The Strategist

TPP: The New Regional Trade Organization with Global Plans

11/09/2015 - 15:14

The emergence of Trans-Pacific Partnership (the agreement on the organization establishment, signed in Atlanta, US, has yet to be ratified by the parliaments of twelve of its member countries) is the most important event in world trade since the WTO’s creation. And, as in the case with the WTO, the cause of occurrence were developing countries.

Pete Souza
Pete Souza
Original version of the Trans-Pacific Partnership (TPP) was established in 2005 by four countries: Brunei, Chile, Singapore and New Zealand - that is, from the outset, the organization mostly consisted of developing countries. Later, negotiations on the TPP’s, which lasted seven years, were joined by others: Peru, Vietnam, Malaysia, and Mexico, which eventually found themselves among the twelve countries that have signed the agreement on creation in its current form. Other developing countries had expressed interest in joining the TPP as well: there were Philippines and Colombia (2010), and Taiwan and South Korea (2013).

Not only emerging economies, but such high-ranks as New Zealand, United States, Japan, Canada and Australia allied themselves into TPP, too. Thus, the partnership is composed of five industrialized and seven developing countries. Overall, its members account for 40% of global GDP.

The agreement on the TPP’s establishment provides a significant liberalization of trade in goods. According to Michael Froman, chief negotiator from the United States on this issue, the TPP will lead to the complete elimination of tariffs on 18 thousand US exports goods - and comparable tariff benefits will be incumbent upon the rest of the eleven participating countries. As Froman stated, the TPP will create the "Traffic Code for trade." Canada opens its dairy market, Japan - its beef market.

Moreover, the TPP sets minimum standards for protection of intellectual property rights, rights of employees, as well as the natural environment.  The latter is particularly important for developing countries, especially concerning the part about limits for deforestation and fishing, including freshwater fish: the fishing industry, for example, is one of the most important in Vietnamese economy. All the countries - participants should respected the rules of the International Labour Organization, set minimum wages and limit working hours. In some cases, this required significant climbdowns from developing countries: in particular, Vietnam was forced to make a commitment to allow creation of trade unions, not controlled by the Communist Party.

Also, the restrict of support for state-owned enterprises in order to maintain international competition is mostly aimed at the developing countries. This is particularly important for Malaysia and Vietnam. There is a significant fact regarding the role of Vietnamese state-owned enterprises: in 2014, the Vietnamese government set itself a target to reduce the support by at least 15%. By 2020, the role of state-owned enterprises should be less than 10% - just like in most countries of the world. According to Matthew Goodman from the US Center for Strategic and International Studies, "this requirement is very important for the White House, as it lends weight to TPP’s definition as the agreement of the XXI century".    

On the other hand, developing countries have made some trade-offs from the industrialized countries in the course of negotiations. For example, Chile and Peru vanquish the opponents in debate that drug manufacturers should be protected from competition of the developing countries not for 12, but for 5 years.

In any case, the TPP agreement is a first significant multilateral foreign-trade agreement since 1995, when the WTO had been launched (WTO participants have been trying to negotiate a new agreement since 2001, but the organization includes 161 developing and industrialized country, that never managed to get along).

It should be noted that the WTO emerged thanks to developing countries as well. An idea to create the WTO appeared in 1982, when Geneva hosted the ministerial meeting of the General Agreement on Tariffs and Trade (GATT). Then, it was decided to launch a new round of international trade negotiations, called the Uruguay Round and eventually crowned by the WTO’s creation.

The reason for such an initiative was the heavy debt crisis, felt by developing countries. Just in 1982, Mexico announced that they were unable to service the external debt, and other Latin American countries have indicated willingness to follow suit. These countries could not be found bankrupt, yet a very real threat of going bankrupt has arisen before US banks, that gave huge loans to Latin American countries. Further events were determined by US banks’ fear of bankruptcy. They stopped giving new loans to Latin American countries, yet agreed to restructure debts and deferral of payments. The Latin American countries expressed their willingness to participate in international trade negotiations in order to grow their exports and restrict imports to save money on debt repayment. So did the African countries.

It is worth noting that for the first time since the collapse of the fixed exchange rates system in the 1970s, the IMF started to play a prominent role in the world due to the debt crisis of developing countries. Western creditors - banks and governments - have started to use recommendations of the Fund, when deciding whether to give delay in debt payment to a country-debtor, or provide new loans. A favorable opinion of the IMF depended on the debtor countries’ performance of standard programs of economic stabilization, elaborated by the Fund.

IMF avoided imposing too stringent requirements on most heavy US banks obligators (primarily in Latin American countries), not wanting to cause their discontent. Yet, the Fund did not let African countries have an easy time as they mostly oved to Western governments. The countries could not have brought banks a significant percentage, so the IMF insisted on immediate implementation of the market reforms and rejection of socialist experiments, otherwise threatening to refuse next tranche of the loan. IMF considered participation in the negotiations’ Uruguay Round on the establishment of the WTO as one element of the reform.

Thus, it is no exaggeration to say that the WTO was created for Latin American and African countries under pressure of US banks and the IMF.

According to American researcher Dani Rodrik, "The Uruguay Round and the creation of the WTO were a turning point for the developing countries. Until now, these countries showed no interest in multilateral trade negotiations and almost did not obey the GATT’s rules. There is no surprise: the developing countries were quite satisfied with their situation. Industrialized countries unilaterally granted them trade concessions. Also, agreements between the industrialized countries on the mutual reduction of tariffs, achieved in the hardest struggle, automatically extended to the developing countries. Now, the situation had changed. The WTO’s creation was the first foreign trade activity, in which developing countries took an active part."

It should be noted that the agreements, signed by the developing countries, sounds somehow boring and routine. Perhaps, just Agreement on any pre-shipment inspection of goods and Agreement on Import Licensing Procedures stand out there. It is also important that in the 1980s, the Soviet Union was also the largest debtor of the West and a prominent participant in the debt crisis of developing countries, yet neither American banks nor the IMF succeeded to force the state to the WTO.

The debt crisis in developing countries has become a reason for the WTO creation. Yet, TPP emerged from a sharp slowdown in growth of developing countries and an obvious crisis of world trade. This is the balance point: these countries are extremely dependent on world trade, which, in turn, is highly dependent on them. In physical terms, world trade virtually ceased to grow, and significantly reduced in value. According to the American Peterson Institute for International Economics’ estimates, TPP will have increased global GDP to $ 225 billion by 2025. GDP of the organization’s members will grow on average by 1%, and mostly it will be related not to the United States and other industrialized countries, but developing countries - in particular, Vietnam's GDP will grow by 10%.