TPP’s First-Mover Advantage

The Trans-Pacific Partnership agreement signed in February 2016 is one of the main achievements of US policy of promoting American multinational companies interests in the Asia-Pacific Region. The TPP is not a demolition derby it is about first-mover advantage when the one who sets the rules of the game will make others follow them. The US managed to set those rules, and if the agreement comes into force, China will have to seek ways to join it.

The Trans-Pacific Partnership (TPP) agreement signed in February 2016 is one of the main achievements of US policy of promoting American multinational companies interests in the Asia-Pacific Region (APR). Sources close to the White House claim that more than 600 US corporations were involved in the text drafting and preliminary negotiations with partner countries. All TPP countries are APEC economies. Australia, Canada, Mexico, the United States and Japan are G20 member-states.

It is important to note that none of the provisions in the TPP agreement contradicts the principles of the World Trade Organization (WTO). However, TPP launches a process of highlighting the most sophisticated international trade rules that suit a limited group of interested participants. In the future these next-generation rules may serve as a tool for exclusion of non-participating economies from the newly arranged system of international trade and production by granting preferences and advantages only to the members of the agreement.

That is the reason why a number of countries which were not involved in negotiations (South Korea, Indonesia, the Philippines and Thailand etc.) hastily announced their readiness to join the agreement. Even though the number of TPP members can increase only after the agreement is ratified and comes into force, that can take several years. Presumably after reaching the critical mass TPP members will seek to impose their own rules of regulating trade and investment on other countries. It resembles the General Agreement on Tariffs and Trade (GATT) , the WTO’s predecessor, which was originally set up by a limited number of countries (23) and contained provisions for allowing other players to join further down the line, on the condition that they comply with the regulatory standards that had already been put in place.

The Trans-Pacific Partnership is over 6000 pages long and contains 30 chapters with multiple annexes, appendixes and exceptions covering an unprecedented variety of trade and economic issues. Not only does the Trans-Pacific Partnership regulate the scope of international trade in goods and services (market access) and the movement of labour and capital, it also controls the domestic regulations of member states in such areas as labour law, environment, intellectual property, etc.

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In terms of tariff reduction and elimination of barriers, the Trans-Pacific Partnership Agreement can hardly be considered as a breakthrough document. Even before the TPP was signed, a reasonably high level of liberalization had already been achieved in the region as a result of bilateral free trade agreements between individual member countries [3]. It means that the redistribution of trade flows within the TPP as a result of removing internal barriers will be minimal and that the agreement is designed for future trade flows.

As for regulatory coherence TPP agreement contains several recommendatory chapters that require the laws and regulatory norms of individual countries to be gradually adapted and unified to comply with the high standards of developed countries, primarily the United States. For example, the parties have agreed to consolidate their labour market regulation standards. The environment chapter is aimed at combatting wildlife trafficking, illegal logging and illegal fishing. But it does not contain any provisions on tackling climate issues. The agreement reproduces certain US anti-corruption standards, and provides for good governance and anti-corruption measures to be implemented, including establishing the rights of companies (stakeholders) to protect themselves against corruption and its consequences and applying tougher penalties for corruption offences, especially those that affect international trade and investment.

A unique chapter for such kind of agreements is the one devoted to development, which identifies three main areas for collaborative work, in order to “maximize the benefits of the TPP agreement for the people and bring about economic development and prosperity: Broad-Based Economic Growth, Women and Economic Growth, Education, Science and Technology, Research and Innovation.” The provisions in this chapter are essentially promoting American values abroad. Implementation of these measures (for example, new health safety regulations, food security and environmental standards) can be arranged in the form of “soft” coercing under the warning of removal from the TPP regime.

The authors of the agreement noted the need for the gradual institutionalization of TPP process, meaning not only capacity building activities like seminars and workshops, but also establishment of subsidiary bodies like committees and working groups and even a the arbitral tribunal for settlement of disputes.

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The Commission will be the main body of TPP and will meet regularly at the level of ministers and senior officials. The Commission’s functions will include: considering matters relating to the implementation of the Trans-Pacific Partnership agreement; preparing economic reviews; considering proposals for introducing amendments to the provisions of the agreement and overseeing the work of subsidiary bodies such as committee for coordinating the process of adopting and revising regulatory measures, a competition and business facilitation committee, a contact group on small and medium-sized businesses, a development committee, etc. Decisions at all levels shall be taken by consensus.

The proposed institutional framework is virtually identical to the APEC in terms of its organizational structure and the countries that make it up. If we add so-called ‘applicants’ to the current TPP members we’ll find out that all APEC economies (with the exception of Russia, China and Papua New Guinea), can eliminate APEC and switch to cooperation exclusively within Trans-Pacific Partnership framework.

China’s position is of particular interest in this respect. While it is often said that the TPP was developed with the express purpose of isolating China, the facts do not support this claim. Currently, China has adopted a wait-and-see approach, as it calls the TPP an example of shaping large and attractive markets with low barriers for the movement of goods, services, and investments between countries and an example of high internal regulations standards, which could propel the Chinese economy forward. Strategically, the US and China are moving in the same direction and have a common vision of the future of the world trade where China and the US are the key players. High economic interdependence of the world’s two largest economies does not allow them even to think about real isolation of one another since problems in one economy will inevitably entail an economic crisis in the other. Therefore, the TPP is not a demolition derby it is about first-mover advantage when the one who sets the rules of the game will make others follow them. The US managed to set those rules, and if the agreement comes into force, China will have to seek ways to join it.

The agreement shall enter into force if at least six of the original signatories, which together account for at least 85 per cent of the combined gross domestic product of the original signatories in 2013. Under current circumstances, it is not an easy task. The current American administration wants to complete the ratification process as soon as possible, before Barack Obama’s presidency ends in the autumn of 2016. However, the TPP agreement does not enjoy Americans’ unanimous support, which could conceivably prevent the agreement from being ratified by member states. Other economies also face the risk of new governments coming into power and reneging on their predecessor’s commitment to ratify the TPP. Experts are concerned that many members could choose alternative integration formats, especially since China is particularly active in this area. There are negotiations underway to form Regional Comprehensive Economic Partnership (RCEP) based on ASEAN+6 with China’s active participation. Round 11 of RCEP negotiations concluded in Brunei on February 19, 2016, the next round will take place in Australia in April, and it is highly probable that by the end of 2016, the conclusion of negotiations will be announced. Chinese officials claim that RCEP does not contradict the TTP, on the contrary, it complements it.

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Given these circumstances, Russia’s warily negative attitude towards TPP looks a bit odd. Russia consistently focuses its efforts on working within the WTO exclusively and it underestimates the TPP as one of many regional free trade agreements. However, the Trans-Pacific Partnership should not be regarded as a run-of-the-mill regional trade agreement. With the failure of the Doha round of the WTO talks, the US attempts to create an alternative multilateral mechanism based on those rules and regulations the US has already tried out on NAFTA (an agreement with Canada and Mexico), on other free trade agreements in the Americas (Chile, Peru, etc.), on individual agreements in the Asia-Pacific Region (Australia, Singapore, the Republic of Korea).

It is important to realize that the TPP is a part of the US global trade strategy, and the US is very close to concluding the negotiations with the EU on The Transatlantic Trade and Investment Partnership (TTIP). Unlike the TPP’s marginal influence on Russia’ economy [4], the agreement between the US and Europe could have a very negative impact on Russia’s international business indicators. Another important item on the American agenda is bringing about an agreement between Japan and the EU with provisions similar to the TPP and the TTIP. It would form the US-Asia-Europe circle and complete the creation of a global trade and economy system. This system would be governed by the US and it would exclude Russia. China’s joining TPP seems an unlikely scenario at the moment, yet this possibility should also be taken into account while elaborating Russia’s trade and economic strategy, particularly within the SCO and BRICS where China plays a very important, and maybe even crucial role.

1. Initially, a four-party free trade agreement was signed between Singapore, New Zealand, Chile and Brunei in 2005. After the United States, Australia, Peru and Vietnam joined (in 2008–2010) the agreement became the basis for the American initiative to form the Trans-Pacific Partnership (TPP). Malaysia became the tenth participant in October 2010, with Mexico and Canada joining the negotiation process in the autumn of 2012 and Japan following suit in March 2013.

2. TPP accounts for 27.5% of global GDP (by Purchasing Power Parity), 23.9% of global exports and 26.7% of global imports of goods and services. Trade within the bloc stands at 42.7%. The relative share of the TPP in attracting global direct investments in 2014 was 28.1%, and 42.8% in exporting direct investments. The total population of all TPP countries exceeds 810 million people.

3. Forty-two free trade agreements currently exist among TPP members.

4. The share of the TPP countries in Russia’s trade volume is no more than 10 % (mostly accounted for by Japan and the US), the trade structure and the TPP preferences do not promise any significant changes for the Russian goods. Estimates show that with the TPP coming into force, Russian economy would lose about 100 million USD mostly due to a possible (already small) decrease in supply of agricultural products to those countries.