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  • Jul 26, 2014
  • Updated: 6:05am
BusinessEconomy

Global trade deals paralysed by regional politics

Regional trade deals are being undermined by geopolitical rivalries and distract from the larger prize of comprehensive global agreements

PUBLISHED : Thursday, 23 January, 2014, 1:19am
UPDATED : Thursday, 23 January, 2014, 3:21am

Most economies, and especially the more successful among them, depend heavily on international trade.

Clarity, predictability, and minimal red tape are essential if the benefits from trade are to be realised.

But years of disappointment with World Trade Organisation (WTO) negotiating paralysis have contributed to the creation of some 300 preferential trade agreements (PTAs) globally.

That number is set to climb, despite the WTO's Bali deal last month - its first significant agreement after more than 10 years negotiating the Doha round with no meaningful result to speak of.

Each WTO member on average already belongs to 13 PTAs and at least one Asian country belongs to no fewer than 250.

It is hardly a recipe for clarity, predictability and least-cost trade administration.

In the face of stasis at the WTO, can governments be blamed for seeking other avenues to forge closer trading relationships?

The answer must be no, despite the fact that the costs of preferential trade, such as navigating rules about where products originate and managing a multitude of different regimes, make them less efficient than multilateralism.

PTAs can deliver improvements between signatories, but the regulatory divergence they create can distort and reduce trade flows.

Studies suggest that the additional costs from preferential, compared to non-discriminatory, trade can vary between 1 per cent and 6 per cent of the covered trade. Utilisation rates have also been rather low under some PTAs.

On the other hand some have estimated the Bali agreement to be worth up to US$1 trillion in additional trade, which would support 20 million new jobs.

The politics surrounding mega-regionals threatens their promise

The obvious conclusion is that governments should invest in making the WTO work.

But the emergence of so-called mega-regional trade agreements complicates matters.

On the face of it, mega-regionals multiply the opportunities for trade.

Two emerging mega-regionals are particularly relevant to Asia.

One is the Trans-Pacific Partnership (TPP), which currently comprises 12 parties. Five are in the Americas (Canada, Chile, Mexico, Peru and the United States), and the rest are in Asia (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam).

These 12 economies already share 20 separate PTAs. Nevertheless, the TPP is billed as a gold standard model for the 21st century because of its level of ambition in opening markets and deepening co-operation across an impressive range of regulatory issues.

Where the TPP cannot be said to meet gold standard modernity is in relation to geography and politics.

Many observers have suggested that the TPP is intended, at least by the US and perhaps others, as a means of containing China and consolidating American influence in the region.

A geopolitical riposte to this is arguably embedded in the other emerging Asian mega-regional, the Regional Comprehensive Economic Partnership (RCEP).

This is being negotiated between the Asean 10 plus 6 (China, India, South Korea, Australia, Japan and New Zealand) and it is noteworthy that all Asian members of the TPP are also in RCEP. Perhaps it is partly a matter of insurance.

RCEP involves some element of deeper economic integration, but is less ambitious than the TPP. It arguably places greater emphasis on consolidating pre-existing PTAs.

Question marks clearly hang over the mega-regionals, at least as large as those that have hovered above the WTO during its decade of disappointment.

The politics surrounding mega-regionals threatens their promise. Their inherent strategic positioning weakens excluded economies. Their preferentialism drives divisiveness.

Many factors explain why the WTO stalled for so long on the Doha round, but no small part of it is geopolitical.

Major economies have found it very difficult to cut trade (and other) deals against the background of a rapid shift in the economic centre of power globally, largely towards the east.

It is a shared problem at the regional and multilateral level, involving the same governments. The only difference is the result of politics - fragmentation in one case and paralysis in the other.

Few would demur from the view that the WTO is a preferable alternative to fractured regionalism.

If the political bind is the same whether the configuration is preferential or multilateral, the economic choice is straightforward - the WTO path promises greater rewards even if it is more challenging to negotiate in the immediate future.

It will require leadership from the major players. The Bali result should encourage them to believe it is possible.

The future health of world trade requires governments to rise to the challenge.

Patrick Low is vice-president for research and senior fellow at the Fung Global Institute

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