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R.I.P. TPP, time to turn back to the WTO

Author(s): Patrick Low

Date: Dec 28, 2016

Theme(s): Trade & Investment

Publications: Opinions & Speeches

Fellow Patrick Low discusses options that might act to revive faltering cooperation over global trade.

International trading relationships are more uncertain today than they have been in a long time. The inability of the World Trade Organization to bring closure to Doha round negotiations after more than a decade and a half has undermined already shaky faith in multilateralism.

The notion that mega-regional deals among several large trading partners could serve as an alternative, or perhaps a pathway, to global trade cooperation has taken a hard knock. The 12-nation Trans-Pacific Partnership pact is moribund for the foreseeable future, perhaps even dead.

The same can probably be said for the Trans-Atlantic Trade and Investment Partnership between the European Union and the U.S. To use modern idiom for an old construct, even the EU mega-regional too is under considerable strain, not least as a result of Brexit.

The most significant big trade deal left standing is the Regional Comprehensive Economic Partnership agreement between the 10 members of the Association of Southeast Asian Nations, China, Japan, South Korea, India, Australia and New Zealand. This deal will likely succeed by avoiding the levels of integrationist ambition characterizing other mega-regionals. In many ways, it represents a consolidation of pre-existing, fragmented arrangements.

The diminished condition of global trade cooperation raises three obvious questions. Why does it matter? Why has it happened? What should be done about it?

Mutual dependency among nations is the best antidote for zero-sum gamesmanship that leads all too easily to negative-sum outcomes. Many integration efforts are rooted in conflict avoidance and the quest for peace rather than economic calculus. The origins of post-war European integration and ASEAN cooperation offer good examples. Nothing has changed that imperative, but it is often overlooked or remains implicit in public discourse.

Even though political common sense may be the core underpinning of closer cooperation among nations, it is mutual economic gain that sustains it. The economic case for specialization through trade and investment as a source of national income and growth has been widely accepted in principle, but is increasingly derided in terms of its perceived consequences, including by those who will lose from less of it.

This brings us to the second question: What is driving this shrinkage in cooperation and diminished goodwill? Two explanations stand out. First, geopolitical competition has become a more powerful force in the first decade-and-a-half of the 21st century than it was in the second half of the last century.

The relative diminution of Western economic and political power reflected in the rise of Asia has strained many facets of the pre-existing world order. We see this not only through shifting shares of global economic activity, but also in the failure of international political and economic institutions to accommodate new realities.

Strained relationships at the World Bank and the International Monetary Fund, for example, find expression in stand-off attitudes towards such initiatives as the Asian Infrastructure Investment Bank and China’s Belt and Road Initiative.

In trade, the mega-regionals are a manifestation of geopolitical competition. The TPP did not exclude China by accident, nor did the troubled efforts to develop a Trade in Services Agreement parallel to the WTO’s Doha round negotiations. The Trans-Atlantic Trade and Investment Partnership was explicitly billed in national discourse as a last opportunity for the U.S. and EU to write the rules of 21st century trade.

The second part of the explanation for flagging trade cooperation is of domestic provenance, and it is the consequence of years of neglect, both in terms of public discussion and policy. On the first of these, politicians have made their lives a lot easier through mercantilist discourse on trade: exports are good, imports are bad.

At the same time, considerable evidence shows that technological developments in the digital economy, robotics and other discoveries are by far the biggest disruptors of labor markets. But few politicians would risk a call to halt technological advancement. Instead of taking the necessary measures to ameliorate the negative employment effects of technology, they prefer to blame trade, pushing policy towards protectionist outcomes.

Moreover, concerns about trade-driven disruption are all too frequently couched in accusations of foreign foul play. Adjustment costs can certainly result from unfair trade practices left unchecked, but populist politics often eliminate the distinction between predatory trade behavior and market-based outcomes.

Politicians have been reluctant to make the intellectual case for trade, focusing instead on rhetoric about keeping jobs at home. Protectionist outcomes offer short-term palliatives. All they do is to buy time. When companies that have become uncompetitive are protected to survive, consumers and producers pay the bill, along with workers in other industries.

As short-termism and the defense of privilege continue to squeeze public spending on education, training, health and social safety nets, disaffection grows. Inequality and a sense of exclusion mount. So too do opportunities for an altogether uglier brand of populism. Demagogic politicking finds support among millions of angry citizens nourished on “post-truth” blame and hate speech. Trade emerges badly from this.

Globalization does not inevitably carry the seeds of its own demise. Rather, it is threatened by short-termism, sustained by a toxic narrative that masks the politics of blame and responsibility avoidance. Anti-globalization is primarily the product of political failure.

The third question posed earlier is about how to fix a deteriorating trade situation. Necessary action comes in two parts: international and domestic. Geopolitical rivalry must be steered in the direction of more constructive positive-sum game outcomes. Trade is a practical and productive place to start.

If the mega-regionals and the WTO are both afflicted by the same rivalrous behavior, it would surely be better to address this in the one globally inclusive institution designed to manage trade relationships — the WTO.

Some commentators have argued that the WTO has problems reaching timely and sufficiently ambitious decisions and that these shortcomings can be circumvented through preferential arrangements. There is truth in these criticisms of the WTO, but we must ask whether the prospects for arrangements such as the TPP and TTIP are any brighter. The evidence suggests that they are not. The argument here is that negotiating stasis is a shared problem in variously configured negotiating country clusters, not least because of the geopolitical tensions hovering over trade relationships.

The WTO has at least three advantages over the alternatives. Its near-universality makes it non-discriminatory, which confers a greater degree of legitimacy on outcomes. The absence of a geographical constraint upon the WTO means that it can build its forward-looking agenda around particular issues that become ripe for negotiation; the framework for such cooperation is already there and does not have to be constructed as a greenfield agreement.

Finally, the WTO is in a position to “multilateralize” existing preferential deals, starting with those that are the least difficult, and building confidence sequentially. This can also be done in a way that does not push countries that are not ready for particular commitments into making them prematurely.

Several examples already exist in the WTO of so-called “critical mass” deals, whereby all WTO members benefit from the arrangements but only those ready and able to do so take on the corresponding commitments. Processes can be set up for extending the obligations to new countries as their economic situation evolves.

A return to a multilateral setting would offer the best chance of progress. Re-engagement on trade cooperation requires that governments are more honest with their own constituencies about the sources of disruptive pressures in modern economies and far more pro-active in addressing the fallout.

Current tendencies in global and domestic politics do not favor positive action in these directions. But is it too much to ask that in the months and years ahead, less inflammatory rhetoric could make room for decision-makers to tease out and pursue common interests? We should hope that it is not.

 

This article first appeared in the Nikkei Asia Review on December 26, 2016.
The views expressed in the reports featured are the author’s own and do not necessarily reflect Asia Global Institute’s editorial policy.