The most important trade deal you’ve never heard of

December 15, 2011
By David Gordon and Sean West
The views expressed are their own. 

With Europe at the fore, it seems hard to justify paying attention to a congressional hearing about a trade deal nobody’s ever heard of.  But the most important trade agreement in a generation—the Trans-Pacific Partnership (TPP), the subject of a House Ways and Means Committee hearing yesterday—is quietly advancing.  The pact, a free-trade deal including the US and several other Pacific Rim nations, will profoundly affect economic and security relations between the US and Asia.  And it may ultimately reshape global economics.

Negotiations are only starting, and with Japan just joining the talks they could go on for years.  The true significance of TPP lies in what it promises: a new type of broad alliance for a world where trade and investment issues are no longer separate, and together underpin a new geopolitical reality.  It’s the first of what could be many “coalitions of the willing” to unlock economic and financial efficiency.  And if works, it will act as a magnet to pull many more countries into its fold.

TPP’s emergence follows nearly a decade of disappointment in trade talks.  The World Trade Organization’s (WTO) Doha Development Round of talks first collapsed in 2003 and effectively died with the financial crisis.  Doha’s moribund state is a direct result of the massive changes in the international economic system that the crisis brought to the fore. Now there is a new approach for trade and investment negotiations.

The WTO and global trade talks under its auspices are built on a divide between developed and developing economies.  With developing countries’ increasing economic clout, this divide no longer makes sense.  China, the world’s second-largest economy, is a developing country.  So are Brazil (seventh), India (ninth), Mexico (fourteenth), Turkey (seventeenth), and Indonesia (eighteenth)—and these and their developing peers’ share of global economic activity is growing dramatically.  The breakdown of the dichotomy between developed and developing economies—with developed countries loath to grant powerful developing economies their traditional advantages, and developing countries equally loath to relinquish them—torpedoed Doha.

No less fatal to Doha were the changes in global finance.  In yesterday’s world, developed countries were assumed to be mature and less risky, dispensing aid to emerging markets and shepherding developing countries into the international economic regime in exchange for major concessions.  That seems almost quaint today, when French President Nicolas Sarkozy goes to China with his hat in hand to ask for help rescuing the Eurozone, IMF intervention in Europe requires Brazilian funding, and the preferential treatment of companies and investments by developing economies is a core global issue.

The death of Doha and the rise of TPP mark an inflection point for global economic negotiations. For the first time since the modern trading regime took shape in 1947, a negotiating round collapsed.  Continuing shifts of power in the world economy and the increasing convergence of trade and finance make another WTO-wide round impossible to conclude, even if no one is willing to declare failure.

As power struggles stymied Doha, countries turned to bilateral deals. In Asia alone, 51 FTAs were inked from 2000 to 2009, with another 78 under negotiation.  Yet complex webs of small deals are extremely inefficient over the long term. With each FTA establishing different standards, businesses and governments lose the economies of scale that ambitious trade pacts bring.

Enter TPP.

Unlike bilateral agreements, the TPP is large in scale: partner countries account for 24 percent of global exports and 40 percent of global GDP.  It is large in scope: with provisions on regulation, supply chains, and intellectual property, a fully formed TPP will be more like a special economic zone than a free-trade area.  Finally, TPP avoids the twin torpedoes that sunk Doha: it includes the same rules for both developed (the US, Japan, Australia, New Zealand, Singapore, Chile, and possibly Canada) and developing (Brunei, Malaysia, Peru, Vietnam, and perhaps several others) economies, and covers sensitive investment issues as well as trade.

On the surface, it looks like TPP comes with big drawbacks.  Though TPP-like alliances are preferable to a mess of bilateral deals, they are less efficient than WTO-wide multilateral regimes.   The scope and scale of TPP and other mooted trade coalitions (such as China’s FTA with the Association of Southeast Nations or a more integrated post-crisis Eurozone) will disadvantage countries outside these pacts.  The division of the world into numerous trading clusters will make rules of origin on goods and services increasingly complex and restrictive, though less so than in a world of bilateral pacts.  The costs of regulatory adherence or manufacturing outside a coalition could drive industries to certain destinations in the same way that low-cost labor does today.

