Why Regional Trade Agreements like the TPP are Good for the Multilateral Trading System

The emergence of Asian regional free trade agreement negotiations such as the Trans-Pacific Partnership (TPP) of 12 Pacific Rim countries, APEC’s Free Trade Agreement of the Asia-Pacific (FTAAP), and ASEAN’s Regional Comprehensive Economic Partnership (RCEP) has prompted the question of whether regional trade agreements (RTAs) are beneficial for the overall global trading system. Given that RTAs typically grant its members with preferential benefits, they seem to be in conflict with the core principle of the World Trade Organization (WTO) that WTO members are supposed to treat all other WTO members with “most favored nation” status.  Skeptics of RTAs point to the fact that regional/preferential trade agreements can hurt both members and non-members of the RTA through trade diversion, and RTAs create fragmentation of the world trading system in which nations may look increasingly towards the mechanisms of the RTAs instead of the WTO.[1] It is the position of the author that RTAs, specifically the TPP, do more good than harm overall in that they continue to raise the standards to promote global free trade in ways that the WTO can’t, but does not threaten the existence of the WTO.

 

RTAs and the WTO can coexist. GATT’s Article 24 allows free trade areas or customs unions to be created, as long as non-members don’t find trade with the group any more restrictive than before the regional trade agreement was set up.[2] The WTO also has a transparency mechanism through which members of the trade agreements report the RTA to the WTO. Hundreds of RTAs already exist. According to the WTO’s transparency mechanism, 449 physical RTAs exist in the world, 262 of which are currently in force.[3] The existing “noodle-bowl” of RTAs shows that RTAs can coexist alongside the WTO, and emerging trade agreements like the TPP should not be treated any differently. In fact, regional trade agreements such as the TPP, FTAAP, and RCEP are aimed to build on the existing overlapping bilateral and regional FTAs.

Image Source: The Economist

 

Of course, in order for the regional or preferential trade agreements to coexist alongside the WTO, they have to make sure that they do not actively hurt or exclude states that are non-members of the RTA. Indeed, experts project that while the TPP will lead to 294.7 billion USD in annual income gains in the world by 2025, non-members will see an income loss of 11.4 billion as a result of the agreement, with Russia projected to lose 2 billion USD.[4] (Additionally, FTAAP, which Russia is a member of, is looking at 1,921.7 billion USD in annual income gains in the world by 2025, with Russia projected to gain 265.9 billion USD, and the rest of the world losing 71.4 billion).[5] However, the TPP is not exclusionary by nature. For example, while currently negotiated between twelve countries, the TPP has expanded its number of negotiating countries since its first negotiation between the P-4, the four original members. It has also opened itself up for consultations to potential members and interested parties such as to South Korea and Taiwan, though is not going to include new negotiating members until the twelve reach an agreement first.[6] [7] There is much speculation as to whether the TPP was created to hedge against the rise of China, however the members have not actively excluded the possibility of having China eventually join the TPP, and China may very well seek to join TPP in the future. In fact, Zhu Guangyao, the Chinese vice minister of finance, mentioned in October last year that China has become interested in the trading bloc.[8]

 

Another contentious aspect of this issue is whether regional trade agreements such as the TPP will cause fragmentation and undermine the existing WTO structure. However, the WTO says that regional trade agreements could actually help the WTO’s multilateral trading system.[9] The TPP aims to be a “21^st century, high-standards” agreement in that it covers aspects of trade that extend far beyond just reducing tariff barriers (while still currently under negotiation, these aspects include regulatory coherence, IP protection, labor rights protection, environmental protection, etc.) [10], and this is good for the multilateral trading system overall in that it will continue to raise the bar for freer trade by serving as a laboratory of sorts for new ideas and serve as an example for future agreements at the multilateral level, as well as prod the WTO to work harder to reach an agreement so that it does not become irrelevant. As the difficulties faced when concluding the Bali agreement in December 2013 and the ever-prolonged Doha Development Round show, given that the WTO keeps expanding its membership and that trade agreements cannot be passed unless there is full consensus, reaching agreement at the WTO level will take increasingly more time. Regional trading agreements provide a way for members to discuss the breakdown of trading barriers when the multilateral trading system is facing gridlock, as we have seen in the recent decade.

 

Despite its shortcomings, however, the WTO still remains an irreplaceable institution and will remain as such amid the emergence of these “21^st century, high-standard” agreements. The WTO’s dispute settlement mechanisms are second to none and are still the best ways that nations raise and settle trade disputes amongst each other.[11] The WTO is also the most effective forum to date that facilitates discussion within a large number of economically diverse nations that regional agreements cannot accomplish. Nonetheless, the WTO must also make an effort to stay relevant. The WTO rules has not been updated for two decades (since the WTO superseded the GATT), and hence has not caught up with some of the “21^st century” demands that these new regional trade agreements ostensibly offer. In order to stay relevant, it must undergo serious reform of its processes and become a 21^st century institution itself.

 

In the same way that the EU accession process helped jump-start the free-marketization and adoption of many domestic institutions that have helped overall GDP growth in many economies in Central and Eastern Europe,[12] the consultations and negotiations process into the TPP and similar agreements have the potential to not only boost Asian economic integration and create gains from trade, but they can serve as a mechanism to inspire countries to be more open to free trade, for both members and non-members alike. There will always be winners and losers to a certain extent at the international and domestic levels when it comes to trade, but as long as governments and its publics see the benefits to continue to lower their trade barriers and foster regional integration, and the trade created by the RTAs maximizes overall welfare by far outweighing any trade diverted by the agreement, the proliferation of high-standard regional trade agreements are good for those involved as well as for the multilateral trading system overall.