The most important trade deal you’ve never heard of
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.
Moving Doha forward: The U.S. view
By Ron Kirk, U.S. Trade Representative Ron Kirk. The opinions expressed are his own.
Right now in Geneva, Switzerland, a test is underway. It is a test of the willingness of World Trade Organization (WTO) members to move the decade-long Doha Development Round negotiations into the “end game” – as President Obama and other G20 Leaders have directed negotiators to do this year. The window of opportunity for the talks to avoid decline into futility is a narrow one. The United States will leave no stone unturned in its quest for an ambitious and balanced outcome. But key negotiating partners must share this motivation.
The world has changed since the Doha negotiations began in 2001. To succeed today, WTO trade talks must address the world as it is and as it will be in the coming decades. The remarkable growth of emerging economies like China, India, and Brazil must be reflected in a final Doha outcome.
The United States has been frank about the importance of increased access to these emerging markets for U.S. exporters. But such access is also vital for the poorest countries that have been a particular focus of the Doha negotiations –especially since these countries already have largely open access to major developed economies like the United States. In a negotiation in which the United States is being asked to significantly cut 100 percent of import duties on both industrial and agricultural goods, we are asking emerging economies to accept responsibility commensurate with their expanded roles in the global economy.
No country is more important to a successful Doha outcome than China. By any estimate, China will be an enormous winner from a Doha agreement. China’s exports have boomed since joining the WTO, but it continues to maintain high tariffs, many of which still would not be cut under the current parameters of the Doha Round.
Despite its position as an economic and trade powerhouse, today’s WTO rules allow China to have open access to major markets without giving appropriately reciprocal access. In Doha, we are asking China to commit to a significant opening of its market in industrial sectors – like chemicals, electronics, and industrial machinery – where China’s global competitiveness is unquestioned. That’s reasonable.
Similarly, Brazil is one of the world’s ten largest economies and a growing export power. Yet Brazil’s market remains restricted in the technology sector, among others. Since 1996, 73 countries comprising over 97 percent of the global trade in information technology products have opened their markets to competition in this sector by signing the WTO Information Technology Agreement (ITA). Signatories include developing countries such as Egypt, El Salvador, Costa Rica, and Vietnam. In Doha, one of our “asks” of Brazil is to join the ITA. That’s reasonable.
Not interesting.. It looks like you got a cushy position for being a friend to the current administration.. As a dallas native i’m not impressed and honestly either should you
New messenger, same mandate
– Kevin P. Gallagher is professor of international relations at Boston University and co-author of “The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley” and “Putting Development First: The Importance of Policy Space at the WTO.” The opinions expressed are his own. –
On the campaign trail, President-elect Barack Obama pledged to rethink U.S. trade policy. The initial nomination of Xavier Becerra as United States Trade Representative was a signal that Obama will work to fulfill that promise. Congressman Becerra declined the offer and former Dallas Mayor Ron Kirk has been chosen to head the office instead. Given Kirk’s enthusiastic support for NAFTA, he will receive close scrutiny as he takes over a USTR that has the mandate of rethinking U.S. trade policy.
Regardless of the messenger, Obama has pledged to fundamentally change U.S. trade policy. To this end, there are four early priorities for Kirk and Obama: honor existing commitments under the WTO, press for an equitable completion of the Doha Round, conduct a thorough evaluation of major U.S. trade agreements, and enact comprehensive trade adjustment assistance legislation.
The immediate first step is to honor the WTO ruling that deemed that the $3.2 billion in annual cotton subsidies and $1.6 billion in export credits violate trade rules. The Institute for Agriculture and Trade Policy estimates that U.S. cotton subsidies caused damages of $400 million between 2001 and 2003 alone for poor African cotton-producing countries, where more than 10 million people depend directly on the crop.
Returning to multilateralism by honoring the cotton ruling would not only aid poor farmers but would also allow the U.S. to regain legitimacy at the WTO by sending signal to developing countries that the U.S. no longer preaches a global trade policy of “do as we say, not as we do”.
Second, Obama and Kirk should move to complete the Doha Round on terms that benefit both the U.S. and its trading partners. A core principle of a reconfigured Doha Round should be the recognition that developing countries need the policy space to deploy the kinds of government measures that have been proven to work for development in the west. According to separate studies by the World Bank and the Carnegie Endowment for International Peace, the deal debated while Bush was in office would have yielded only $6.7 billion to 21.4 billion (or less than a penny per person per day) for the poor. Rich countries were projected to see per capita income gains 25 times those in developing countries. (Read the full report here.)
Third, Obama’s first year in office should also honor his pledge to evaluate impacts of the North American Free Trade Agreement (NAFTA) and other major trade agreements. It is essential that the assessment analyzes the economic, environmental, social and regulatory impacts of past agreements on the U.S. economy– and on our trading partners.
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.