Yet these apparent negatives are in fact central to TPP’s transformative power.  The incentives to join will be profound, creating a magnet effect for countries outside the coalition. This is not unlike the attractive powers of the original General Agreement on Tariffs and Trade, which continues to underpin the WTO club that countries—most recently Russia—still want to join. Exclusion from TPP agreement will encourage countries to seek membership, requiring their reform across a swath of areas to meet TPP standards—including and especially those on parallel treatment of investment and enterprises.

Geopolitics also plays a role.  WTO negotiations are allergic to geopolitics: they define countries by development level and nothing else.  TPP is the first entry in a new world that marries the economic and the geopolitical.  Just as countries are increasingly using economic tools for strategic ends, trading coalitions will supplement and enrich military alliances as a primary form of strategic ties.  While TPP is not a closed club—over time it could theoretically include China—momentum behind its creation is substantially generated by other Asia–Pacific countries fearing the regional dominance of the Middle Kingdom. TPP will simultaneously allow the US to take full advantage of the shifting momentum in the world economy and provide the necessary economic underpinning for long-term US military and security commitments in Asia–Pacific.  Think of TPP as a hybrid: a pinch of NATO mixed with a lot of NAFTA.

The Ways and Means hearing on Wednesday was just another step in the advancement of TPP. The future of trade is here.  Even if you’ve never heard of it.

David Gordon, former director of policy planning at the U.S. State Department, is head of research at Eurasia Group. Sean West is US political risk director at Eurasia Group.

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[…] The Trans-pacific Partnership, the most important trade deal you’ve never heard […]

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[…] The most important trade deal you’ve never heard of […]

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The TPP has very little to do with goods trade. It has everything to do with propagating American dominance in the post-industrial 21st Century. When you look at why REMOVAL OF CAPITAL CONTROLS would be included in a trade pact, the answer is clear as day.

America, with bipartisan support, chose ultra highly leveraged FINANCIAL ENGINEERING as a post-industrial era “industrial policy”, and in the last 15 years has staked the policy with the full faith and credit of the nation, and the best minds the country can offer. Bloomberg reported the size of the derivatives casino reaching US$700 TRILLION (50 times the American GDP) by June 2011. When you consider that the American banking sector has only $16 Trillion in total balance sheet assets, gambling at this level of $700 Trillion (about 44 TIMES assets) is RECKLESS. And yet Washington acts as if the irresponsibility is a good thing. This festering financial cancer is affecting not only America, but the entire world.

The world’s economic malady since 2008 was basically caused by an American decision about 15 years ago, to enable massive OTC derivatives trading, as the nation’s industrial policy in a post industrial world. The policy is imposed on the rest of the world through FREE TRADE, which eventually led to the 2008 debacle.

Today, American banking is synonymous with “trading”, mostly in unregulated OTC derivatives. I believe it was reported that B of A made 90% of its profits in 2010 on trading; the number of SBA loans made also dropped by about 90% from previous levels. American banks don’t bank (lend) anymore, they trade. They are not really banks anymore, but malignant forms of their former selves.

On its face, as a grand national strategy, derivatives look brilliant: not constrained by natural resources, not limited by labor, “new products” galore come forth from the “ingenuity” of the new-fangled breed of financial engineers, and growth looks unlimited, basically constrained only by the salesmen’s ability to sell.

The “minor detail” is that unlike most other business endeavors, derivatives do not produce anything. $700 Trillion in derivatives did not produce a shirt, a tire, or even a single hamburger. It is purely redistributive – one side wins, and the other loses, with the croupier (banker) taking a cut as intermediary. Derivatives, in other words, is PURE GAMBLING. Or is it rigged gambling? The “contracts” are typically crafted by the best Wall Street prospectus writers, and not even the salesmen can really explain them. The suspicion is unavoidable that if they are truthfully explained, nobody would buy them. The products are typiclaly sold on the age old “confidence” basis – “Hey, this is a sophisticated business instrument coming from one of the world’s largest financial institutions, what can possibly go wrong? Just trust me.” It is also a VERY profitable export. Foreign central bankers and major insurance houses, sick and tired of 2.5% returns on Treasuries, are prime customers (victims).

There is no sign of abatement, even after the 2008 debacle. With the American mutual funds industry now (year end 2011) pushing for massive adoption of derivatives, and the Commodities Commission promulgating regulations to allow the small guys to join the fun, the derivatives casino is going to be US$1.5 QUADRILLION in no time. That would be 100 times the size of the American GDP, and more than the entire world’s total GDP!! That is sheer MADNESS. What is scary is that many in Washington believe that there is method (and good) in that madness.

2008 complicated things a bit. The world witnessed how even 100 year old financial houses can go belly up overnight. Lehman Bros. had $60 Billion of derivatives on its books, lost 3% or $2 Billion, which wiped out its equity. WHAT is the significance of that? 3% of $700 Trillion is $21 Trillion, which is more than the TOTAL equity of ALL American financial companies. AND you would never know when it would hit, or even which bank it might hit. MF Global is just the latest example – total wipeout with very little prior warning.

You think that would stabilize the world economy?

2008 complicated things, as I said. Both Germany and China ordered their banks to stop massive gambling in derivatives. Both of their economies recovered. America bet the farm, and counted on EXPANDING the scope of the casino, betting heavily that (a) in the name of FREE TRADE or other trade arrangements (such as TPP), other countries will be forced to open their markets to this contagion, and (b) the American banks would always win HUGE against foreigners, as they did in the decade before.

The $7.77 TRILLION in subsidies (in the form of no cost or very low cost loans) to the American banking industry also complicated things (Bloomberg reported the practice after 2 years of FOIA requests). Now the foreigners are going to point to that as an violation of WTO rules, and refuse to allow the American banks to come in and maraud.

As an aside, against that backdrop, disputes over merchandise trade (a billion here, a few hundred millions there) are rather irrelevant. The real economic “battleground” in this 21st century is going to be over industrial policies in a post industrial world – mostly over the financial industry. It is absolutely necessary to discuss and compare risks in various nations’ banking and financial systems, to identify systemic risks and frauds that could infect the whole world.

It is clear that TPP goes way beyond balancing merchandise trade, as it seeks to take away sovereignty as protection for nations’ industries, be they financial or manufacturing or farming, and substitute them with rules written to benefit special interests. It is not in America’s national interest to see multiple Asia Pacific nations impoverished. But if the American banksters have their way, and successfully destroy national financial defenses in the name of trade negotiations, Asia Pacifics and the world would be the poorer.

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[…] It’s exciting to see that the nine nations that are working on the Trans Pacific Partnership (TPP)–the new Free Trade Area for Asia/Pacific– could create a trading area 40% greater than the total gross domestic product of the EU. There’s a good summary of the TPP from Reuters here. […]

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The next negotiating round of the Trans-Pacific Partnership will take place in San Diego, California from July 2-10, 2012. USTR will be hosting a Direct Stakeholder Engagement event on Monday, July 2, 2012. This event will provide stakeholders the opportunity to speak directly and one-on-one with negotiators, raise questions, and share their views. We tried this format at the last round in Dallas, and most stakeholders expressed their preference for this one-on-one engagement. Some stakeholders said they would like the opportunity to make presentations to negotiators as in earlier negotiating rounds and we will accommodate these requests. In addition, there will be a stakeholder briefing on July 3. The negotiation round venue and registration information will be posted shortly.

Best regards

Mr. Bredbånd

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As a citizen of a democratic republic, I cherish my rights of access to crucial information about the nation’s economy. Therefore there must be labor and environmental observers at the Trans-Pacific Parternship trade talks because the President of our democratic republic said he was only going to do 21st century trade deals; and even cautious economists like Gene Sperling were making these environmental and labor negotiating rights – well not quite negotiating rights, are they? – observer rights – in books like his “Pro-growth Progressive” and comments I heard him make in public earlier in the decade.

So who, exactly, are the people protecting the nation’s rights in these areas, sitting in on the talks? What’s that you say, there aren’t any? Oh, I see. No wonder the house and the senate are sending protest letters to the President that even they – the elected representatives of this democratic republic – such as they and it are – don’t know what’s going on.

No wonder Mitt Romney says sign it right now! And President Obama says….???? I’m sure glad that important issues get discussed in the Presidential campaigns in this….democratic republic (of “free” trade without representation.)

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