Mega-regionals: What Is Going on?

Mega-regionals: What Is Going on? 

Introduction

A lot is happening on the trade negotiations front in almost every corner of the world. Countries have been active and prolific at the bilateral and regional levels for some time – 432 RTAs have been notified to the WTO. But the key ongoing negotiations are of a different dimension: they involve more partners, from different levels of development and different regions, covering larger volumes of trade, and aiming at reaching agreements of a deeper nature on a wide scope of issues. These are the mega-regionals, of which the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership are in a category of their own by virtue of their scope and impact. If current negotiations are successful, new rules will shape trade and investment flows, underpin global governance on 21st century trade issues and facilitate the proliferation of global value chains. Their purported emphasis on promoting broad liberalization, reducing non-tariff barriers and addressing regulatory hurdles through greater convergence would unleash new opportunities and bring about more growth to the world economy. 

They may also contribute to bringing more dynamism to the multilateral trading system, spearheading a virtuous circle of enhanced rule making and trade liberalization. Or they may not. Much will depend on the specific provisions to be agreed upon and the type of preference they will create. 

Not all preferences are equal. 

Some of them carry a larger potential for discrimination than others. The greater their discriminatory nature, the higher the friction and fragmentation risks they entail. On the contrary, provisions with low or no discriminatory potential actually may be quite beneficial for non-members. This is no minor issue. While mega-regional negotiations encompass a large number of countries, they exclude an even larger group. About 160 nations, home to over 80% of the world’s population, are sitting on the sidelines while these discussions take place. The way in which countries choose to react to these developments may determine, at least in part, the impact of these pacts on individual non-members and on different regions, as well as on countries that are party to the mega-regionals. The broader question of the geopolitical impact that mega-regionals may have in today’s world is an issue that demands great reflection. The multilateral trading system is not exempt from the impact of mega-regionals. Much will depend on the specifics of the agreements that are finally concluded, and in particular on  whether they are crafted with an inclusive perspective and are open to new members. Much will also depend on whether WTO members opt to advance an ambitious post-Bali multilateral agenda, which could include plurilateral agreements as a way to proceed in consolidating the WTO’s centrality. 

All of this presumes that mega-regionals will come to fruition as planned, but this cannot be taken for granted. There are big negotiating challenges ahead, and domestic political divisions in participating countries to be bridged. If the megaregionals fail, the consequences on the potential of trade and investment to continue driving world growth and prosperity will be considerable. While there is a lot of uncertainty regarding the future and impact of mega-regional agreements, it is clear that this is the topic of choice in the global trade agenda today. 

This is why the World Economic Forum’s Global Agenda Council on Trade & Foreign Direct Investment decided to dedicate its work this year to Mega-regional Trade Agreements: Game-Changers or Costly Distractions for the World Trading System? Extensive discussions, with the participation of all Council Members, showed that this is a rich subject that poses important questions and ignites strong debates. A consensus was not reached on all its angles, nor was that the main purpose. Instead, the aim was to explore the impact that mega-regionals may have on non-members, highlighting opportunities and challenges in promoting the coexistence of these agreements – should they materialize – with the multilateral trading system. 

With all the uncertainties and caveats surrounding the negotiation of mega-regional agreements, there is a strong case to be made on the importance of consciously working to facilitate the relationship between them and the multilateral trading system, for the benefit of all countries.

The Impact of Mega-regionals

For decades, but with particular impetus since the inception of the World Trade Organization in 1995, many of the WTO’s members have enthusiastically embarked in selective associations with other members, aimed at more deeply integrating their economies. These schemes vary in nature, scope and effectiveness and range from free trade agreements to custom unions to common markets. The General Agreement on Tariffs and Trade (GATT) defines free trade areas as those in which two or more custom territories agree to eliminate duties and other restrictions “on substantially all the trade” between them on products originating in their territories.

Colloquially and in WTO practice and law, such agreements are referred to as regional trade agreements (RTAs) to differentiate them from unilateral preferential schemes. 

