Martin Wolf – Financial Times
Trade deals must not become an alternative to the WTO
Should proposed US plurilateral trade agreements be welcomed? This is a big question, not least for those who consider the liberalisation of world trade to be a signal achievement. It is also highly controversial.
Since the failure of the ?Doha round? of multilateral negotiations ? launched shortly after the terrorist attacks of September 11 2001 ? the focus of global trade policy has shifted towards plurilateral agreements restricted to a limited subgroup of partners. The most significant are US-led: the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. As a study by the US Council of Economic Advisers puts it, the Obama administration?s trade agenda aims to put America ?at the center of an integrated trade zone covering nearly two-thirds of the global economy and almost 65 per cent of US goods trade?.
The TPP is a negotiation with 11 countries, most importantly Japan. Its partners account for 36 per cent of world output, 11 per cent of population and about one-third of merchandise trade. The TTIP is between the US and the EU, which account for 46 per cent of global output and 28 per cent of merchandise trade. The main partner not included in these negotiations is, of course, China.
Some of the countries participating in the TPP still have quite high barriers to imports of goods. The CEA notes the relatively high tariffs in Malaysia and Vietnam and agricultural protection in Japan. It also argues that the TPP partners and EU have higher barriers to imports of services than the US.
Yet lowering barriers is only a part of the US aim. The CEA report adds that, in the TPP, Washington is proposing ?enforceable labor protections and greener policies?. But it is also seeking ?strong enforcement of intellectual property rights?. In the TTIP, ?both sides seek agreement on crosscutting disciplines on regulatory coherence and transparency? ? in other words making rules more compatible with one another and more transparent for business. Thus, both the TPP and TTIP are efforts to shape the rules of international commerce. Pascal Lamy, former director-general of the World Trade Organisation, argues that ?TPP is mostly, though not only, about classical protection-related market access issues?.?.?.?TTIP is mostly, though not only, about?.?.?.?.? regulatory convergence?.
Whether these negotiations succeed will depend on whether the administration obtains trade promotion authority from Congress. But should we want them to succeed?
The straightforward points in favour are: plurilateral agreements are now the best way to liberalise global trade, given the failure of multilateral negotiations; their new rules and procedures offer the best template for the future; and they will bring significant gains.
These arguments have force. Yet there are also counter-arguments.
With limited political capital, the focus on plurilateral trade arrangements risks diversion of effort from the WTO. That might undermine the potency of global rules. Jagdish Bhagwati of Columbia University stresses such risks. Furthermore, preferential trading arrangements risk distorting complex global production chains.
Another concern is that the US is using its clout to impose regulations that are not in the interests of its partners. I would be less concerned about labour and environmental standards, though both might be inappropriate, than about protection of intellectual property. It is not true that tighter standards are in the interest of all. On the contrary, if US standards were to be imposed, the costs might be very high.
Finally, the economic gains are unlikely to be large. Trade has been substantially liberalised already and any gains decline as barriers fall. A study of the TPP by the Peterson Institute for International Economics in Washington suggests the rise in US real incomes would be below 0.4 per cent of national income. A study of the TTIP published by the Centre for Economic Policy Research in London comes to slightly higher figures for the EU and US. Completion of the TPP and TTIP might raise US real incomes by 1 per cent of GDP. This is not nothing, but it is not large.
The US-EU agreement does not raise concerns about the US ability to bully its partners. In trade, the two sides are equally matched. There are three further concerns with the TTIP, however.
First, Jeronim Capaldo of Tufts University has argued that estimates of the gains ignore macroeconomic costs. His Keynesian approach argues that the EU will lose demand because of a fall in its trade surplus. This is ridiculous. Macroeconomic problems should be addressed with macroeconomic policies. Trade policy has different goals.
Second, some of the barriers they are attempting to remove reflect different attitudes to risk. The negotiators will have to devise a text that allows co-ordination of regulatory procedures ? over drug testing, say, without imposing identical preferences. If Europeans do not want genetically modified organisms, they must be allowed to preserve that preference. If trade policy treads on such sacred ground, it will die.
Finally, we have the vexed issue of investor-state dispute settlement. Many complain that political choices ? publicly-funded health systems or the right to control drug prices ? might be put at risk by systems biased in favour of business. Negotiators fervently deny this. They had better be right.
On balance, the benefits of the TPP and TTIP will probably be positive, but modest. But there are risks. They must not become an alternative to the WTO or an attempt to push China to the margins of trade policy making. They must not be used to impose damaging regulations or subvert legitimate ones. Tread carefully. Overreaching could prove counterproductive even to the cause of global trade liberalisation. firstname.lastname@example.org . May 12, 2015