Megaregional Trade Agreements explained: the past, the present and the future
“Mega-regionals, such as the TPP and the TTIP, are an important part of ‘next-generation’ trade agreements and offer new opportunities to stimulate trade opening by deepening regional and global integration. Many provisions included in these agreements are non-discriminatory and can therefore also benefit non-members. However, there are concerns around fragmentation, exclusion and unfairness.” – Anabel González discussed challenges and opportunities of Mega-Regional Trade Agreements during a lecture “Developments in Global Trade: An Insider’s Perspective” organized by CASE – Center for Social and Economic Research and the World Bank.
Causes of the global trade slowdown
On June 3rd, Anabel González, Senior Director of the Trade & Competitiveness Global Practice at the World Bank and former Minister for Trade of Costa Rica, spoke at CASE on the causes of the current slowdown in global trade and how countries were attempting to kick start their trade relationships. Minister González focused on two specific themes harming the global trading system, citing cyclical and structural problems. In regards to cyclical factors, the weak recovery of the advanced economies since the global financial crisis meant that trade was also growing slowly. Lower commodity prices and China’s transition to a new growth path were two additional mutually reinforcing cyclical factors that shaped trade performance in 2015. Lower commodity prices reduced commodity producers’ incomes, leading those countries to import less from all other regions, including China. At the same time, China’s gradual shift from investment to consumption and the decline in its industrial production reduced China’s imports from other regions, including commodity producers. Overall, cyclical factors accounted for about two thirds of the global trade slowdown in 2015 relative to the pre-crisis period (with the rest being accounted for by long-term or structural factors).
Perhaps more interestingly, however, were structural issues, which affected trade by altering long-run trade elasticity, or the trade-intensity of GDP growth. Minister González stressed that a slowdown in trade liberalization, coupled with changes in global value chains, may have also contributed to the slowdown in trade.
New Generation Trade Agreements
Against this backdrop, Minister González moved to the challenges and opportunities of so-called “Mega-Regional Agreements,” classifying them into one of three groups: trade agreements of yesterday (e.g. General Agreement on Tariffs and Trade), today (e.g. North American Free Trade Agreement) and tomorrow (Transatlantic Trade and Investment Partnership, Transpacific Partnership). González described these last two mega-regional agreements, and stressed the innovative nature of both TTIP and TPP: “In order to reap the potential benefits from TPP, countries would need to complement its implementation with productivity-enhancing domestic reforms that unlock supply side constraints. This would include establishing a sound business climate, reducing barriers to FDI, strengthening competition. The TPP may be for a member country like Malaysia what EU accession was for Poland in the late 90s and early 2000s.”
Minister González also focused on the broader nature of TTIP, concentrating on the regulatory convergence it promotes. She noted that “the improvement in regulatory compatibility between the US and EU that is planned under TTIP should have a direct positive impact on companies, which export to both Europe and the United States.” However, she acknowledged that there may be drawbacks to the new generation of Mega-regionals, such as concerns that these agreements could undermine the relevance of the multilateral trading system, in which all parties have equal position at the negotiating table. What is more, rules agreed within TTIP, by definition do not take into account interests of non-member developing countries, and even amongst member countries they may be more suited to the needs of advanced economies owing to their stronger bargaining power. On the other hand, developing countries can assess the impacts of certain approaches to economic integration pursued through the TTIP and then adopt those that have been most effective through other Preferential Trade Agreements.
Importance of business environment
Christopher Hartwell, President of CASE, responded to Minister González’s presentation favorably, but mentioned an additional factor that inhibits trade, namely that of economic policy uncertainty. As trade is a longer-term flow, when a country’s policy environment is unstable, there is no incentive for firms to invest long-term in cultivating trade links. Policy uncertainty thus harms macroeconomics and trade, and dampens investments for the longer-term. Agreeing with Minister González, Dr. Hartwell also noted that the main barriers in trade globally are no longer tariffs, which are ‘just the tip of the iceberg”, but non-tariff barriers, such as a poor business environment, sanitary and phyto-sanitary regulations, and unfair and uneven customs administration. Dr. Hartwell stressed that Mega-Regional Agreements should be focused on removing NTBs and on liberalization rather than necessarily on regulatory harmonization.
During the Q&A session, the audience asked questions regarding the possible negative consequences of TTIP, especially concerns raised these related to regulatory harmonization or investor protection. Minister González said that the controversy on these issues was baffling and overblown, as TTIP was only a way to allow for recognition of standards, not to set them. She also stressed the need of appropriate education and the responsibility of policymakers in the trade agreement processes.
