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Cold Water for Hot Trade Deals

May 13, 2013 Topic: EconomicsGlobalizationTrade

Cold Water for Hot Trade Deals

The TPP and TTIP trade arrangements still have their toughest work ahead of them.

In the final analysis, the pursuit of megaregional agreements comprising the lion’s share of world GDP is likely to overshadow any liberalization initiatives in Geneva. It will also eliminate any residual pretense that the WTO can develop more effective rules to guide the design of regional agreements. Moreover, the investor-state dispute-settlement mechanisms advocated as part of the TPP could replace the WTO’s system of state-state dispute settlement in a large and growing number of cases.

Yet, the megaregionals would leave some of the biggest remaining impediments to world trade unaddressed. Their participants do not have the highest tariffs or the most freedom to raise them under WTO rules. These distinctions belong to the developing economies, such as India, Brazil, and South Africa. Moreover, crucial issues such as agricultural subsidies—whose reduction has a most-favored-nation effect by definition—are excluded from the regional deals.

Nor will the mega-regionals leave much room for negotiation of issue-centered “plurilateral” agreements among a subset of countries under the WTO. Combined, TPP and TTIP will account for a very large share of world trade in the sectors of greatest interest to their members, greatly reducing the attraction of negotiating plurilateral deals under the aegis of the WTO.

Risk Management

There are two ways to increase the likelihood of success and mitigate the risks associated with Washington’s bold new strategy.

First, a healthy dose of realism about what can be achieved and by when will help manage expectations and retain the credibility of the process. Obtaining fast-track authority will likely be essential to making progress early on and to closing deals.

Second, China should be encouraged to join TPP negotiations—and the sooner the better. The EU, China and the United States also need to make a determined effort to harvest what is possible from Doha and to revitalize the multilateral process. China should take on the sort of greater leadership role in the WTO that it has so far carefully eschewed.

The new U.S. trade policy holds promise, but only if it does not marginalize the WTO and provoke determined resistance by developing countries. And as the world’s largest exporter, China has a big stake in ensuring that multilateral collaboration retains its relevance in the presence of the new megaregionals. Neither the United States nor China can afford a return to an outdated GATT-like system in which the advanced countries are calling the shots while developing countries watch from the sidelines.

Uri Dadush is a scholar at the Carnegie Endowment for International Peace and former director of the international trade department at the World Bank. He is co-author of Juggernaut: How Emerging Markets Are Reshaping Globalization.