Do prospective regional trade “mega-deals” such as the TPP and TTIP pose a threat to the WTO and the multilateral system? Not likely.

For decades, the proponents of the multilateral system have worried about the proliferation of bilateral free trade deals (FTAs) and regional trade agreements (RTAs). They have regarded these agreements as complicating the governance of international trade, distracting countries from the tough work of multilateral trade liberalization, and creating closed systems that mainly benefit stronger players while disadvantaging or leaving out weaker countries — especially the least-developed nations that need access to good markets the most, but have little to offer in return.

Businesses have welcomed FTA’s and RTA’s as helpful to their interests.  Yet they have also complained about the added complexities and costs in navigating multiple agreements and unraveling their accompanying “rules of origin”, particularly frustrating in today’s world of multi-country value chains.

The Rise of the Mega-Deal

The Doha Round launched in 2001 was intended to drive a new phase of multilateral trade liberalization: improving access in traditional areas, drawing the agriculture sector fully into multilateral disciplines, setting up rules in some new areas, and bringing significant benefits to developing countries under its featured “DOHA Development Agenda”. 

Instead, the Round’s failure has left those most interested in making further progress little choice but to give even more emphasis to bilateral and regional approaches.

The United States has led the way in shifting its trade policy away from the frustrations of the Doha Round.  It has adopted a strategy of focusing on major regional negotiations both to lower trade barriers for American businesses, but also to put in place rules around certain new issues, such as the behavior of state owned enterprises, not yet subject (or only marginally so) to international trade disciplines. 

This has resulted in the ambitious Trans-Pacific Partnership (TPP) negotiations, and the recently launched Transatlantic Trade and Investment Partnership (TTIP) talks between the USA and the European Union.

Proponents argue that the positive outcomes of these “mega-deals” — so-called because they involve countries that together account for large portions of the global economy — could eventually be folded into an eventual revitalized WTO round.  However, skeptics worry that they will lead elsewhere: to separate regional “systems” and a permanent weakening of the WTO-centered multilateral approach to the governance of international trade.

Are these fears misplaced? Three reasons suggest that the danger is not great.

The first is that the TPP and TTIP deals are by no means assured.

Although the Trans-Pacific Partnership negotiations have made significant progress, they have missed deadline after deadline.  The addition in mid-2013 of Japan has further complicated matters.  The TPP is now essentially the framework for a huge bilateral deal between the 1st and 3rd largest global economies.  And in late September, the latest USA/Japan talks ended with a Japanese walkout.

Every passing day diminishes the chances of the TPP being concluded before presidential election politics take over the USA agenda at the end of 2015.  Even if there were a breakthrough between Japan and the USA in the coming months, the lack of congressional “fast track” authority (which gives the Administration authority to negotiate a deal subject to a single yes/no vote by Congress) and the uncertainties of American domestic politics together constitute a serious hurdle. 

Why would America’s trading partners in the TPP make important final concessions without knowing that Congress will not take the deal apart clause by clause and impose additional demands as the price of its approval?

Meanwhile the USA/EU negotiations are just getting underway.  The size and complexity of this negotiation are enormous.  If you add America’s political situation to Europe’s preoccupations with its flagging economy, the arrival of a new Commission leadership in Brussels, and the internal power jockeying among the Commission, member states and the European Parliament, it’s hard not to imagine that this “mega-deal” could be “mega-years” in the making.  And Russian aggressiveness in Eastern Europe has become a major political/security distraction.

Second, even if these strong head winds do not stall or blow off course the TPP and TTIP negotiations in the medium term (the TTIP would sit alongside the now complete Canada-Europe Comprehensive Economic and Trade Agreement or CETA), these “mega-deals” are still not likely to become game changers.

While the TPP and TTIP together include 40 countries representing about 60% of the global economy, they still leave a significant 40% of world economic activity and 119 members of the WTO on sidelines. 

In the days when the “Quad” (USA, Europe, Japan and Canada) dominated world trade and largely determined the course of multilateral trade negotiations, these two proposed mega-deals could have been decisive in determining the future direction of the trading system.  But as we have seen in the Doha Round, the rise of new economic players, the shift in global economic power, and a feistier developing world generally, have forever changed this dynamic. 

In this respect, neither the TPP nor the TTIP include Brazil, India or most importantly China.  Mexico’s presence at the TPP table is the one exception to the inclusion of a major emerging market.  Measured in nominal GDP, Brazil, India and China are predicted to be the world’s 4th, 3rd and largest economies respectively by mid-century, with China achieving number 1 status before 2030. By 2050, today’s emerging economies generally are expected to account for up to 70% of global trade.

