The world may be on the verge of renewing the global trading system with huge “mega-regional” negotiations on the trade rules of the 21st century. These negotiations include the Regional Comprehensive Economic Partnership (RCEP), the Trans Pacific Partnership (TPP), and the Transatlantic Trade and Investment Partnership (TTIP); the countries involved cover nearly 80% of global GDP. The hope is that these approaches will overcome constraints that have held up progress in the World Trade Organization (WTO).
Among these negotiations, the TPP is especially important because it aims to establish the most rigorous and comprehensive rules, and is scheduled to be concluded ahead of the others. The completion of the TPP could in turn accelerate the RCEP negotiations and influence the templates for other trade agreements, including the TTIP. Ideally these efforts will translate into a global process that leads to reasonably coherent rules across economies. To be sure, the enlargement and consolidation of the new agreements could take many years, and will need to overcome complex political issues. Optimistically, 2015 may turn out to be pivotal year in this process if it produces agreements on the TPP, RCEP, and a Republic of Korea-People’s Republic of China (PRC) FTA.
Figure 1. Optimistic timelines for mega-regionals
Competition among the mega-regional agreements represents a contest for 21st century rules. The TPP is promoting what the US and others hope will be a winning template in three ways. First, it covers new areas and issues, such as the internet and electronic commerce, integrated global supply chains, and the rise of emerging markets. Second, it seeks an agreement that’s good for both developing and developed countries. That’s hard to do: on one hand, the trade rules of the 20th century served mainly the interests of developed economies, and on the other, the development-oriented Doha Round failed to attract wide support. By addressing issues that matter to both groups of economies—market access and agriculture on one hand, investment, services, and intellectual property rights on the other—the architects of the TPP aim to please multiple constituents. Third, the TPP attempts to streamline behind-the-border regulatory approaches, which is increasingly necessary for economic exchange among highly integrated economies.
Given these complex goals, it’s not surprising that the TPP faces stiff political opposition in many countries, including the US. To some, proposed environmental and labor rules are too restrictive, to others too permissive. To some, agricultural liberalization is essential, to others devastating. Emotionally charged debates also swirl around investment rules, intellectual property and regulatory coherence—areas that local groups want to control without much international input. The long negotiations have given rise to suspicion and opponents have built support among people who distrust globalization and/or are frustrated by the difficult economic environment of recent years. Such opposition has slowed the negotiations—in the US, for example, action on Trade Promotion Authority legislation has been postponed due to election politics.
Modeling the benefits of trade agreements
Although the media and the blogosphere tend to report extreme interpretations of often minor provisions, the wider economic benefits of the agreements seem to be large, as suggested by estimates by Michael Plummer, Fan Zhai and me.1 Such exercises involve inevitable uncertainties, not just about modeling and data, but also the content of final agreements. Nevertheless, the results suggest large gains even discounted for uncertainty. For example, the TPP template applied to the current 12 negotiating partners shows 11% income gains for Viet Nam and even 2% gains for the large economy of Japan, because the agreement would increase Japan’s trade and inward FDI, which is currently small relative to GDP. In some cases the TPP also shows negative results—for example, trade diversion losses for the PRC because it is not assumed to participate in the initial agreement. Meanwhile, RCEP would generate large gains for the PRC, Japan, and the Republic of Korea, assuming it establishes free trade among them. The payoffs from RCEP would be much smaller for ASEAN members, since they already have FTAs with all RCEP members. The largest benefits by far would be associated with an agreement that covers all TPP and RCEP members (which we call an extended Free Trade Agreement of the Asia Pacific, or FTAAPX).
Figure 2: Annual income gains in 2025 ($ billions)
PRC = People’s Republic of China
Source: Petri, Plummer, and Zhai (2012).
The PRC in the TPP?
The search for a pathway to a region-wide agreement is thus a critical challenge for decision-makers. An especially important anomaly today is that no negotiation includes both the PRC and the US, the world’s two largest economies. Although many have blamed geopolitics for this gap, the more likely explanation is that the PRC and the US are simply not ready to agree on common rules. But prospects are now rapidly changing with the PRC’s new leadership, which is focused on economic reform, including state-owned-enterprise reform and investment and service liberalization.
The result may be larger and more productive agreements. The PRC and the US have re-launched stalled negotiations on investment and formal and informal commentary now suggests that both countries see possibilities for a TPP that includes the PRC. The PRC is also taking an active interest in APEC—as host of the 2014 APEC year—and in the FTAAP agreement that APEC has long championed.
Such enlargements of mega-regionals would bring dual benefits. On one hand, expanding the TPP membership into the FTAAP would increase gains substantially and generate more nearly global rules. In addition, a widely agreed regional trading system would reduce economic frictions and greatly enhance regional as well as global stability. But make no mistake: an ambitious expansion of the trade agenda will require difficult reforms and adjustments within and across countries.
Mega-regional negotiations offer new ways to craft trade and investment rules, offering a route to updating global rules. It’s too early to tell whether these initiatives will lead to a successful, coherent global process, but they could provide significant intermediate term economic benefits and new venues for productive international cooperation. Support from the world’s largest economies—PRC, Europe, Japan, and the US—is critical to this process and would make it historically significant. The mega-regionals will require sustained leadership in many capitals in order to withstand tough challenges from national and international politics.
1 Petri, P. A., M. G. Plummer, and F. Zhai. 2012. The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. Policy Analyses in International Economics 98. Washington, DC: Peterson Institute for International Economics.