August 20, 2015 12:00 am JST

Supachai Panitchpakdi: TPP would be a 2nd-best outcome for Asia

We are witnessing an unprecedented phenomenon in the postwar history of world trade. For the last four years, GDP has uncharacteristically outpaced growth in trade volume. As trade has always been a key driver of global growth, the contraction of its share in gross domestic product could put the brakes on future economic expansion.

     One way to avoid a slowdown is through international agreements intended to facilitate trade. More than 400 such regional arrangements are in place worldwide, including large and vibrant examples such as the 10-member Association of Southeast Asian Nations Free Trade Area.

     Not all trade frameworks are beneficial, however. The U.S.-led Trans-Pacific Partnership risks undermining the World Trade Organization framework, which forms the backdrop for global trade. The envisioned pact would also place extra burdens on small countries through rules and regulations imposed by large economies that go far beyond the WTO structure.

     Although many economists have called on Asia to move from an export-oriented growth model toward greater reliance on domestic consumption, the regional network of production continues to rely on intra-Asian trade. The network has been boosted by a series of bilateral and regional free trade agreements, and will be further bolstered by the launch of the ASEAN Economic Community by the end of 2015.

Regionalism rising

However, the underlying drive has had less to do with trade liberalization per se than with a form of regionalism intended to boost trade for development. This is evident in the discussions on a proposed Regional Comprehensive Economic Partnership pact that would include China, Japan, South Korea, India, Australia and New Zealand as well as the ASEAN countries. Crucially, the leading role in the RCEP is assigned to ASEAN, which conveniently sidesteps the controversial issue of which country will dominate the partnership.

     So far, the rise in the number of bilateral and regional trade agreements has not distracted from the WTO's efforts to facilitate multilateral trade. However, the launch of talks on so-called megadeals such as the TPP and the Trans-Atlantic Trade and Investment Partnership, being negotiated by the U.S. and the European Union, puts regional agreements in a different light. These proposed agreements, which together include countries responsible for more than 60% of global GDP, will involve rule-making exercises that are far in excess of the norms set by WTO agreements.

     The TPP negotiations have been underway for the last six years between 12 countries -- the U.S., Brunei, Chile, Singapore, New Zealand, Australia, Canada, Japan, Malaysia, Mexico, Peru and Vietnam. The talks cover a range of issues, including upgrading trade-related intellectual property rights, privatizing state-owned enterprises, harmonizing competition laws, linking labor rights to trade, setting up dispute-settlement mechanisms and liberalizing trade in agriculture and automobiles.

     Due to the complexity of market access and behind-the-border issues, the TPP has gone through 20 formal negotiating sessions without reaching a final agreement. The latest session, which took place at the end of July in Hawaii, is said to have made major advances and come close to a final deal. The process has been highly reminiscent of talks in the early years of this century on a proposed Free Trade Area of the Americas, which also went through several secretive negotiation sessions only to founder on the traditionally sensitive areas of intellectual property rights, labor and agriculture.

Contentious chapters

The TPP's most contentious chapters involve so-called 21st century trade and regulatory issues, which are far more complex than those of the failed FTAA and go well beyond the WTO arrangements. On copyrights, for example, the major stumbling block is the extension of protection from 50 years to 70 years after the lifetime of the author. On patent protection for pharmaceutical products, the proposals include introducing the evergreening principle (which facilitates the extension of patents) and establishing a monopoly period for next-generation biological drugs made from living cells.

     On investment, the coverage and the pervasive authority of the proposed investor-state dispute settlement mechanism is perceived by critics as bestowing on multinational companies rights equal to those of sovereign states. In the automotive sector, the proposed convergence conflicts with the reality that many Asian producers with regional supply chains source their parts from various countries, not all of which will be members of the TPP.

     For those who believe in pushing at the frontiers of trade liberalization at all costs, the TPP is undeniably laudable. But for those who think such an effort should be made through an open multilateral process, the proposed pact raises fears that the WTO's role as guardian of the rules of international trade may be diluted and eventually transferred to a group of regional and plurilateral agreements. This would be to the detriment of the smaller economies, which would see their bargaining positions weakened.

     The TPP process also raises awkward geopolitical issues. For example, a U.S. government decision just before the Hawaii talks to upgrade Malaysia's status in a report on human trafficking was widely seen as a political move designed to allow Malaysia to meet U.S. rules for TPP membership. No such upgrade was announced for neighboring Thailand, which has been mounting unprecedented attacks on human trafficking but is not a party to the talks. China, the world's second-largest economy and a crucial player in the Asian economy, has been excluded from the talks even though its domestic markets are key to sustainable growth for many potential members of the pact.

     This is one reason why the alternative regional grouping under the RCEP remains a viable alternative. But if the TPP is to go ahead, it should avoid behaving in a divisive manner, such as blocking out major Asian economies by putting up unreasonably high regulatory fences. For those that are already in the negotiations, the social consequences of the TPP on health care protection, dispute settlement and labor rights will have to be spelled out clearly to prevent the deterioration of Asia's developing and much-needed social safety net. Furthermore, there has to be a road map for reconciling the competing interests of countries that will be members of the ASEAN Economic Community, RCEP and TPP.

Voices of dissent

Many leading economists have criticized the TPP. Nobel Prize-winning economist Joseph Stiglitz warned that it presents "grave risks" and "serves the interests of the wealthiest." Fellow Nobel laureate Paul Krugman remarked: "I'll be undismayed, and even a bit relieved, if the TPP just fades away. ... There isn't a compelling case for this deal, from either a global or a national point of view."

     The truth is that the TPP is a second-best option for Asia that will create significant adjustment problems, especially for smaller countries. The priority for Asia should be the RCEP, and if the U.S. and other countries want closer trading relations with Asian countries, it should be in that context.

Supachai Panitchpakdi is former director general of the World Trade Organization and former secretary-general of the United Nations Conference on Trade and Development. He served on the U.N. High Level Panel of Experts on Budget Recosting.

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