Unless these three emerging economies in particular are engaged by the USA, Europe, Japan and Canada in these or other new mega-arrangements, it is very doubtful that the TPP and TTIP alone will have the critical weight to transform the international trading system’s rules and set the new standard for global trade governance.  They will have an impact, certainly, but it will not be decisive.

It is worth noting that the only other potential “mega-deal” of any size is the Regional Comprehensive Economic Partnership, or RCEP, now being negotiated among the 10 members of ASEAN and the six other Asia Pacific states with which ASEAN has a trade agreement: China, South Korea, Australia, New Zealand, Japan and India.  China is a leading advocate of this rather low-key negotiation.  It is proceeding slowly despite its end-2015 deadline, and is expected to be much less ambitious that the TPP, possibly creating a competing and less demanding “model” to that being pursued by the USA.

Lastly, it is likely the global trade community will come back to the multilateral approach to trade governance whatever happens with the TPP, TTIP and RCEP, for the following reasons:

  • While, for developing countries, the Doha Round has not delivered its promised dividends, they will come back to the WTO simply because it gives them the best chance of negotiating the best conditions for their exports versus the largest economies, and ensures a level playing field with each other in the competition for foreign markets and the inward flows of investment so necessary for internal growth;
  • For advanced countries, like Canada, the multilateral system was their creation, despite the appeal of FTAs and even mega-FTA’s they are regarded as supplementary to the WTO which remains “bred in the bone” 
  • Among emerging economies, China’s leadership will be critical. Beijing seems still committed to the WTO, diligent in implementing its accession commitments.  It has shown interest in the WTO-based plurilateral negotiations on services and on environmental goods, and is supporting the trade facilitation agreement agreed at last December’s WTO trade ministers’ meeting in Bali even while India’s new government has pulled its agreement to the pact
  • The WTO’s new leadership under a Brazilian DG, Roberto Azevedo, and his team has brought some fresh air and new drive to the institution and to the search for a way forward; and finally,
  • International businesses still prefer the multilateral to more fragmented approaches to trade governance, since only the WTO can provide the simpler and all-encompassing global framework for building and accessing the global value chains that now dominate international commercial relationships.

Nursing the WTO system back to good health

In the meantime, and until the above factors favouring the WTO come into alignment — still possibly several years away — there are things that WTO members could be doing to facilitate the restoration of the multilateral system to good health.

As a first step, those governments toiling away on current mega-deals should introduce a bias in the negotiating outcomes that complement rather than compete with the multilateral system, and make it easier for the multilateral approach to re-assert itself at a later date. 

In this regard, trade specialists have suggested negotiators and governments do the following:

  • ensure the planned mega-deals as transparent and non-threatening as possible, and are open to accession by non-participants;
  • shape the terms of these arrangements in ways that make them more not less adaptable to eventual multi-lateralization in the WTO;
  • limit the use of “hard” preferences among parties to mega-deals that are highly discriminatory against non-participants.

Another bridging tool would be for the TPP and the TTIP to use the WTO’s excellent and well-oiled systems for dispute settlement, rather than create their own tribunals or processes.  The WTO also offers excellent secretariat and statistical services that could be contracted where they are required.

Another interesting option would be to back away from a high ambition TPP (something that appears already compromised by bringing in Japan), and use it more as a stepping-stone to a higher level WTO agreement in due course, and a means of bringing along at least one of Asia’s two emerging economy giants: China or India.  China is the obvious choice.  In recent months Beijing has ramped down its earlier criticism that that the TPP was part of the broader U.S. geopolitical strategy of containing a resurgent China.

Inviting in China now, to help shape the TPP, will mean some “water in the wine” of ambition.  Yet, it is arguably better to have China part of a system evolving to higher levels of liberalization and discipline rather than to set the standards so high and exclusionary that China is given little choice but to create its own competing system either in Asia (through the RCEP), or in the worst case, through a mega-deal among other BRICs and developing countries.  It is unlikely that China will join a TPP in which they have not played a formative role.

Finally, efforts should be redoubled to make today’s WTO work as a successful negotiating body, starting with reforms to the governance model in line with the new political and economic power dynamic.  This will not be easy for advanced countries.  We have seen the resistance within the U.S. and EU to implementing the governance reforms in the IMF and World Bank agreed to in 2009 at the Pittsburgh G20 Summit that would give emerging economic powers more voice. 

On a positive note, WTO members have shown themselves more flexible over the past months in looking at the expanding the use of negotiations among interested parties, such as on services, which others might join later.  These approaches should be encouraged, restoring confidence and a sense of positive momentum.