By the end of 2014, 432 RTAs had been notified to the WTO, of which 238 were in force. In addition, countries have been prolific in establishing bilateral investment treaties containing rules and commitments that significantly affect trade in goods, services and technologies, as well as other terms of further integration of national economies into global markets. At last count, the world had in place 3,196 international investment agreements (IIAs): BITs and “other IIAs”.

Moreover, over 30 new RTAs, involving more than 110 countries, are currently under negotiation, with some of them geared to constitute a new order in international economic governance given their design, content and quantitative and qualitative weight in the global economy. Significantly, they involve all the important poles of trade and investment in the evolving global economy. Several of these innovative agreements take place between two or more countries in different regions, or between countries with RTAs among them and individual countries or groups of countries in other RTAs. 

This type of composition is not unprecedented, but the trend is now affecting more parties and happens at a time when the Organisation for Economic Co-operation and Development (OECD) estimates that RTAs and IIAs already “cover among their member countries 90% and 60% of cross-border trade in goods and services, respectively”.4 The last wave of agreements, in addition to establishing lower applied tariff rates between parties (with the collateral effect of generally lowering MFN applied rates), have also added a universe of contractual commitments among parties on provisions concerning mostly behind-the-border regulatory matters that go deeper than their WTO obligations (WTO-plus) or that extend the coverage of WTO disciplines (WTO-beyond or WTO-extra obligations). The economic significance of RTAs has also been in crescendo. RTAs of the past may have been defined more by geopolitics, but the new trend is for a greater emphasis on commercially meaningful associations that address several emerging policy concerns. Also, new RTAs are organized around a set of deeper integration issues that fosters transnational collaborative production and global value chains. They could be termed production-sharing RTAs or regulatory integration RTAs given their emphasis on an increasingly common and extensive package that in addition to market access includes services, competition policy, investment (including capital movement provisions), technical barriers and regulatory compatibility, intellectual property protection and customs cooperation. By their nature, at this time, trends in integration reflect three types of dominant RTAs: a. FTAs of substantive current or potential trade and FDI value. Examples under negotiation or recently concluded include US-South Korea; EU-Singapore; EU-Canada; EUJapan; EU-India; EU-Mercosur; Australia-China; CanadaKorea; Canada-India; the embryonic CJK; and BITs between the US and China and the EU and China. b. Consolidation RTAs, in which existing RTAs are expanded through new membership or by merging with other RTAs. An example of a recent effort is the novel Pacific Alliance which practically fuses and further integrates six pre-existing FTAs among Mexico, Colombia, Peru and Chile, with possible extension to Costa Rica and Panama. The emphasis is on tariffs, services and cumulation of imports for rules of origin. Another example is the Tripartite Free Trade Area in Africa, aimed at consolidating three subregional agreements, i.e. the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern Africa Development Community (SADC). c. Mega-regional RTAs, deep integration partnerships in the form of RTAs between countries or regions with a major share of world trade and FDI and in which two or more of the parties are in a paramount driver position, or serve as hubs, in global value chains (i.e. the US, the EU, Japan, China). This category includes ongoing negotiations in the TPP; the emerging TTIP between the EU and the US; and potentially the RCEP, between the 10 ASEAN5 countries and six of its RTA partners: China, India, Japan, South Korea, Australia and New Zealand. Beyond market access, emphasis in this integration is on the quest for regulatory compatibility and a rules basket aimed at ironing out differences in investment and business climates.

This report’s focus is on this last category, and on the TPP and the TTIP in particular. They are singled out given their conformity with criteria that profiles them as a potential new pillar of trade governance6 , complementary to the multilateral trade system: a. The agreement would affect a share of at least a quarter of world trade in goods and services (TPP: 26.3%; TTIP: 43.6%)7 and of global FDI. b. At least two economies party to the agreement are hubs in GVCs as evidenced by their share of trade intermediate goods and tasks in the region or regions involved.8 c. The agreement’s coverage goes deeper and beyond existing – 2013 – contractual obligations and disciplines of the WTO, RTAs and BITs. In this context, the agreement addresses a minimum of areas and regulatory reform essential to 21st century world markets such as services, investment, competition policy, regulatory convergence, the digital economy and customs cooperation. d. Parties to the agreement are engaged in multiple RTAs with third-party economies and enjoy extensive trade and investment exchange with a significant number of non-members, making the partnership a potential reverse trade-diversion scheme.

The Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) – Key Issues and Potential Impact on Members

TPP The TPP encompasses a number of East Asian and North and South American countries. 

In 2006, Brunei, Chile, New Zealand and Singapore initiated a four-way FTA, termed the Pacific-4, with a vision of comprehensive trade liberalization being implemented by 2015. By 2010, an additional five countries, the United States, Australia, Malaysia, Peru and Vietnam, signalled their intention to join the agreement, leading to the creation of the TPP. Since then, Mexico, Canada, Japan and South Korea have requested to join the TPP, and during 2013, existing members approved participation of the first three candidates in the expanded TPP (often referred to as the TPP-12).11 By mid-March 2014, South Korea completed the first round of bilateral consultations with each of the 12 parties. However, at this stage, no additional member would be expected to join before an agreement is first finalized by the TPP-12.12 The TPP aims to achieve extensive liberalization of both goods and services, and entails comprehensive coverage of trade in services, investment, government procurement, non-tariff measures and many regulatory topics, as indicated in Box 1. However, as highlighted by the Congressional Research Service, the 12 countries are economically and demographically diverse. The US is more than twice as large as any other TPP country in terms of its economy and population; there is wide variation in levels of economic development between member states, and each has significantly different strategic and economic interests. 

Box 1 – The Content of TPP 

The following topics are reported to be included in the ongoing TPP negotiations: 

– Market access for agricultural and industrial products. Parties aim for duty-free access for trade in goods. They are also dealing with export and import licensing procedures, customs issues and trade facilitation. 

– Services. The agreement would employ a negative list approach and cover financial services, including insurance and insurance-related services, banking and related services, as well as auxiliary services of a financial nature, to be addressed in a separate chapter. 

– Government procurement. Agreement states common principles and procedures, as well as specific obligations for conduct of procurement; it aims at comparable coverage by all members, while recognizing transitional measures for procurement markets of developing countries. 

– Agriculture, other than market access. It will deal with sanitary and phytosanitary standards (SPS); tobacco regulation; and agricultural competition. 

– Rules. The TPP will include chapters and provisions that build on disciplines contained in the WTO’s Uruguay Round agreements on Technical Barriers to Trade (TBT) and intellectual property rights (IPR) enforcement. For example, the TPP TBT text introduces provisions that would remove restrictions for testing, inspection and certification services providers, such as in-country presence requirements. On IP, it would agree to a shared commitment to the Doha Declaration on TRIPs and Public Health and include innovative provisions, particularly on (i) Patents (e.g. available for plants and animals and for diagnostic, therapeutic and surgical methods for the treatment of humans and animals and adjustment of the duration of patents to compensate for delays occur in the granting process); (ii) Undisclosed data (e.g. exclusive protection for five years of the pharmaceutical safety and efficacy information, from the date of marketing approval, in the territory of a party including similar protection for safety and efficacy of a product previously approved in another territory; further protection for at least three years on new clinical information for the approval of a pharmaceutical product containing a previously approved chemical entity including those previously approved in another territory); (iii) Copyright (e.g. term Game-Changers or Costly Distractions for the World Trading System? 15 * Excludes USA and Japan Source: Draper et al., P10-11. Figure 1. Trade among TPP Member Countries ($ billion), 2012 200 0 700 1200 1700 2200 Trade among TPP Member Countries ($ billion), 2012 Intra-NAFTA trade NAFTA-Japan trade TPP-NAFTA* TPP-Japan* Intra-TPP trade* 58% 12% 11% 10% 9% of protection in the case of juridical persons of 90-120 years compared to the standard of 70 years in TRIPS; improved legal remedies against the circumvention of effective technological measures); and (iv) Enforcement measures (e.g. expansion of existing standards in TRIPS, ACTA and KORUS on civil and administrative procedures, including provisional and border measures and criminal procedures and penalties, namely, in cases of trademark counterfeiting and copyright or related rights piracy and misappropriation of trade secrets and a section on internet service providers). TPP would also include provisions on biologics and transparency and procedural fairness in healthcare technologies. 

