Sean West

The most important trade deal you’ve never heard of

Sean West — Thu, 15 Dec 2011 23:01:13 +0000

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.

If only Congress were less ambitious

Sean West — Tue, 22 Nov 2011 21:01:57 +0000

By David Gordon and Sean West
The opinions expressed are their own.

There’s a good reason that only paid staffers and blood relatives seem to approve of Congress, as Senator John McCain recently quipped. But it is not the simple reason that Congress continues to fail, as witnessed in the implosion of the supercommittee. Rather it’s that Congress continuously promises unachievable historic fixes when it should instead be focused on slow progress.

There’s nothing wrong with small-scale fixes when they are the best achievable outcome. Congress is hyperpolarized and both sides are fighting for a mandate to reform the entire economy in line with their competing visions. As underwhelming as the August debt limit deal was, in the current political environment, saving over $2 trillion one way or another was a positive result. The fact that Congress could agree to something this large this year is actually quite stunning.

Failure – and the ensuing loss of respect in the eyes of voters – is largely due to leaders on both sides pretending that massive overhauls are in reach when they clearly aren’t. The problem is that Congress isn’t content to just do its job — it can’t help itself but to overpromise and then underdeliver.

During the debt limit debate, voters were treated to a roller coaster ride of epic proportions: One day Congress was going to cut $4 trillion from the debt, the next day the US government was going to default. In March, Congress was going to let the government shut down unless historic spending cuts were put in place. Both situations were manufactured crises that were created with the promise of forcing historic fixes. Neither did.

The supercommittee demonstrates the danger of playing this game. Members spent way too much time pretending they were going to do something historic — trading $3 trillion plans back and forth — instead of simply working on the $1.2 trillion task before them. Failing to reach $1.2 trillion looks that much worse to the public because Congress continuously talked about achieving much broader taxation and entitlement reform.

Neither party has full control of the political process and neither has an incentive to secure a big deal so close to a presidential election, so when the crisis has real consequences (like a shutdown of the government or default) they come together for modestly-sized deals amid dire political circumstances. At the end of the day for the supercommittee, sequestration thirteen months in the future was not a big enough threat to force an agreement.

Voters have every right to tune out what is a noisy game of fool-the-masses. And they are starting to do so. A recent poll found half of the voting population was “not at all aware” of the supercommittee, in contrast to the debt limit debate which was at least “somewhat closely” tracked by 70%. As the supercommittee turned to cobbling together an eleventh-hour modest deal as it had done twice earlier this year, it realized nobody was paying attention. With cover of public ignorance, members decided not to take any of the deals on the table and let the committee collapse. The public stopped paying attention because Congress had oversold its prior efforts; in losing its watchful eye, Congress no longer had to do anything.

In a democracy, elections appropriately determine large-scale policy changes—and with a presidential election less than a year away, it should be no surprise that the two parties must let voters determine whose vision is implemented instead of cutting deals today. The problem is that no one on either side is prepared to say that—they continue to pretend they will outperform, making modest progress less capable of being achieved.

America’s fiscal problems are sizable, but still fixable before the moment of reckoning, especially in contrast to the extraordinary challenges Europe faces. And it is relatively predictable how those problems will be fixed in either a second-term Obama administration or a first-term Mitt Romney administration. There’s nothing wrong with political posturing to show constituents that their interests matter. But there is something fundamentally wrong with manufacturing multiple artificial crisis points to force historic deals that never materialize, and to fail to reach a modest deal when no one is looking.

Hopefully less than a year before the election we will reach that magical moment when politicians openly admit that their reelection concerns trump policymaking and thus there are obvious limits to what can be achieved before Election Day. If they had only admitted as much at the beginning of 2011, voters might still be paying attention.

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.

Photo: An aide carries a signage as a group of lawmakers calling themselves the “Go Big Coalition” meet for a news conference to encourage members of the so-called “super committee” on debt reduction to find a large compromise at the U.S. Capitol in Washington, November 16, 2011. REUTERS/Jonathan Ernst.