On Oct 5, negotiators from 12 countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam) announced that they have agreed on the Trans-Pacific Partnership (TPP). The agreement took over five years to complete, including 19 rounds of negotiations, seven ministerial meetings, seven officials' meetings, two meetings of leaders and ministers, and one chief negotiators' meeting.
TPP is probably the most important multilateral free trade agreement since Nafta, the North American Free Trade Agreement (Canada, Mexico and the US) in 1994. The World Trade Organisation has made valiant efforts since 2001 to formalise a global multilateral FTA.
However, with 161 member countries, and each country having special interests to protect, the progress has been excruciatingly slow. With not much to show for the WTO-led multilateral trade liberalisation efforts for some 14 years, countries have been negotiating bilateral and regional FTAs. The Asian Development Bank estimated that, as of March 2013, there were 109 Asian FTAs in effect, 63 under negotiations and 41 proposed.
China is not a member of TPP but it has bilateral FTAs with eight of its 12 member countries. Bilateral FTA agreements are mostly overlapping and create problems because of spaghetti or noodle ball effects which ensure that these agreements are so intermixed and intertwined that they cannot be extricated individually. These arrangements do lower transaction costs but they are still generally higher than what could be under a comprehensive multilateral FTA.
World trade is now in the doldrums. The volume of goods traded during the first half of this year was only 1.9 per cent higher than the corresponding period for the previous year, far lower than the average of the last 20 years, at 5 per cent. WTO reduced its forecast of trade growth this year on Sept 28, from 3.3 per cent to 2.8 per cent, and noted that this forecast could be "overoptimistic". A major multilateral deal like TPP will act as a trade booster, at least between the member countries, by lowering and even eliminating numerous tariffs.
There is a lot of hype and spin about the importance of TPP. For example, nearly all parties, including the US President and the global media, have claimed that this will cover 40 per cent of the global economy. However, TPP is not about gross domestic product but trade. Even if the combined GDPs of all the 12 member countries are considered, they would account for about 36 per cent of global GDP. If world trade is considered, which is what TPP is all about, it would cover about 13 per cent. Nobel Prize winner Joseph Stiglitz has scathingly concluded that TPP is not about free trade, as its supporters claim. Rather, "it is an agreement to manage its members' trade and investment relations on behalf of most powerful business lobbies".
REAL FREE TRADE?
Viewed in terms of global population, TPP countries account for only about 11 per cent.
Credit Suisse has estimated that TPP will increase the US GDP by only 0.2 per cent by 2025. Japan's Cabinet Office has estimated that GDP would increase by only 0.66 per cent if all import tariffs disappeared. TPP is an important step in the right direction. Until all the 12 countries ratify the treaty, the various sectoral winners and losers cannot be identified definitively, let alone their likely magnitudes. Ratification will be relatively simple in countries like Japan and Singapore, where the ruling parties have comfortable majorities.
The biggest problem is likely to be in the US. President Barack Obama will be in office for about 15 more months. Under the fast-track procedure formally adopted early this year, Congress will have 90 days to review the deal with an up-or-down vote but no amendments. This approval will be taking place when the US presidential election will be in full swing.
The American public has generally become more sceptical about free trade since Nafta. Then President Bill Clinton oversold the benefits of Nafta. The fact is, all trade agreements create winners and losers. Nafta contributed to the transfer of low-skilled manufacturing jobs, especially in the auto sector, to Mexico.
In the final analysis, all trade deals are inherently political. Voters are often not enthusiastic about them. Republicans generally are supporters of free trade. However, their pathological hatred for Mr Obama may have an impact on the future of the Bill in Congress since this would hand him a legacy-making victory.
Our view is that the overall ratification of TPP may be a somewhat tortuous process. It may take some time but it will be ratified by all the member countries.
There is much in the treaty that is praiseworthy. For example, it has managed to liberalise the sacrosanct agricultural sector. Countries agreed to eliminate some agricultural subsidies that promote exports but not subsidies assisting domestic production. Canada, for example, opened more of its diary market to imports but promptly announced a new production subsidy. Japan has agreed to import more dairy products, sugar, beef and rice. All these indicate how complex and difficult it is to have real free trade.
Overall, TPP attempts to expose inefficient companies and agricultural farms to greater external competition. However, the time interval for reducing tariffs for many items is far too long. For example, imported light Japanese trucks will face import duties in the US for another 30 years.
TPP breaks some new grounds. Among its 30 chapters are some that specifically address labour and environmental issues. All parties must follow the 1998 Declaration of International Labour Organisation on Fundamental Principles and Rights at Work. It also requires members to set and enforce minimum wages, maximum work hours and occupational health and safety standards.
At present, all TPP countries, except Singapore, prescribe minimum wages. Vietnam will have to allow unions independent of the Communist Party.
The agreement includes steps to enforce the prohibitions under the Convention on International Trade on Endangered Species (Cites) and steps to reduce deforestation and overfishing. However, how they would be achieved is still unknown. All the commitments are enforceable under its dispute settlement procedures.
If everything goes according to expectations, TPP should expand trade and contribute to higher incomes as well as productivity improvements. It may also put downward pressure on wages in developed member countries. This is because accelerated imports of competing goods may put pressure on the prices of locally made goods and hence, wages. Equally, trade liberalisation may contribute to new export opportunities which could lead to higher wages. Over time, there will thus be winners and losers. It may lower costs of living.
In the final analysis, TPP is as much about geopolitics as international trade. Some have argued that TPP should be viewed as an integral component of Washington's grand strategy to contain a resurgent China. It would counterbalance Beijing's geo-economic power. President Obama has claimed "under this agreement, we, rather than countries like China, are writing the rules for the global economy".
In our view, TPP without China is a missed opportunity. Admittedly, if China was a part of TPP, it would have been pretty nigh impossible to sell the idea to the US Congress.
China has been pushing its own FTA, the Regional Comprehensive Economic Partnership (RCEP), with 16 countries. Seven countries of RCEP are members of TPP. However, it includes major countries like India, Indonesia, the Philippines, South Korea and Thailand.
RCEP countries account for 12 per cent of global trade (TPP 13 per cent), a collective GDP of 29 per cent (TPP 36 per cent), and nearly half of the global population (TPP 11 per cent). During the post-2000 era, RCEP countries had much higher GDP growth rates than TPP ones. With TPP steadily progressing to be a reality, the pressure will be on China to accelerate the progress of RCEP.
Ideally, a global agreement under WTO would have been the optimal solution. However, there is no indication that there is likely to be a major breakthrough in the foreseeable future. Thus, regional FTAs like TPP are welcome developments.
The first writer is Distinguished Visiting Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.
The second writer is a senior research fellow at the Institute of Water Policy in the same school.
This article was first published on Nov 10, 2015.
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