– Rules of Origin: Cumulation of origin. Since many of the parties to the TPP are trading partners in FTAs, being part of the TPP implies that inputs originating from a TPP country that are included in a final good exported by another TPP nation to a third TPP member are regarded as originating in such nation. This fosters the participation of TPP members in regional production networks. 

– Investment: Provisions of investment protection, ensuring non-discrimination, a minimum standard of treatment, rules on expropriation and prohibitions on specified trade distortive performance requirements. Also, provisions for investor-state dispute settlement subject to safeguards to protect the rights of TPP countries to regulate in the public interest. 

– Competition Policies: Establishment and maintenance of competition laws and authorities, procedural fairness in competition law enforcement, transparency, consumer protection, private rights of action and technical cooperation. 

– Trade Remedies 

– Separate chapters on labour and environment. On the latter, it may contain substantive provisions on new issues, such as marine fisheries and other conservation issues, biodiversity, invasive alien species, climate change, and environmental goods and services, in addition to cooperation for capacity building. 

– Other new and cross-cutting issues will include regulatory coherence; state-owned enterprises; e-commerce; competitiveness and supply chains; and small and medium-sized enterprises. 

Given the significant economic diversity of member states in terms of wealth, production structures and strategic goods, the TPP’s wide coverage requires extensive negotiations between member states in order to achieve the goal of a significant and far-reaching agreement. In addition, the goods sector is being negotiated based on the existence of current bilateral FTAs. Thus, where FTAs exist between countries, they are likely to be adopted within the TPP, while countries without an existing FTA between them have entered into negotiations on a bilateral basis.14 Meanwhile, other issues are being negotiated among all participants; yet, the goal remains a single agreement applicable to all members. This complexity has some implications for the eventual outcome, and is discussed further below.

The TPP can significantly impact on global trade dynamics, given that goods trade among TPP partners amounted to more than $2 trillion in 2012 (see Figure 1). The North American Free Trade Agreement (NAFTA) (Canada, Mexico and the US) and Japan nevertheless accounts for the largest proportion of this trade, with intra-NAFTA trade alone amounting to nearly $1.2 trillion in 2012. Bilateral trade between Japan and NAFTA accounted for close to $250 billion (over 80% of which was between the US and Japan) of total intra-TPP trade, with Japanese exports to NAFTA countries accounting for $160 billion. Trade flows between the remaining TPP-12 members made up only $180 billion of total TPP trade. Trade between the remaining TPP-12 members and NAFTA, and between the rest of the TPP-12 and Japan amounted to $233 billion and $204 billion respectively.15 Clearly, the NAFTA countries, particularly the US, and Japan are the key drivers of the TPP. Indeed, the US and Japan, in line with what has been suggested by Baldwin (2014) and with evidence generated by estimating shares of trade in intermediate goods and services for the US and Japan and partners in the TPP and other economies in the Pacific basin, drive supply and transnational organization of production and serve as regional hubs.16 The large number of FTAs being implemented between Asian and Pacific states also suggests that the effects of tariff liberalization may be low despite the significant share of global trade accounted for in this region. Cheong (2013) underlines the extent to which FTAs may dilute the effect of liberalization on goods trade, with countries in the Asia-Pacific region having signed close to 100 FTAs (either bilateral or regional) between themselves. Cheong (2013) further notes that many previous studies estimating the effects of regional FTAs in the region may have therefore over-estimated the gross domestic  product (GDP) and trade gains likely to be achieved through greater regional integration in this region by not taking into account that goods trade is already significantly liberalized through the numerous FTAs already being implemented.17 In terms of goods trade, the TPP faces a similar situation, with many countries within the TPP already trading under free trade arrangements. Cheong (2013) suggests that the gains for member states from goods trade liberalization through the TPP are likely to be negligible for most member countries. All countries, with the exception of the US, Chile and Peru, are likely to experience a marginal increase in their GDP. However, for all members, this increase is less than 1%, with New Zealand experiencing the greatest gain (0.97%) and Canada the lowest (0.02%). Conversely, the results suggest that the US is unlikely to experience any change, while Chile and Peru are likely to experience negligible GDP declines of 0.13% and 0.04% respectively.18 Estimates from the Peterson Institute for International Economics suggest the potential impact of the TPP may be somewhat larger, when including the impact of reducing nontariff measures.19 The model assumes a staggered approach to the implementation of the TPP, with an agreement among the nine original members by 2013 and the three additional members (plus South Korea20) one year later. Enforcement occurs one year after the agreement is signed, followed by five years of implementation. The study finds that by 2025, real GDP will increase by 0.75% for TPP members. The potential impact on individual countries ranges from a positive 0.4% impact on GDP for the US to a 13.6% improvement in GDP for Vietnam. Similarly, exports could increase significantly, from 2.5% for Chile to 37% for Vietnam. Vietnam’s gains are expected to arise through its expanded role as a manufacturing centre of textile and garment industries. Cheong (2013) and Williams (2013) both note that many see the TPP as a stepping stone to the creation of a free trade agreement among all APEC members, given that TPP members form a sub-set of APEC. As Williams (2013) highlights, TPP country trade with the other APEC members not currently party to the TPP negotiations is larger than intra-TPP trade, amounting to over $2.7 trillion in 2012, with China accounting for over 50% of this trade. The creation of an APEC free trade area (also known as the Free Trade Area of the Asia-Pacific) would be the largest single market on the planet, bringing significant gains to member states. Petri and Plummer (2012) estimate that these gains could amount to an additional $2 trillion (2007 dollars) by 2025, or an increase in APEC GDP by 3.5%. The long-term gains from the TPP for member states may therefore be substantially greater if this agreement creates a domino effect where all other APEC members subsequently “fall” into the TPP. 

