa is sourced from the
EU, and to a lesser extent the US and Japan. On balance,
therefore, the TTIP is of most direct significance. Furthermore,
both the TTIP and the TPP may result in a degree of trade
and FDI diversion, of manufactures in particular, to signatory
countries. That could have implications for certain South
African industrial and agricultural exports to the EU market in
particular.
In the Asian case, resources dominate the export footprint.
To the extent that the TPP and the TTIP promote economic
growth in both regions, that would provide important
stimulus to South Africa’s resource exports. They have been
constrained in recent years, mostly owing to domestic policy
constraints, which may intensify since the South African
government lays great stress on adding value to resource
exports. Consequently, export taxes, FDI conditionalities
and domestic ownership requirements are gathering pace
in the domestic policy debate. Hopefully, this will not result
in substantial new hurdles to resource exports, favouring
competitors such as Australia over South Africa.
Furthermore, in the wake of TPP and TTIP conclusion, other
competitor countries may secure deals with the EU and US
that will offset the erosion of their preferences into those
markets. South Africa has a trade agreement with the EU,
although this covers goods only. It currently enjoys almost
duty free access to the US, but periodic threats to graduate
the country may at some point materialize, particularly
in the case of AGOA. The country does not have any
preferential deals with Asian countries – a major gap in its PTA
architecture.
Overall, South Africa’s domestic policy trajectory points
increasingly inward, towards import substitution and
reindustrialization. Chronically high unemployment rates and
persistent inequality have entrenched defensive approaches
to trade. The leadership of the trade ministry refers to the
narrative on global value chains as the “new Washington
consensus”. Hence, liberalization and upgrading trade-related
rules are not on the agenda. Indeed, the reverse is true:
bilateral investment treaties are being cancelled and replaced
with an investment promotion law which in its current
incarnation could result in intrusive conditions being imposed
on foreign investors. Consequently, South Africa will continue
to see its preferences erode in key external markets, while
foreign firms increasingly re-evaluate their approaches to FDI
in South Africa in favour of other African “gateway” countries.
Game-Changers or Costly Distractions for the World Trading System?
31
This inward-looking approach is being transposed into the
region. From the South African government’s standpoint, the
African growth story is the next big thing, and South Africa is
the gateway – at least to Southern Africa. Consequently, if the
regional market can be secured for South African companies,
it could work in the country’s favour. However, this logic is
likely to encounter swelling regional resistance, challenging
South African leadership. This will undermine South Africa’s
role as the regional economic gateway: since gateways
are conduits, they must necessarily be open to trade and
investment. Furthermore, regional markets are no substitute
for South African companies’ broader interests in Europe, the
US, and East Asia.
South Africa could continue to gradually seal off the
domestic market and hope that the world will engage it on
its own terms. But that course will undermine the country’s
international competitiveness, and a post Mandela world
is likely to look elsewhere. Instead, South Africa should be
thinking seriously about how to position the country for the
future global trading system.
Preference schemes
The TTIP could provide an opportunity for the EU and the
US to jointly revisit trade preference schemes to support
the development objectives of sub-Saharan African lowincome countries. The Trans-Atlantic partners apply distinct
non-reciprocal arrangements that offer special access to
African nations and least developed countries – the most
comprehensive of which are AGOA and Everything but Arms
(EBA).36
To cite some of the most commonly echoed weaknesses:
AGOA excludes and applies tariff quotas to key products
the region can produce competitively, not least agricultural
products;37 EBA provides full duty-free, quota-free coverage
but only to countries classified as LDCs, thereby driving an
arbitrary wedge within the region; the administrative costs
of compliance to complex local content requirements can
be prohibitive to firms operating in LDCs; the rules of origin
required for product eligibility are seen as ill-adapted to the
development of value chains; and AGOA’s annual review
mechanism added to the uncertainty of the scheme’s renewal
post-2015 reduces security of access.
There is as yet no evidence that the harmonization of
preference schemes is on the agenda of the TTIP.38 However,
short of integrating their preferential arrangements, the EU
and the US could send a strong message to their African
partners that the agreement is about coherence and inclusion
by mutually recognizing requirements covering rules of origin.
This not only would reduce information costs and ease
compliance procedures for African exporting firms, it also,
in principle, would allow imported products from African
countries covered by preferences to be granted reciprocal
access to EU and US markets.
AGOA (Enacted by the US in 2000)
EBA (Enacted by the EU in 2001)
Applies equally to sub-Saharan African LDCs and nonLDCs, although it offers added benefits to LDCs by providing
duty free treatment to products covered by the generalized
system of preferences as well as flexible rules of origin on
apparel (Third-Country Fabric provision).
Applies uniformly to all LDCs worldwide including African
LDCs by providing full duty free, quota free access
under specific conditions of origin. Trade relations with
sub-Saharan African non-LDCs fall under the reciprocal
Economic Partnership Agreements.
Eligibility is reviewed annually and determined by political
conditionality (rule of law, foreign policy objectives, barriers to
trade and investment, etc.). Added LDC benefits are defined
by economic criteria (per capita ceiling with exceptions).
Eligibility is determined by generalized system of
preferences requirements that include economic criteria
(LDC status defined under a UN ranking based on per capita
income, human assets and economic vulnerability) and basic
political criteria (human rights).
Beneficiaries in 2013 included 40 of the 48 countries in
sub-Saharan Africa, with 24 covered by LDC provisions.
32
In 2013, sub-Saharan Africa accounted for 2% of world trade
and less than 3% of global FDI flows, with extractive industries
drawing the lion’s share. Liberal access to developed
markets, as envisioned by the policy thinking behind AGOA
and EBA, could help stimulate investment and job creation
in agricultural, manufacturing and service export sectors.
However, despite their successes, both schemes suffer from
limitations that curtail their utilization and effectiveness.
Mega-regional Trade Agreements
Beneficiaries in 2013 included 27 of the region’s 34 LDCs,
while excluding low-income countries not classified as LDCs.
International production networks
The fight for relevance in 21st century trade is increasingly
being conducted via GVCs. Despite the developmental
potential that disaggregated production networks hold for
low-income economies in Africa by allowing for the formation
of capabilities and clusters in a narrow set of specialized
tasks, the region has essentially been bypassed.39
Most models predict that the mega-regionals will not lead
to significant trade diversion and that any loss could be
compensated by the efficiency gains to the global economy.40
This prognosis will depend on how the agreements are
designed (e.g. an approach based on open regionalism with
accession clauses or “docking stations”) and the manner in
which the EU and the US decide to integrate the many trade
agreements they hold with third countries and regions (e.g.
mechanisms covering the cumulation of rules of origin).41
The TTIP, TPP and RCEP incorporate all three GVC hubs:
Europe, North America and East Asia. There is a risk
that these agreements could have negative spillovers on
the incentive to invest and stimulate actual and potential
production in sub-Saharan Africa.42
As discussed, generous preference schemes in developed
markets with rules adapted to the realities of modern
trade could spur African export diversification. The
operationalization of the LDC Services Waiver and the
implementation of the Trade Facilitation Agreement, as
agreed at the WTO Ministerial in Bali, may also form part of a
supportive international policy environment, which will need to
be complemented by national and regional policies.
Although many economies in sub-Saharan Africa have
consistently grown faster than other regions of the world
in recent years, primary commodities have driven a large
share of this growth. Most African nations need to implement
reforms that improve their business environment and
attractiveness as investment destinations so they can develop
their potential in manufacturing activity and agricultural
productivity. Modernized infrastructure and backbone
services (logistics, telecommunications and transportation) are
further preconditions to competitiveness and the ability to tap
into sophisticated production networks.
Securing greater depth and coherence to existing regional
integration efforts will also be an important strand in subSaharan Africa’s effort at creating an environment conducive
to the expansion of value chains. Official intra-regional trade
between African nations stands at around 10% (compared
to 30% for ASEAN nations). This weak integration is partly
driven by the lack of complementarities between the region’s
economies, but also by the prevalence of high barriers to
trade: the cost and complexity of conducting business across
borders severely restricts the ability to form regional value
chains. Given the low level of intra-African trade, Africa will
remain dependent on external forces for a long time, and
these forces will require the greatest adjustments in the near
term. However, initiatives at the regional level could be used
as laboratories for reform and for building regional value
chains with an eye on graduation into global production
networks.
A recent initiative of note that underscores the awareness of
the need to better integrate and harmonize regional economic
communities is the SADC-EAC-COMESA Tripartite.43 The
agreement is to be based on three pillars (market integration,
infrastructure and industrial development) with an agenda
in two phases that includes trade in goods (tariffs, non-tariff
measures, rules of origin, customs cooperation, dispute
resolution) followed by services, intellectual property,
competition policy and investment – all of which were until
recently rarely considered in African regional trade agreements
and could better prepare Africa for the post mega-regional
environment.
Conclusion
One of the consequences of mega-regional activity is that
the influence of sub-Saharan Africa on the global trade
and investment agenda will diminish – the region relies on
the World Trade Organization to be heard and has very
little bargaining power to push its interests forward outside
of the organization. Nevertheless, sub-Saharan African
policy-makers can devise strategies aimed at building on
the opportunities and curtailing the risks occasioned by the
mega-regional agreements. This entails closely monitoring
the negotiating chapters, working with partners to ensure
that the potential for discrimination is minimized and creating
a domestic and regional economic environment that invites
confidence.
5.2.2 The Potential Impact of Megaregionals on the Asia-Pacific Region and
China
5.2.2.A – Impact of Mega-regionals on the Asia-Pacific
Region – Sherry Stephenson
The Asia-Pacific region is at the centre of three of the
largest mega-regional negotiating efforts, namely the TransPacific Partnership, the Regional Comprehensive Economic
Partnership and the tripartite China-Japan-South Korea
free trade agreement negotiations. From the start, the
Asia-Pacific has been one of the main drivers of the megaregional phenomenon and is at the centre of the ongoing
transformation of the world trading system. The TPP effort
involves 12 countries representing 60% of world GDP, 40%
of the world’s population and 33% of world trade, while the
16 RCEP participants represent 33% of world GDP, 45%
of the world’s population and almost 30% of world exports.
The TPP originated from an Asia-Pacific agreement of four
core countries, while the RCEP is being led by the 10 ASEAN
members. Although only involving three countries, the CJK
FTA talks might also be considered a minor mega-regional
effort, given the size of the three participants that represent
20% of world GDP and nearly 20% of world exports.
As regards the progress of these negotiating processes in
the Asia-Pacific, the RCEP negotiations are only now getting
underway, while the CJK FTA negotiations are moving at a
slow pace due to political tensions that creep into the process
from time to time. The TPP negotiations are the closest to
being concluded, but there are strong elements of uncertainty
that still need to be resolved, including ongoing market
access differences between the US and Japan, differences
Game-Changers or Costly Distractions for the World Trading System?
33
over the strength of IPR protections to be included in the
agreement and the question of Trade Promotion Authority in
the United States where US Trade Representative efforts have
not yet led to a foregone conclusion in the Congress.
Several informal deadlines have already come and gone. But
if and when successful, the TPP will put a new face on trade
rules and trade relations, and will have a significant impact
at the multilateral level on the direction of future trade rules,
either in other regional agreements or eventually in the WTO
itself, as it may well evolve through plurilateral agreements
on specific issues in the future. These issues are likely to
be ones that have already been addressed in the TPP and
where a normative framework will have been developed.
Thus, the TPP may prove key to driving future trade relations
among major trading partners; only time will tell. It is well
acknowledged already that South Korea is preparing itself to
request adherence to a future TPP.
For its part, China is watching the TPP closely, while working
diligently to participate in as many key FTAs as possible so
that it will be ready to adhere to the agreement at some point
in the future should it choose to do so.45 China has requested
a pilot study on the feasibility of an FTA with the United States
that should be considered by its economic leaders in mid2014. The US and China restarted negotiations on a Bilateral
Investment Treaty, and these should be nearing completion as
of mid-2014.46 An investment treaty is generally viewed as a
necessary step towards a possible free trade agreement.
The first visit of a Chinese President to the European Union
took place on 1 April 2014 when President Xi Jinping was
received in Brussels to discuss deepening the economic
relationship between China and the EU. The two trading
powers are already well into negotiations of an EU-China
Investment Agreement covering investment protection and
market access. The Joint Statement issued at the time of
the meeting importantly mentioned the future negotiation
of a “deep and comprehensive FTA”, when the conditions
are right.47 China has also requested its participation in the
Trade in Services Agreement (TiSA) negotiations, ongoing in
Geneva, breaking the solidarity of the BRICS in this regard
and clearly putting its own trade and development priorities
above those of political concerns.
Many Asian countries are involved in more than one of these
three ongoing major and minor mega-regional initiatives,
which raise questions about the depth of the different
agreements, their relationship to each other in terms of
disciplines and extent of liberalization, and the motivations of
the participants in each case. Several analysts have written
about the TPP and RCEP as two alternative paths towards
an envisaged Free Trade Area of the Asia-Pacific, which is the
stated goal of APEC.48 More recently, analysts have begun to
posit a future possible “fusion” of the TPP and RCEP in order
to read the FTAAP, as it is doubtful that some of the ASEAN
members at lower levels of economic development would be
able to accept the higher TPP norms and standards for many
years. This possibility of a fusion would lie far down a future
path, and the position of the US in such a situation would be
unclear.
34
Mega-regional Trade Agreements
The TPP, if and when finalized, will have a major impact on the
conclusion of other mega-regionals, as well as on the AsiaPacific region itself. It should provide a stimulus for the RCEP
and the CJK FTA talks to move forward with more vigour and
to incite these other two efforts to aim for a deeper level of
disciplines and commitments. A finalized TPP should also be
a strong catalyst to push China to reflect on its ultimate goals
in the Asia-Pacific region. As a regional leader, China should
logically wish to be a member of both, but currently only
Japan is in this position. China may or may not choose to be
one of the driving forces in trying to consolidate the TPP with
the RCEP provisions to move towards an FTAAP.
It is worth noting that the RCEP is the only mega-regional
in which China and India are participating, two of the key
members of the BRICS. As such, it is an important initiative
that merits close monitoring. In this context, it is particularly
interesting to highlight the recent change in India’s attitude
towards participation in free trade agreements. Commerce
Secretary Rajeev Kher has recently pronounced himself
publicly in favour of the RCEP, claiming that it is an important
pact for the country and that the industry should be prepared
to avail itself of the opportunities derived from it.49 He
emphasized the key role of exports as a necessary ingredient
of economic policy and indicated that India’s export strategy
would be mainstreamed into government structures and
objectives. Kher also said “RCEP is an extremely important
agreement for India and it can be a game-changer. RCEP is a
big challenge to industry because we need to equip ourselves
to deal with the possibilities of opportunities that are coming
out of RCEP”.50
The mega-regionals that are currently under negotiation in the
Asia-Pacific region, given the importance of the economies
involved in these integration processes, should serve to
change the panorama of the world trading system over
the next decade, with important implications as well as for
countries outside and inside the region.
First, the new Asia-Pacific mega-regionals will draw more
economic activity into the region, through further enhancing
its dynamism and attractiveness for foreign investors and
traders. The greater integration of Asia-Pacific markets will
serve to expand the scale of productive operations and break
down remaining barriers to trade even further, especially in the
services area. Improvements in the running of certain service
sectors such as transportation, telecommunications, ICT,
logistics and financial services will result in a huge contribution
for the formation of international production and distribution
networks.
Second, these large agreements will have relatively less
discriminatory effects on the rest of the world than smaller
agreements would have, meaning that trade diversion should
not be a major worrying factor for countries outside the
region. In fact, the economic stimulus to be provided by the
TPP and/or RCEP could be considerable, both for economic
growth and for trade growth.51 The larger the mega-regional,
the larger the beneficial impact will be on both members
and global GDP and trade. According to a study by Petri,
Plummer and Zhai (2011), the effect on the world economy
would be small initially, but by 2025 the annual welfare gains
would rise to $104 billion on the TPP track, $215 billion on
the RCEP track and $303 billion on both tracks. An eventual
region-wide agreement (FTAAP) would generate even larger
benefits – $862 billion – by 2025. Logically, smaller countries
would benefit immediately and more significantly than larger
countries.52
notably the “four dragons” in Asia-Pacific, later China after its
reforms, as well as the ASEAN countries. Japan, China, Hong
Kong, Singapore, Taiwan, China and South Korea owe much of
their growth and prosperity in recent decades to the international
trade system.
Third, the new mega-regionals in the Asia-Pacific will impact
patterns of trade and FDI through reinforcing and expanding
existing supply chain operations. The members of the
potential future Asia-Pacific major and minor mega-regionals
(TPP, RCEP and the CJK FTA) are already at the centre
of current supply chain structures as sources of demand
– Japan, Australia and North America (the US, Canada
and Mexico in the TPP) – and centres of supply – China,
Japan and South Korea in the RCEP and the CJK FTA. A
successfully completed RCEP with significant market-opening
disciplines, especially in the services area, should help to
expand the operation of current value chains further into
South-East Asia through greater involvement of the ASEAN
members, potentially including part of the Indian economy as
well.
While the Asia-Pacific economies are highly and tightly
integrated in the contemporary international economic system
and indeed major actors through global value chains, the
politics and geopolitics of the Asia-Pacific are in respects
reminiscent of those in Europe of the late 19th and early 20th
centuries.
These potential future implications of the mega-regionals
should be a major source of worry for countries outside the
Asia-Pacific region, as it will likely make it more difficult for
them to break into and participate in these supply chains. For
outside countries, it will be important to find ways to link their
trade and investment patterns with the Asia-Pacific region,
such as the five members of the Pacific Alliance in Latin
America (Chile, Colombia, Costa Rica, Mexico and Peru) are
trying to do in their new trade agreement through expanding
the attractiveness and scale of their economies to Asian
investors. It may encourage countries outside of the Asian
mega-regionals to think of trying to “dock” a future FTA with
one of the major agreements.
From an institutional perspective, a potential future TPP and
RCEP, and possibly a CJK FTA, or in a more distant future,
an FTAAP, could serve as models the WTO might draw upon
to reflect on future reform, especially as it approaches its
20th year mark in 2015. With so many of its main traders
already experimenting with new rules and models for trade
agreements, WTO members might find it easier to consider
some of these new frameworks as an inspiration for a
possible overhaul of current rules, breaking down the silos
between trade disciplines and incorporating investment
within the multilateral trading system rules to better reflect the
integrated 21st century trading economy. The only thing that
seems quite clear in this moving picture is that the Asia-Pacific
region and its economies will be at the heart of the action in
this transformation.
5.2.2.B A Geopolitical Perspective – Jean-Pierre Lehmann
The philosophy of the post-World War II rules-based
multilateral trade regime was that it should be divorced from
geopolitical considerations and that trade should no longer,
as it had in the pre-war decades, serve as a weapon in the
armoury of offensive foreign policy. It was further assumed
that an open rules-based trade system would contribute
to peace and prosperity. When contrasting the first and
second halves of the 20th century, there can be no doubt
that the system was outstandingly successful, not only for
the established trading powers, but also for aspiring ones,
There was Great Power rivalry. It is, after all, just over a
hundred years ago that Britain invaded Tibet (1903-1904)
to thwart perceived Russian ambitions in the Far East. While
there were numerous rivalries between the Great Powers, the
biggest rivalry of all was between Germany and Britain. The
fact that they were each other’s biggest trading powers did
not prevent war.
Indeed, trade and investment had been booming in Europe
(as in Asia-Pacific today), convincing many, in the famous
words of Norman Angell, that “international finance is now so
interdependent and tied to trade and industry, that political
and military power can in reality do nothing”. The fact today
that Japan, China and South Korea should be each other’s
main trading partners and that they are highly interdependent
economically cannot by itself guarantee the absence of
conflict. Furthermore, the parallels between Germany and
Britain in the early 20th century and China and the US in the
early 21st deserve attention; attention, not obsession. As
Mark Twain mused: “History does not repeat itself, but it does
rhyme.”
In early 20th century Europe, booming trade and investment
were in part driven by an intense arms race. We see this
in Asia now, not only in China, but also in India, Vietnam,
Singapore and the Philippines, and, if Prime Minister Abe has
his way, there will be increased military expenditure by Japan.
As was the case in Europe a century ago, there are strong
currents of nationalism in Asia. This is especially true in China,
not entirely surprising in view of how much it suffered from
the Western powers and Japan in previous centuries. A
resurgence of nationalism also exists in Japan, symbolized by
the recent visit of Prime Minister Abe to the Yasukuni Shrine.
This nationalism, often ultra-nationalism, was fuelled by and
further exacerbated the fundamental mistrust that prevailed. In
The War that Ended Peace, Margaret MacMillan writes about
the European powers in the early 20th century that “highlights
the irrational and uncontrollable hatreds between people who
had so much in common”. In East Asia, this phenomenon
is especially glaring in respect to relations between Japan
and South Korea: both democracies, both major economic
powers, both dependent on a benign and dynamic global
trade system, yet both are at daggers-drawn because of
profoundly wounding historical legacies arising from Japan’s
colonization of Korea (1910-1945) and especially during World
War II, and by an ongoing territorial dispute over the Dokdo/
Takeshima Islands.
Game-Changers or Costly Distractions for the World Trading System?
35
In saying that Asia-Pacific is a geopolitical cauldron is by
no means to imply that war is inevitable. Trends can be
reversed. But one of the ways of seeing a nightmare scenario
materialize is to ignore the dangers. To say that war is
inevitable is the height of irresponsibility and inhumanity. To
say that war is impossible comes a notch just below. As The
Economist noted: “The most troubling similarity between 1914
and now is complacency.”
Asia-Pacific lacks trust, confidence-building measures and
solid institutions. Given this context, what can be the role
of the trade regime? For Asia-Pacific (as for the rest of the
world), there can be absolutely no doubt that priority must be
given to the rules-based multilateral trade system. The recent
“victory” of the WTO Bali ministerial meeting provides a much
needed gust of encouraging air. But, again, complacency
would be very dangerous.
The CJK FTA initiative is to be encouraged, not because of
expectations that concrete results are down the road, but
because at least it creates a rare forum for the three to talk.
As ASEAN is one of the very few cross-border institutions
in Asia-Pacific and as it has been quite successful since its
establishment in 1967 – over the decades having seen SouthEast Asia transformed from a battleground to a marketplace
– its potential positive leadership deserves recognition and
support. RCEP, therefore, seems worth betting on.
TPP, on the other hand, is much more contentious. Even
though the intention may not be geopolitical, it is impossible,
given the realities in Asia-Pacific, to ignore geopolitical
considerations and possible ramifications. It is perceived as
the economic arm of the US’s strategic “pivot to Asia”. The
facts that it is driven by the US and that it excludes China by
nature make it divisive, exactly at a time when every effort
should be focused on making Asia-Pacific more cohesive and
united.
Creating a dynamic, open, inclusive and solid trade regime
in Asia-Pacific should best be left to Asian initiatives and
leadership, with international support. The Asia-Pacific region
is geopolitically fragile. Upsetting it in any way by megaregional trade initiatives that insufficiently take into account
these realities could have catastrophic consequences. As
Winston Churchill said: “The farther back you can look, the
farther forward you are likely to see.” In looking back at 1914,
there are lessons for 2014 and beyond.
In this context, there is one vital lesson that refers to the role
of business. As The Economist notes, “Businesspeople today
are like businesspeople then: too busy making money to
notice the serpents flickering at the bottom of their trading
screens.” Business needs to take the geopolitical realities of
Asia-Pacific seriously, be less myopic, be less inclined to take
wishful thinking for analysis, and think longer term.
5.2.2.C – TPP and China’s Response – Wan Meng
Economic integration in Asia is largely market-driven and
the expansion of trade in parts and components is achieved
through the development of regional production networks
or fragmentation. China, a large final assembler positioned
at the hub of the production networks in Asia, is a catalyst
36
Mega-regional Trade Agreements
in this development. The priority in Asia now is to deepen
integration and increase the density of networks to close the
development gaps between nations. The Asian integration
style, “soft regionalism”, is somewhat flexible and follows an
incremental path.
The TPP agenda, which mainly includes Asian participants,
ironically appears to disconnect with the regional initiatives
for the following reasons. First, the TPP is not in the
Asian integration style and therefore could jeopardize the
achievement and the long-term goal of an FTAAP. Second,
China, the trading powerhouse of Asia, is excluded from the
TPP.
China’s exclusion from TPP is unlikely to undermine China’s
dominant role in Asia’s economy
The regional integration (in a wider context based on a TPP)
may meet difficulties without China’s involvement. Consider
Japan, for example. As China has emerged as Japan’s
top trading partner, Japan tries hard to bring China in with
a bilateral FTA. This assertion made by Japan is a clear
illustration of the strategic importance of China.
A TPP alone cannot change the existing structure of
economic integration in East Asia. China has concluded
agreements with ASEAN10, Singapore, New Zealand, Chile
and Peru, and is engaged in negotiations with Australia. Such
pre-existing links suggest there will be moderate economic
benefits for China in joining the deal. Therefore, the American
engagement in Asia through the TPP is not likely to isolate
or pose a threat and undermine China’s regional identity.
Though the TPP may deconstruct East Asian cooperation
and reconstruct trans-Pacific cooperation, the growing
China-Japan interactions suggest the potentials for creating a
powerful Asian trading bloc.
Further, South Korea’s recent interest in integration with
the East Asian region calls for the realization of pushing
for broader regionalism. The trilateral partnership between
China, Japan and South Korea is important as these three
economies account for 90% of East Asian GDP.
China’s strategic response to a US-led TPP
A cornerstone of Obama administration policy is to use
agreements like the TPP as a component of an integrated
approach to development policy. The TPP is therefore used
as a socio-political tool to institutionalize a “super-sized” next
generation trade deal that includes the free movement of
goods, services and capital, and even labour. A TPP means to
set the social, political and economic tone of the conversation
about the methods and values of transnational economic
activity in strict accordance with US standards. Therefore,
for the US, the TPP represents a means of leveraging power
and participating in emerging global conversations about the
structures of acceptable behaviour.
The US is also using the TPP as a vehicle for undermining
efforts to revive and promote the WTO agenda. The US
believes that WTO multilateralism should include more
regionally specific agreements. The TPP and the related
Trans-Atlantic Trade and Investment Partnership for Europe
represent an alternative for developing the governance
framework for international trade, one in which smaller groups
of individual states reflect the priorities of the member states.
These reveal the WTO’s continuing work among powerful likeminded states.
The “China containment” argument
The notion of “China containment” means that the TPP is
nothing but a vehicle through which the US strategically
confines China’s influence within the Asian-Pacific region, to
restructure the economies therein to the benefit of the US.
Most observers believe that China’s exclusion from the TPP
will lead to substantial economic loss and gradual deprivation
of its existing norm-setting power within the region. They
argue that because the TPP would shift production and
services from China, reduced exports would compel China to
resort to domestic consumption, a growth factor yet having to
reach its full potential. The US then gains from the conclusion
and implementation of the TPP, being again the pivot of the
Asia-Pacific economy. Therefore, China has to join the TPP
negotiation as early as possible, to avoid the aforementioned
adverse effect should China be excluded.
The China containment argument offers insights into the
relationship between the US and China, and the function of
the TPP in balancing such a relationship. Nonetheless, China’s
approach to the current US-led TPP negotiation has to be
more strategic, responsive to reliable facts and expectations
in international trade.
Problems with current US-led TPP
The ratification of the TPP would be more difficult than
expected
A TPP-type FTA is unpopular among many developed
countries and the lagging ratification process has led to
continued domestic critique of the US participation in the
TPP negotiation, concerning whether the US would gain
from it. For example, for import-sensitive US sectors, Japan’s
participation in the TPP could mean increased competition
from Japanese products, including in certain agricultural
sectors and in the US auto and auto parts sector. Some civil
society organizations suggest that since the TPP’s power
shift will further undermine democratic values and national
supremacy, the TPP is more than a negative economic
harmonization agreement. It is foreseeable that the ratification
and implementation of the TPP agreement in the US
Congress would be complicated and its final acceptance
among participants remains an open question.
The TPP’s less transparent process would undermine its
accountability
The TPP process has been criticized for the deviation from the
usual pattern of permitting a lively engagement by civil society.
The 16th round, for instance, excluded many countries from
the TPP negotiations, including China. A group of international
law professors and US Senator Daniel Patrick Moynihan
criticized that the TPP’s deviation from the international
standard of transparency creates a basis in the international
community to challenge its institutional legitimacy. Such
a risk would harm any existing participant’s confidence in
the viability of this international organization, creating more
political puzzles.
The above observations serve as a reason why China should
leave alone its successful implementation and enforcement
domestically and internationally. China may choose to be
more patient, in a reasonable expectation that the TPP would
mature into a less comprehensive, less coercive and more
lenient FTA. Otherwise, history would tell that an international
economic integration agreement of such a nature would face
its demise well before its ratification.
Adverse effects of China’s exclusion from the US-led TPP
China should be concerned that its exclusion from the US-led
TPP has potential risks for China’s economy and status within
the Asian-Pacific region.
Foreclosure of market access and the resulting trade diversion
from China
The pressing concern for China is the resulting exclusion
from the preferential market access accorded to TPP
members and the US. For example, the US would stand to
lose $25 billion in exports and $5 billion in the form of welfare
following the East Asia Free Trade Area’s (EAFTA) negative
trade-diversion effects to non-members. If the TPP would be
ratified with China being excluded, China would stand to lose
substantially in its exports and in social welfare in general.
The TPP’s comprehensive norm-setting scheme may
undermine China’s leading role in Asian FTAs
Apart from market access, China’s existing FTAs within the
Asian-Pacific region are narrower in the coverage of trade in
goods and services and having no WTO-plus provisions.
The TPP is supposed to deal with 21st century issues
that other existing FTAs do not cover. The main problem
lies in the so-called “platinum” norm-setting standards the
US is pushing for in the TPP negotiations. These include
stronger IPRs, tighter labour and environmental standards,
and regulatory discipline of state-owned enterprises. These
standards are less consistent with China’s traditional principles
of international relations. If China were excluded from the
negotiation stage of a TPP, China would be compelled to
make concessions.
Problems related to accession to the TPP mean that
accession of future members have to be negotiated
separately, undeniably leaving the veto power with the original
signatories. In this respect, instead of the TPP being inclusive
in terms of its membership, it may in fact be the reverse.
Conclusion: China’s stance with the TPP
For China, the ultimate decision to join the TPP is more of a
political than an economic question since it will be reduced
to comply with the established US-led TPP terms. The notion
of economic independence and sovereignty is a factor, which
could not be ignored during an FTA negotiation process.
An economic integration treaty would inevitably disturb the
political process of a sovereign, including the US and other
TPP participants. Hence, whether the TPP could be accepted
as currently intended among interested states requires more
patient observation.
Game-Changers or Costly Distractions for the World Trading System?
37
Therefore, China should wait for a better time to join the
TPP negotiations, as a successful TPP calls for China’s
participation. If, as history suggests, the TPP is not well
received by intended member states, China would be in a
comfortable position to extend its economic leverage for
the norm-setting powers, and to convert the TPP into an
FTA according to a set of compromised terms, if not China’s
terms. It may lead to the rise of a politically driven, divergent
dual track: China taking the lead through the Asian (EAFTA
and the Comprehensive Economic Partnership for East Asia)
track and the US taking the lead through the TPP track.
An opaque, regulatory-coercive and membership-inclusive
TPP track is therefore an alternative to the existing “soft
integration” in the Asian-Pacific region. Inevitably, there will
be competition between the two tracks; however, as a matter
of acceptance and sustainability, China may still maintain
its currently significant role in the Asian economy, and may
strategically respond to any challenges posed from the US-led
TPP.
How close and relevant are the relationships?
As reflected in Table 3, the trade agreements network of Latin
America with the EU is stronger than that with the Asian TPP
countries. Practically all Latin American countries either have
an FTA with the EU or are negotiating one (i.e. the Southern
Cone Common Market or Mercosur) and a number of them
have FTAs with the US and Canada. In contrast, except for
Chile that has FTAs with many of its Asian TPP negotiating
partners, virtually all other Latin American countries do not
currently have preferential access to Asian TPP partners.
The same holds true for export flows, as seen in Table 4: Latin
American exports to the EU (12.5% of their total export share)
are on average three times bigger than their exports to the
TPP Asian countries (4.1% of their total export share).
5.2.3. Mega-regionals – How “Mega”
Will Their Impact Be for Latin America? –
Beatriz Leycegui
The numbers above explain why the main interest for a
number of Latin American countries (e.g. Mexico, Colombia
and in Central America) in the TPP and TTIP derives from their
current preferential access, since they have FTAs with the US
and have important exports to that country. Nearly 40% of
Latin America’s exports are sold to the US, and in the case of
Mexico, almost 80%.
Given the “mega” nature of the TPP and the TTIP under
negotiation, it is worth reflecting on Latin America’s interest
in these agreements and their potential significance for the
region. Determining the degree of interest or impact among
Latin American countries in these processes is complex, since
there are many elements to consider, including the following
that are addressed: whether they have trade agreements with
TPP or TTIP negotiating parties and how important those
markets are for their exports; and their degree of participation
in these mega-regionals.
For Mercosur members (which, do not have FTAs with the
US), the foreseeable market access preferences that the
EU could grant to US agricultural products under a TTIP
would affect their competitiveness in such a privileged
market. Furthermore, as CEPAL notes, Argentina, Venezuela,
Brazil and Uruguay will be further affected by the “loss of
Generalized System of Preferences (GSP) benefits in the
European Union, as a result of being classified for three
consecutive years as upper-middle income countries by the
World Bank.”53
Table 3. Free Trade Agreements between Latin American Countries and Negotiating Parties of the TPP and the European Union
Latin America
TPP Negotiating Parties
Mercosur (Argentina, Brazil, Paraguay,
Uruguay, Venezuela)
(Chile, Peru)
El Salvador, Honduras, Guatemala, Nicaragua
(Chile, Mexico, US)
EU
1
Bolivia, Ecuador, Venezuela
Chile
(Australia, Brunei, Canada, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, USA, Vietnam)
Colombia
(Canada, Chile, Mexico, USA)
Costa Rica
(Canada, Chile, Mexico, Peru, Singapore, USA)
Mexico
(Canada, Chile, Japan, USA)
Panama
(Canada, Chile, Mexico3, Peru, Singapore, USA)
Peru
(Canada, Chile, Japan, Mexico, Singapore, USA)
1) Under negotiation (process resumed in 2010)
2) Signed but not in force
3) Under negotiation with Mexico
Source: Table prepared with information primarily from OAS (2013) “Trade Agreements by Country” available at http://www.sice.oas.org/agreements_e.asp
38
Mega-regional Trade Agreements
Table 4. Exports from Latin America to TPP and TTIP Countries (2012)
(In millions of $)
Latin
American
Countries
TTIP Negotiating Countries2
TPP Negotiating Countries1
TPP countries (excluding
American countries)3
TPP American countries
(excluding USA)4
Share
of total
exports
Argentina
USA
EU
USA
Share
of total
exports
Share
of total
exports
Share
of total
exports
$3,689
4.7%
$9,817
12.5%
$3,914
5.0%
$11,268
14.4%
Bolivia
$563
4.8%
$1,000
8.6%
$1,716
14.7%
$655
5.6%
Brazil
$13,862
5.8%
$14,100
5.9%
$26,701
11.1%
$48,392
20.2%
Chile
$10,314
13.4%
$4,209
5.5%
$8,986
11.7%
$11,848
15.4%
Colombia
$1,064
1.8%
$5,071
8.5%
$21,733
36.2%
$8,949
14.9%
Costa Rica
$403
3.6%
$426
3.8%
$4,167
37.0%
$1,967
17.5%
Ecuador
$876
3.7%
$4,211
17.7%
$10,587
44.5%
$2,448
10.3%
El Salvador
$46
0.9%
$187
3.5%
$2,470
46.3%
$241
4.5%
Guatemala
$199
2.0%
$909
9.0%
$4,099
40.5%
$672
6.6%
Honduras
$62
1.3%
$156
3.3%
$2,163
45.5%
$1,226
25.8%
$4,819
1.3%
$14,718
4.0%
$287,814
77.6%
$22,031
5.9%
Nicaragua
$44
0.9%
$820
17.4%
$2,065
43.8%
$330
7.0%
Panama
$16
1.9%
$136
16.6%
$161
19.6%
$179
21.8%
Paraguay
$151
2.1%
$442
6.1%
$143
2.0%
$1,060
14.6%
$2,838
6.2%
$5,848
12.9%
$6,049
13.3%
$7,446
16.4%
Uruguay
$84
1.0%
$562
6.4%
$324
3.7%
$976
11.2%
Venezuela
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$39,032
4.1%
$62,613
6.5%
$383,093
39.9%
$119,690
12.5%
Mexico
Peru
Total
1) Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, Vietnam, Canada, Chile, Mexico and Peru
2) USA and the EU
3) Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam
4) Canada, Chile, Mexico and Peru
N/A = Not available
Source: Table prepared with information from the Inter-American Development Bank, 2012
Advantages of being a party
Chile, Mexico and Peru are the only Latin American countries
that are part of the TPP negotiations. Their major interests in
it are:
– Strengthening their economic ties with their Asian TPP
partners and consequently with Asia-Pacific. At the same
time, the TPP can contribute to constructing a transPacific free trade area among APEC economies and other
possible Latin American partners with coastlines on the
Pacific Ocean (Central America, Colombia and Ecuador).
– Increasing their participation in regional value chains by
connecting their existing FTAs with the new partnerships
evolving under the TPP. Specifically, through cumulation
of origin, the parties could increase the suppliers of inputs
to include those from all member countries of the TPP
and the final exported goods would have access to TPP
partners with a tariff preference.
– Compensating tariff preference erosion by obtaining
concessions from new competitors that are also part of
the TPP. Of particular interest, as a result of a TPP, Japan,
Brunei, Malaysia, New Zealand and Vietnam would gain
preferential access to the US.
Game-Changers or Costly Distractions for the World Trading System?
39
– Potentially taking advantage of reopening pre-existing
FTAs to improve or update them (e.g. rules of origin,
disciplining the use of trade remedies, and improving the
dispute settlement mechanisms). So far, there has been
little space to revisit prior commitments. However, towards
the end of the TPP negotiations, this could occur to obtain
the proper balance among concessions.
– Expanding cooperation in new areas such as SMEs,
education, research, science and technology, among
others.
For the majority of Central American countries and Colombia,
becoming part of the TPP could be important because of
their trade interests with the US, sharing as a result many of
the interests of Chile, Mexico and Peru. However, for Latin
American countries that are less dependent on the US, have a
relatively small trade relationship with TPP Asian countries and
have inward-oriented or closer economies, the TPP is less
attractive (such as Brazil, Argentina and Bolivia).
Regarding the TTIP, so far, the only Latin American country
that has requested to be part of the negotiation is Mexico.
Having received the same petition from Canada, and possibly
from other EU trading partners if Mexico and Canada were
incorporated, the US and the EU have decided to close
the door to additional participants. The complexity of the
negotiations is also a reason for the TTIP negotiating parties’
reluctance to invite others to the table. As a consequence,
Mexico has initiated negotiations with the EU to deepen its
existing FTA, with the idea of eventually seeking convergence
of the negotiation processes, at least with respect to
cumulation of origin.
If the TTIP were to include cumulation of origin with common
Latin American FTA partners, this would have a significant
impact for the region as it would diminish trade-diversion
effects and take trade relations to a higher level. This is
certainly a difficult scenario to think about at this time, given
the overall complications of the bilateral trade agreement
negotiation in itself, but the thought should be presented
and well analysed. In addition and taking it two levels higher,
if multilateral negotiations do not progress with the ambition
that present times require and if the TTIP becomes a reality,
the TTIP could eventually converge with NAFTA, the Central
American FTA and other FTAs that the US and the EU have
in common with Latin America. This would create one of the
biggest mega-regional agreements with unforeseeable effects
to the trading system.
Conclusion
The TTIP and the TPP represent risks and opportunities
for Latin American countries. A real assessment of both
agreements will only be possible once they are concluded. In
1960, Latin America began an unsuccessful race to achieve
economic integration. Today, less that 20% of trade in Latin
America is intraregional. This is the result of strong ideological
differences within the region. A recent attempt at further
integration that has captured the attention of the international
community is the Pacific Alliance.
Box 4 – The Pacific Alliance
Colombia, Chile, Mexico and Peru negotiated the Pacific
Alliance to achieve the awaited regional integration among
like-minded countries that share the idea of trade liberalization
and the need to strengthen Latin American links with the
Asia-Pacific region. Together, the countries of the Pacific
Alliance include more than 200 million people with favourable
business environments.(1)
While intra-bloc exports are low (not more than 5%) and
the added value of Pacific Alliance inputs in each country’s
exports is small (12% in the case of Peru, 10% in Colombia
and Chile, and close to 2.5% in Mexico), as a consequence
of the significant commitments described there is great
potential for further integration of their value chains in
sectors such as mining, chemical, textile and apparel and
agroindustry.(2)
All member countries of the Pacific Alliance are FTA partners
between themselves. Therefore, the objective was to go
beyond their existing FTAs, contemplating among other
benefits:
– Total trade liberalization (immediate for 92% of trade in
goods and 8% in a tariff reduction schedule until 2030;
applicable to less than 10 products which in certain
cases had been excluded or had limited access in prior
agreements)
– Practically complete harmonization of rules of origin being
able to cumulate origin in their production processes (one
of the most significant contributions)
– Trade facilitation through connecting each country’s single
window for trade operations and electronic certificates of
origin, among other customs cooperation measures
– Regulatory cooperation through promoting mutual
recognition agreements of technical standards
– Elimination of visa requirements
– Cooperation on many fronts (opening of common
embassies and trade and investment promotion agencies;
environment and climate change, science and technology,
tourism and scholarship programmes for academic
exchanges)
These benefits were incorporated in a memorandum of
understanding signed in 2011 as well as in the Protocol
to the Pacific Alliance Framework Agreement that its
members entered into on 10 February 2014. Given its level of
ambition, the Pacific Alliance has caught the attention of the
international community, and hence the number of countries
accepted as observers has grown significantly: Costa Rica,
Panama, Australia, Canada, New Zealand, Spain, Uruguay,
Guatemala, Japan, China, Portugal, Paraguay, France,
Turkey, South Korea, Honduras, United States, Ecuador, El
Salvador, Dominican Republic, Finland, The Netherlands,
India, Israel, Italy, Switzerland, Germany and the United
Kingdom.
(1) According to the World Bank’s Doing Business 2013 Report, the members of
the Alliance are the top four countries in Latin America with a greater ease of doing
business.
(2) Perspectives of Production Integration among Pacific Alliance Countries
(preliminary version), Inter-American Development Bank, April 2013, pp. 4, 10, 22-32.
40
Mega-regional Trade Agreements
Hopefully, the Pacific Alliance agreement could grow in
participation to include not only more Latin American
countries, but also other countries that have expressed
interest in participating as observers. Being an integrated
region will significantly help Latin America to have greater
leverage to negotiate vis-à-vis other regions; successfully
integrate into global and regional value chains; and resolve
many common economic, social and political challenges.
Asia-Pacific and the European Union continue to successfully
work in such a direction. What is Latin America waiting for?
Game-Changers or Costly Distractions for the World Trading System?
41
6. Facilitating the Relationship
between Mega-regionals
and the Multilateral Trading
System – Robert Lawrence
In this section, measures are proposed that could help ensure
that mega-regional agreements complement rather than
undermine the multilateral trading system. The measures are
of three types: first, those that should be implemented by
the parties to the agreements; second, information on, and
assessments of, these agreements that could be provided
by the WTO and others; and third, measures that could
strengthen the role and maintain the centrality of the WTO in
the trading system.
Crafting open mega-regionals
The specific rules enacted in the mega-regional agreements
will be crucial in determining whether they contribute to a
global economy that is more fragmented or more integrated.
The participants in these agreements should be crafting these
agreements with the broader implications for the system in
mind.
On the one hand, they can conclude agreements with
exclusive and closed memberships that provide preferences
for the members and create higher barriers for outsiders. For
example, such agreements might include (i) restrictive rules of
origin that create disincentives for using intermediate inputs
of non-members; (ii) preferential treatment to signatories in
regulatory and other provisions; and (iii) extending mutual
recognition of member standards only for goods and services
produced in the member countries rather than any goods
(even those from third countries) that meet the standards of
any member of the agreement.
On the other hand, participants could contribute to a more
open multilateral trading system with agreements that are
open to additional members and that create more integrated
and contestable markets, not only for firms based in the
member countries but also from countries not party to
the agreement. This would occur, for example, if a mutual
recognition agreement allowed firms from non-member
countries to meet the standard of any one of the members,
in order to sell throughout the region. Contributions to a
more open system might also be made if mega-regionals
implement general rules that improve regulatory transparency
42
Mega-regional Trade Agreements
and allow full participation by all foreign firms (not only those
from signatory countries) in the development of standards,
liberalize services on a MFN basis and adopt trade facilitation
measures that apply to all their trade.
The potential integrative benefits not only need to be an
incidental outcome of the mega-regionals, but should be
consciously cultivated by those concluding the agreements.
The line of least resistance in the TTIP, for example, would
be to negotiate another unique set of rules that covers only
the agreement and would be overlaid on the rules of origin
that govern the US and EU agreements with others. But,
instead, the TTIP could help unravel the spaghetti bowl
of rules of origin if the TTIP rules were then applied to all
other regional agreements signed by the US and the EU.
Indeed, implementing the same rules of origin (and allowing
for diagonal cumulation) in all regional agreements in which
either the US or the EU participate would achieve far more
conformity than anything the WTO could feasibly achieve.
Exchanging information and assessments of regional
agreements
The WTO rules for preferential trade agreements, as
expressed for example in GATT Article XXIV, relate only
to tariffs and are silent on many of the issues covered by
mega-regionals. Moreover, even when it comes to the rules
that have been agreed to, oversight by the WTO has been
extremely weak. It is unlikely that an agreement that now
seeks to impose stronger enforcement of existing rules is
politically feasible.55 Nonetheless, either the WTO or, where
more appropriate, specially designated official institutions and/
or think tanks should be playing an active role in encouraging
arrangements that lead to a more open international trading
system. This should be achieved by improving transparency,
exchanges on best practices and reviews of the systemic
impacts of these agreements.
RTA Exchanges. Members are required to notify the WTO
when they conclude agreements, but the WTO could
do far more to facilitate the exchange of information and
ideas of best practice. Many preferential arrangements
are simultaneously being negotiated with agreements
implementing different solutions to similar problems. The WTO
has a potentially valuable role to play, not only in diffusing the
information it is given, but also in generating its own reviews
to help members and other stakeholders keep up with
developments and adopt best practices.
Suominen (2013), for example, has proposed the creation
of an “RTA Exchange”, a first-in-class global clearing house
of information on RTAs, and a virtual international discussion
forum on ways to leverage RTAs for broader and deeper
global trade integration. The exchange could include
dialogues and the provision of best practice templates for
inclusion in agreements. The WTO could either operate such
an initiative or contribute to it by expanding its own trade
policy review mechanism to cover major regional agreements
in addition to the reviews it currently undertakes on the trade
policies of individual members.
Multilateral-system impact statements. In the United States,
federal policy-makers are encouraged to take account of
the environmental impacts of their actions, by requiring all
qualifying measures to be subject to an environmental impact
statement. The purpose of these exercises is not necessarily
to prevent the measures from being implemented, but rather
to raise awareness and to encourage policies that minimize
environmental impact. Similar awareness should be raised to
encourage negotiators of regional arrangements to design
agreements that would (a) create contestable markets that
provide benefits to outsiders as well as participants, and (b)
serve as the modular components of a more integrated global
trading system.
One mechanism for doing this would be for the WTO or
alternatively an independent authoritative body – either a
think tank or distinguished panel of trade authorities – first to
lay out a set of relevant criteria and then to apply these to an
analysis of regional agreement. Ideally, suitable methodologies
and criteria would be widely available, and it should become
standard practice for drafts of agreements to be analysed
prior to being finalized so that negotiators would be given
opportunities to correct major deficiencies.
Restoring WTO centrality
The successful conclusion of the deep mega-regional
agreement currently under negotiation presents a fundamental
challenge to the WTO’s role as the centre of the global
trading system. With the WTO requiring consensus for its
agreements, the countries that are unwilling to embark on
deeper initiatives can block the institution from incorporating
them effectively. As a result, the WTO rules will the lowest
common denominator while the really meaningful agreements
are undertaken through mega-regionals. With the exception
of the TRIPs agreement, as evidenced by the fate of the
Singapore Issues, the drive towards agreements that entail
deeper integration has been thwarted at the WTO.
Many members are not prepared to adopt binding
commitments in policy areas such as investment, competition
policy and harmonization (or mutual recognition) of standards.
However, as is clear from the large number of members
currently participating in the mega-regional negotiations, there
is considerable demand for agreements that achieve far more
than all WTO members are willing to accept. If the WTO fails
to accommodate these needs, it risks losing its relevance for
these members.
Game-Changers or Costly Distractions for the World Trading System?
43
However, the WTO could restore its centrality by moving
towards a variable geometry, in which obligations to which
all members adhere are complemented by deeper open
plurilateral agreements that members are obliged to join.
These plurilaterals could, in fact, build on the achievements
of the mega-regionals by using innovations made in megaregional agreements as models for negotiating plurilaterals
with broader WTO membership. Regional arrangements can
be valuable in their own right and appropriate to reflect the
unique needs of particular groups of countries, but they can
also help advance progress towards a global system, in which
needs that are more universal are achieved through the WTO.
The WTO 9th Ministerial Conference held in Bali and the
discussions that have followed may have created momentum
to advance on the multilateral front.
Box 5 – The Bali Momentum –
Alejandro Jara
Many commentators have made the point that the number
and size of preferential trade agreements has increased
because of, among other things, the political crisis that has
prevented the Doha Development Round from entering its
concluding phase.
While this statement has to be tested empirically, it has
become conventional wisdom. As such, it has a political
impact of its own, despite the fact that preferential trade
agreements do not address a number of highly sensitive
trade issues that can only be dealt with in a multilateral
context. Such is the case of agriculture export subsidies
and domestic support, fisheries subsidies and anti-dumping
measures. These areas are extremely sensitive, in terms of
the highly organized sectors that defend the status quo.
Since there is no perfect symmetry between the agendas of
the Doha Development Agenda (DDA) and the preferential
trade agreements, the effect of the stagnation of the DDA can
only be said to be relative. In other words, to the extent that
preferential agreements do not touch upon these sensitive
areas, they appear to be easier to negotiate and command a
wider degree of approval of stakeholders in key jurisdictions.
However, the idea of a stalled or dead DDA has now changed
after the recent success achieved at the WTO’s Ministerial
Conference held in Bali (December 2013), that achieved a
few substantial and valuable results, particularly on trade
facilitation. This has demonstrated not only that the system
can deliver and in a substantial manner, but also that there
is now political momentum that WTO members are using to
establish a credible programme and process to conclude the
DDA.
The mega-regional negotiations take up a lot of energy
(human resources and political) that could be otherwise used
in concluding the DDA, and could therefore be considered
as being exclusive processes. However, a closer analysis
reveals important synergies and complementarities that are
highlighted with the prospect of concluding the DDA. For
example:
a. The DDA would bring results that would not be part of any
preferential trade agreements, thus helping the latter to
achieve a better balance of results (agricultural subsidies
and domestic support, fisheries subsidies, and antidumping).
44
Mega-regional Trade Agreements
b. Several WTO members will only pursue further trade
liberalization, bilaterally or otherwise, if a rebalancing of the
WTO is achieved, particularly with regards to issues such
as agricultural trade-distorting subsidization.
c. DDA results would certainly help reduce the discrimination
that affects countries that, for whatever reason, do not
participate in preferential trade agreements.
d. Mega-regionals can certainly pave the way for new and
better disciplines to be multilateralized sooner or later
(regulatory coherence, state-owned enterprises, etc.).
7. Thinking about Failure –
Gary Hufbauer
Success in the TPP and TTIP negotiations cannot be taken
for granted. Nor, for that matter, can we be confident that big
bilateral deals will be concluded – the EU-Japan, EU-China,
and CJK FTAs. Each one of these agreements, but particularly
the two mega-regionals, faces tremendous obstacles. The
Free Trade Agreement of the Americas, which crashed and
burned in 1998, serves as a reminder that failure is always an
option.
Starting with the TPP – the mega-regional most likely to
succeed – the biggest obstacles are found in Japan and
the United States. The implicit belief harboured by several
TPP members that Japan is able and willing to significantly
liberalize agriculture and services may prove too optimistic.
Prime Minister Abe might face a revolt in his Liberal
Democratic Party constituency at the prospect of freer trade
in rice, beef and pork, much less an opening to Wal-Mart and
Target. But agricultural and service exporters within the TPP
will threaten to walk if Japan does not meaningfully reduce its
barriers, and the list of potential naysayers includes Australia,
Canada and the United States.
Meanwhile, the fate of the TPP remains uncertain in the
US Congress. A majority of Democratic Representatives in
the House oppose the TPP, and for that matter, almost any
trade agreement. On this occasion, they are nailing their flag
to a currency chapter, and even if a chapter with that title is
agreed by the parties, it seems unlikely that the fine print will
satisfy sceptical Democrats. To compound the Congressional
hurdles, a significant minority of Republican Representatives
may oppose the TPP, because industries in their districts
would face unwelcome import competition in sensitive
agricultural products, in textiles and apparel, and in other light
manufactures.
open procurement or to harmonize product regulations and
professional standards.
If the two mega-regionals either fail outright or turn into
political show horses rather than economic work horses, and
if the WTO stumbles as a serious negotiating forum, the years
2013-2015 might well be called the Great Turning Point in
post-Second World War policy liberalization. Bilateral FTAs
will still be concluded – even big ones, such as EU-Japan
and perhaps EU-China. And many countries will realize that
unilateral liberalization is a great way to join GVCs and attract
foreign direct investment. But multilateral or mega-regional
deals that cover a third of the world economy or more will
seem like a thing of the past.
In such a world, powerful forces might carry trade in goods
and services, as well as foreign direct investment, to fresh
heights as a percentage of world GDP. The logic of applying
existing technology to foreign markets will not disappear,
and new global value chains will continue to link national
producers. But fresh policy liberalization, on the scale enjoyed
from 1950 to 2000, will be absent from this picture. In this
setting, it seems unlikely that global trade and investment can
serve as the great drivers of world growth and prosperity that
they were in the half century after the Second World War.
Turning to the TTIP, leaving aside the National Security
Agency and the flap over digital espionage, three roadblocks
can be identified. First is the sheer complexity of the deal.
As President Obama loses steam and as the European
Commission acquires new faces (in November 2014), it can
be questioned whether leaders have the necessary stamina.
Second is the opposition of independent regulatory agencies,
both to common standards and to mutual recognition. These
agencies are akin to the fiefdoms that dotted Europe in the
Middle Ages. Unlike the fiefdoms, the regulatory agencies
may not be able to preserve their independence for centuries,
but they may be able to hold out for years. Third is the
strong opposition of states to federal mandates either to
Game-Changers or Costly Distractions for the World Trading System?
45
Appendix
Table 5. Overview of Trade Agreements Mentioned in the Report
Association
of Southeast
Asian
Nations
ASEAN
ASEAN +3
Regional
Comprehensive
Economic
Partnership
(also ASEAN
+6)
Transpacific
Partnership
Transatlantic
Trade and
Investment
Partnership
ASEAN +3
RCEP
TPP
TTIP
European
Union
Australia
Canada
New Zealand
United States
Brunei
Cambodia
China
India
Indonesia
Japan
Laos PDR
Malaysia
Myanmar
Philippines
Singapore
South Korea1
Thailand
Vietnam
Chile
Colombia
Costa Rica
Mexico
Peru
1
South Korea is not part of the TPP 12, but currently in accession talks (see section 5.2.2).
46
Mega-regional Trade Agreements
Pacific
Alliance
CJK
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47
Endnotes
1
GATT Article XXIV.
WTO (2014). “Overview of Developments in the International Trading
Environment – Annual Report by the Director-General – WT/TPR/OV/16”,
31 January.
3
UNCTAD (2013). “World Investment Report”. “Other IIAs” refers to
“agreements, other than BITs, that include investment-related provisions
or investment chapters in economic partnership agreements or FTAs.”
4
OECD (2003), Regionalism and the Multilateral Trading System, OECD
Publishing
5
ASEAN members are: Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand and Vietnam.
6
Baldwin, R. (2014). “Multilateralising 21st Century Regionalism”. OECD
Global Forum on Trade, Paris, 11-12 February.
7
Source: WTO (2014). “WT/TPR/OV/16”, obtained from the World Bank’s
World Development Indicators, WTO Statistics and UNSD Comtrade
database.
8
In the case of TPP, such a “hub” is confirmed for two of its parties, the
US and Japan, and for the TTIP parties, as measured in calculations
using GTAP databases for 2001, 2004 and 2007 and indicators
developed by Arjan Lejour, Hugo Rojas-Romagosa and Paul Veenendaal
in CPB Netherlands Bureau for Economic Policy Analysis (2012).
Discussion Paper 227.
9
According to R. Baldwin, reverse trade diversion implies that, while
the preferences increase trade among the partners, RTA imports from
excluded nations also rise – just not as much (see Baldwin, R. section
4.2, The Economic Impact).
10
With the exception of the boxes, the following subsection is based on
and borrows from P. Draper, S. Lacey and Y. Ramkolowan (2014), “Megaregional Trade Agreements: Implications for the African, Caribbean, and
Pacific Countries”, a report submitted to the ACP MTS programme.
11
Cheong, I. “Negotiations for the Trans-Pacific Partnership Agreement:
Evaluation and Implications for East Asian Regionalism”, July 2013,
available on the ADBI website: http://www.adbi.org/files/2013.07.11.
wp428.trans.pacific.partnership.east.asian.regionalism.pdf (visited on 3
January 2014).
12
China and the US discussed the possible addition of China to the TPP
at the June 2013 Strategic and Economic Dialogue and the Sunnylands
Summit between Presidents Obama and Xi Jinping. As of April 2014,
China had not taken the step formally, but officially stated that it maintains
an “open mind” with regards to the group.
13
Williams, B. R. “Trans-Pacific Partnership (TPP) Countries: Comparative
Trade and Economic Analysis”, 10 June 2013. Available at: http://www.
fas.org/sgp/crs/row/R42344.pdf (visited on 3 January 2014).
14
Cheong, I. op. cit.
15
Draper et al., P10-11.
16
Buiter, W. and E. Rahbari. “Trade Transformed: The Emerging New
Corridors of Trade Power”, October 2011. Citi GPS, available at: https://
www.citivelocity.com/citigps/ReportSeries.action?recordId=1 (visited 22
March 2014). Also, A. Lejour, H. Rojas-Romagosa and P. Veenendaal in
CPB Netherlands Bureau for Economic Policy Analysis (2012), Discussion
Paper 227. Available at: http://www.cpb.nl/sites/default/files/publicaties/
... rected-trade-val.pdf (visited 22 March 2014).
17
Cheong, op. cit.
18
Ibid.
19
Petri, P. A. and M. G. Plummer, “The Trans-Pacific Partnership and
Asia-Pacific Integration: Policy Implications”, June 2012. Available at:
http://www.iie.com/publications/pb/pb12-16.pdf (visited 5 January 2014).
2
48
Mega-regional Trade Agreements
20
South Korea, already a candidate in accession talks, may not become
a party before the agreement among the TPP-12 is finalized, but will likely
join soon thereafter.
21
European Commission website “In Focus: Transatlantic Trade and
Investment Partnership (TTIP)”. Available at: http://ec.europa.eu/trade/
policy/in-focus/ttip/ (visited on 3 January 2014).
22
Fontagne, L., J. Gourdon, S. Jean (2013). “Transatlantic Trade: Whither
Partnership, Which Economic Consequences?” CEPII Policy Brief No.
1, September 2013. Centre d’Etudes Prospectives et d’Informations
Internationales (CEPII).
23
Francois, J. et al. “Reducing Transatlantic Barriers to Trade and
Investment, An Economic Assessment”, March 2013. Available on
the EU website: http://trade.ec.europa.eu/doclib/docs/2013/march/
tradoc_150737.pdf (visited on 3 January 2014). This study also takes
into account the potential impact of “regulatory spillovers”, distinguishing
between regulatory spillovers (trade costs for third countries exporting to
the EU or the US fall as regulations are harmonized) and indirect spillovers
(third countries begin to adopt the standards and regulations set by the
EU and the US through the TTIP).
24
Op. cit.
25
Felbermeyr G. et al. “Transatlantic Trade and Investment Partnership
(TTIP), Who benefits from a free trade deal?” June 2013. Available on
the Bertelsmann Institute website: http://www.bfna.org/sites/default/
files/TTIP-GED%20study%2017June%202013.pdf (visited on 3 January
2014).
26
European Commission. “Transatlantic Trade and Investment
Partnership, The Economic Analysis Explained”, September 2013.
Available at: http://trade.ec.europa.eu/doclib/docs/2013/september/
tradoc_151787.pdf (visited on 3 January 2014).
27
The “pivot” to Asia policy contains an economic element, centred
on TPP, and a military one, focused on “rebalancing” US forces
towards Asia. Democrats and Republicans in the US differ only in the
emphasis they place on the two core elements of the American pivot.
Democrats tend to focus on the TPP, with its implications for economic
interdependence as the basis of international relations, while Republicans
tend to emphasize military power. Both agree on the importance of Asia.
28
Assessment is inspired in work done at the OECD by Iza Lejárraga and
colleagues at the Trade and Agriculture Directorate of the OECD. Analysis
at ICTSD by Christophe Bellmann, Ricardo Meléndez-Ortiz and Harsha V.
Singh.
29
Examples of the treaties listed include the Paris Convention for the
Protection of Industrial Property, and the Berne Convention for the
Protection of Literary and Artistic Works.
30
The EU-India agreement, for example, excludes many of the deeper
disciplines in the EU’s other RTAs.
31
See more detailed arguments on this point in Baldwin (2008).
32
Sub-Saharan Africa is treated with limited reference to the region’s
largest and most diversified economy, South Africa, which is discussed
in a separate box. The paper focuses on the TTIP and TPP, although
the impact of the Regional Comprehensive Economic Partnership on
international production networks is considered.
33
As Stoler (2013) indicates, “While the agreements promise to eliminate
tariffs, all are focused more importantly on dealing with the behind-theborder regulatory and other issues that are of greater concern to business
in the 21st century. Most of the behind-the-border questions would be
addressed through so-called ‘WTO-Plus’ commitments, meaning that
they either deal with issues beyond the scope of today’s WTO coverage
or take a WTO-covered subject and employ a different approach that
produces a superior result in a regional agreement.”
34
China is at present adopting a “wait and see” strategy and has not
closed the door on potentially joining the TPP at a later stage should the
myriad of domestic interests that influence Chinese trade policy push the
executive in that direction. The US attitude to future Chinese membership
is ambivalent and will be guided by Beijing’s economic reform process.
35
There are tremendous variations between African economies with
regard to their dependence on EU, US or Chinese export markets.
Furthermore, Nigeria and South Africa combined account for roughly 50%
of the region’s total exports.
36
Under WTO rules, the Generalized System of Preferences (GSP)
allows for non-reciprocated preferential treatment for products originating
from developing countries, with an expanded list of items for countries
classified as LDCs. Since the initiation of the GSP in 1976, only two
African countries have graduated from LDC status: Botswana and Cape
Verde. EBA falls entirely under the GSP-LDC regime while the US was
granted a WTO waiver to extend AGOA preferences to non-LDCs. China
also offers its own GSP for African countries.
37
In 2012, petroleum products accounted for 86% of overall AGOA
imports.
38
EU and US policy approaches to bilateral relations with sub-Saharan
Africa are increasingly inclined towards reciprocity. Furthermore, existing
schemes have been designed to accommodate protectionist interests
in key sectors, which would require considerable political resolve to
confront.
39
African manufacturing accounts for a mere 1% of global manufacturing
value added. The share of manufacturing in the GDP has fallen sharply
in many sub-Saharan African economies over the past two decades
due to low levels of productivity and intensified competition from Asian
producers.
40
A sector of importance to sub-Saharan Africa’s industrial potential
that will be subject to trade diversion is textiles and clothing, given the
presence of major supplier and buyer nations in the TPP and RCEP, as
well as US insistence on including a “yarn forward” clause in the TPP.
41
As Antoni Estevadeardal et al. (2013) called attention to: “While there is
no obligation to mitigate preference erosion, this could be accomplished
by explicitly including mechanisms for expanding cumulation to third
parties. (…) Such a mechanism would allow such third countries to
participate in the GVCs that span these economies, gaining benefits
instead of being cut out. Where both the US and the EU have already
granted duty-free access to materials from these countries, it seems
particularly unreasonable to exclude them from bilateral value chains.”
42
For example, as Sherry Stephenson notes in her contribution on the
impact of the mega-regionals on the Asia-Pacific region “A successfully
completed RCEP with significant market-opening disciplines, especially
in the services area, should help to expand the operation of current value
chains further into South-East Asia through greater involvement of the
ASEAN members, potentially including part of the Indian economy as
well. These potential future implications of the mega-regionals should be
a major source of worry for countries outside the Asia-Pacific region, as
it will likely make it more difficult for them to break into and participate in
these supply chains.”
43
The FTA, launched in 2011, is seen as an important step towards
the African Union’s ambition of reaching a Continental Free Trade Area
by 2017, although this deadline should be treated with caution given
the obstacles involved. The Tripartite would integrate 26 countries
and cover a population of 600 million with a combined GDP of around
$1,000 billion. However, negotiations are already behind schedule due to
disagreements over rules of origin and sensitive products.
44
The sensitive sectors between these two participants include food
categories of rice, beef and pork, dairy products, wheat and sugar,
where the US is pressing for greater tariff reductions, as well as the motor
vehicles sector, where Japan is trying to obtain further concessions. See
Gary C. Hufbauer (2013).
45
The pilot study on a possible FTA between China and the United States
is being prepared by the Peterson Institute for International Economics
and should be ready in the spring of 2014.
46
See article on “US-China agree to re-start investment treaty talks”, at
http://www.reuters.com/article/2013/07/12/us-usa-china-dialogue-tradeidUSBRE96A0ZD20130712.
47
See the Joint Statement by the EU and China put out by the EU
External Action Service, found at http://eeas.europa.eu/statements/
docs/2014/140331_02_en.pdf. As a result of this meeting, the EU
agreed to support China’s request for participation in the TiSA, or Trade
in Services Agreement negotiations, ongoing in Geneva to revitalize the
services area. The statement says that the EU and China consider the
participation of China in the TiSA negotiation as an important stepping
stone towards the future multilateralization of TiSA.
48
The two paths towards an FTAAP have been mentioned several
years in a row in the APEC Leaders’ Declarations. However, the most
recent APEC Leaders’ Declaration of October 2013 from Bali only made
reference to the FTAAP, stating: “We reaffirm our commitment to achieve
a Free Trade Area of the Asia-Pacific (FTAAP), including by continuing
APEC’s work to provide leadership and intellectual input into the process
of regional economic integration.” See http://apec.org/Meeting-Papers/
Leaders-Declarations/2013/2013_aelm.aspx.
49
Indian Express, 5 April 2014. “RCEP important agreement for
India: Rajeev Kher, Commerce Secretary of India”. Available at: http://
indianexpress.com/article/business/business-others/rcep-importantagreement-for-india-commerce-secy/.
50
Press Trust of India, 5 April 2014. RCEP important agreement for
India: Commerce Secy. Available at: http://www.business-standard.
com/article/pti-stories/rcep-important-agreement-for-india-commercesecy-114040401254_1.html.
51
See Peter Petri and Mike Plummer, “The Trans-Pacific Partnership
and Asia Pacific Integration: Policy Implications”, Peterson Institute for
International Economics, June 2012. Available at: http://www.iie.com/
publications/pb/pb12-16.pdf.
52
ADBI Institute. Asia Pathways, 3 July 2013. “RCEP and TPP: Next
stage in Asian regionalism”, by Sanchita Basu Das. Available at: http://
www.asiapathways-adbi.org/2013/07/rcep-and-tpp-next-stage-in-asianregionalism/.
53
Rosales O., S. Herreros et al. (2013). “The Mega-Regional
Negotiations: Towards a New Governance of International Trade”,
Santiago de Chile: ECLAC-United Nations, International Trade Series no.
121, p. 49 (in Spanish).
54
Leycegui, B. (2012). “Reflections on Mexico’s International Trade Policy
2006-2012”, Mexico City: ITAM, Ministry of Economy, p. 108 (in Spanish).
55
It would be hard to obtain the required consensus to strengthen the
oversight that has been provided by the WTO, but an alternative route
that might perhaps be more feasible would be for a single or group
of countries that have been excluded from major agreements to use
litigation as a complement to negotiation by challenging agreements
that adopt discriminatory provisions that have the effect of undermining
previously granted concessions. Countries are clearly within their rights
under Article 24 to adopt free trade agreements, but are they actually
allowed to adopt rules of origin in those agreements such as yarn-forward
in clothing that have the effect of closing markets to outsiders? GATT
Article 23 does allow for cases relating to nullification and impairment of
benefits, and it would be interesting to see if a country could challenge
some of those rules under this provision.
Game-Changers or Costly Distractions for the World Trading System?
49
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