Guest post by Jesse Shuster-Leibner.
Years of negotiation came to a close recently as trade ministers from 12 pacific countries announced an agreement in principle on the Trans-Pacific Partnership (TPP). This agreement represents a tremendous step forward in global trade regulation. It encompasses 40 percent of global GDP and intertwines the countries of a region that will be the engine of growth for the foreseeable future. Perhaps more importantly, this agreement will write the rules of the global economy going forward. While we wait for the agreement to be passed by Parliament and in the legislatures of all twelve countries, it is worth exploring the implications for the global trade regime.
These implications will hopefully be significant. The Doha round negotiations at the WTO have been stalled for almost 15 years. The multilateral trade regime should not and cannot be forgotten or passed over entirely. Global liberalization avoids the nasty side effects of regional agreements, namely trade diversion effects. Instead, liberalization at the WTO encouraged economically productive shifts in factors of production domestically and production location decisions internationally.
Over twenty years ago, similar sentiments were echoed when the North American Free Trade Agreement (NAFTA) was signed by Canada, the United States, and Mexico. The fear was that preferential trade agreements would eviscerate the global trade regime, but fortunately the NAFTA helped spur the Uruguay round to completion, which established the WTO.
The question today is whether the TPP do for the Doha round what the NAFTA did for the Uruguay round.
When NAFTA was signed it covered a significant portion of world GDP and it still covers over 20 percent of global economic activity. By implementing new standards, the NAFTA put pressure on other countries to complete the Uruguay round to avoid losing access to the lucrative American market. Although the Doha round just hit its fifteenth year of negotiations, it is important to remember that the Uruguay round took 8 years – far longer than expected. Uruguay was originally supposed to end in 1990, but U.S.–EU disagreements led to an extension.
The possibility of regional trade agreements leading to increased pressure and driving global liberalization still exists. Why is this important? Because it can help avoid trade and investment diversion effects thereby increasing the economic pie to make everyone better off. This is the best solution, superior to the continual second best option of preferential trade agreements.
While we may have to wait for the Transatlantic Trade and Investment Partnership (TTIP) between the US and EU to be completed before any pressure truly begins to build at the WTO, the ultimate goal must be trade liberalization at the global level. Regional trade agreements can add pressure to get us there.