TTIP 

The TTIP negotiations, launched in June 2013, aim for a far-reaching trade agreement between the US and the EU, focusing on trade liberalization, behind-the-border and other non-tariff barriers as well as seeking a “high standards” approach to alignment, compatibility and possible harmonization of regulations and standards governing the goods, services, investment and public procurement markets, as shown in Box 2

Box 2 – The Content of TTIP 

TTIP negotiations are organized in three baskets, each encompassing the following set of issues: 

a. Market Access – Removal of all duties in industrial and agricultural products, with special treatment for the most sensitive products – Rules of origin – Trade in services, which seeks liberalization in new sectors, e.g. transport, excluding audio-visual services. 

b. Regulations and Non-Tariff Barriers Parties aim at regulation system compatibility and alignment, to be achieved by a combination of simplification and harmonization of procedures for compliance and regulation-making, and the establishment of a standing scheme for regulatory cooperation towards the future. Such a scheme would built on the existing High Level Regulatory Cooperation Forum (HLRCF) and involve regulators, the regulated community, technical experts and other stakeholders. An innovation will seek a common framework approach on emerging technologies, namely, e-mobility, nanotechnology and smart grid, and eventually health IT and cybersecurity. 

c. Rules – Trade defence measures to establish a systematic dialogue on anti-dumping and countervailing duties – Investment, with guarantees of protection against expropriation, free transfer of funds, fair and equitable treatment and a level playing field for investing companies, investment protection, including investorto-state dispute settlement, relevant safeguards and right to regulate – Public procurement – Financial regulation rules – Intellectual property rights, including geographical indications – reportedly aiming at further promoting robust IP frameworks and effective levels of enforcement with emphasis on the digital environment and attempts to reconcile their respective regimes on geographical indications and data flows – Labour and the environment – innovation includes illegal logging and illegal, unreported and unregulated fishing (IUU).

In addition to the above, the agreement would include new “21st century” issues, e.g. modernization and simplification of trade-related aspects of customs and trade facilitation; competition policy; state-owned enterprises; raw materials and energy; small and medium-sized enterprises; forced localization of production; and transparency. 

MFN tariff regimes in the EU and the US are comparatively low, as noted by Ecorys (2009), