With TPP and TTIP, U.S. and EU Reassert Control Over Rules of Global Trade
By Edward Alden, on
For the past two decades, until this month’s modest agreement in Bali to adopt new “trade facilitation” measures, the developing countries have made good on that threat. They have insisted that any new global trade agreement, such as that pursued unsuccessfully over the past decade through the Doha Round, pay special attention to their needs and priorities in areas like agriculture, manufacturing and intellectual property rules. Their united opposition has made it impossible to conclude another big global trade round on terms acceptable to the U.S. and EU.
But the trade agenda that has emerged over the past several years is starting to look like “back to the future.” Through ambitious regional deals, the U.S. and the EU are reasserting the control they relinquished two decades ago, again putting themselves at the center, not of a single global trade agreement, but rather of an ambitious network of trade deals with global reach. Through these negotiations, the U.S. and EU are poised to establish a new set of trading rules that could last for a generation. The developing countries—even big ones like China, India and Brazil—may have little choice but to go along.
The key pieces of this emerging network are the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP). The TPP, which began as a modest “partnership” among Brunei, Chile, Singapore and New Zealand, has become the vehicle for the United States to achieve its goal of building a free trade zone in the region, an ambition that dates back to the creation of the Asia-Pacific Economic Cooperation (APEC) forum in 1989. And the TTIP will allow the U.S. and EU, two giants of global trade that together still account for nearly half of global economic output, to set the rules on critical emerging trade issues like regulatory standards and cooperation.
The TPP negotiations, which are nearing their final stages, now include 12 countries. The most important addition has been that of Japan, the world’s third-largest economy and one that had long resisted a free trade agreement with the United States. But the government of Prime Minister Shinzo Abe, which joined the talks this year, is gambling that a radical opening of Japan’s economy through membership in the TPP can jump-start stronger growth after more than a decade of weakness. South Korea now wants in as well, and half a dozen other countries have expressed interest.
The TTIP, though still in its early stages, could prove even more consequential. The U.S. and Europe had long resisted any bilateral free trade arrangement for fear it would suck the remaining life out of the WTO negotiations. But the lack of progress in the Doha Round and Europe’s need for an economic boost ended that reluctance. While the negotiations will likely be harder than currently anticipated, they deal primarily with an aspect of trade where big gains are still possible: regulatory cooperation.
With most formal barriers to trade like quotas and tariffs now at very low levels, except in agriculture, the biggest obstacle to more-seamless global commerce is sharply divergent regulatory standards that make it difficult for goods and services developed for one market to be sold in another. One oft-cited example: Humans are much alike in the U.S. and Europe, but cars crash-tested for one cannot be sold in the other. The U.S. and Canada are similarly trying to harmonize regulations in a separate set of talks that could be the first step toward a more integrated North American market as well, which is back on the agenda two decades after the launch of NAFTA.
These various negotiations pose a tremendous quandary for the big developing countries, putting them in much the position they were in two decades ago. China, for example, is trying to negotiate its own web of trade deals, including the Regional Comprehensive Economic Partnership with ASEAN, Australia, New Zealand, Japan, India and South Korea, and a separate free trade agreement with Japan and Korea. But if the TPP is concluded successfully, China will be hard-pressed to remain on the outside if it wants to continue attracting investment, because global companies will prefer the single set of rules created by the TPP. The U.S. is betting on this by insisting, for example, on new disciplines governing state-owned enterprises (SOEs) as part of the TPP, even though few of the current TPP members have big SOEs. The goal is to create rules that will bind China when it eventually concludes it has no choice but to join. India, which is currently lurching between liberalization and protectionism, will find itself facing a similar dilemma. So too will Brazil, whose two-decade effort to create a South American common market through Mercosur has produced little.
At the same time, a successful TTIP could create common or compatible regulatory standards for half of the global economy. That would likely end efforts by China to create its own indigenous regulatory standards, and lead Beijing instead to reluctantly bow to the wishes of its two largest export markets and harmonize with their rules.
Much could still go wrong, of course. The TPP and TTIP negotiations are immensely difficult and could still fail. The U.S. Congress or the European Parliament could throw a wrench into the works and refuse to ratify an eventual deal. But if successful, these agreements will mark a stroke of Machiavellian genius by the Western powers, creating a new trade order whose rules are still set by the old economies.
Edward Alden, a senior fellow at the Council on Foreign Relations in Washington, is the former Washington bureau chief for the Financial Times, and covered the Uruguay Round and NAFTA negotiations as a reporter for Inside U.S. Trade.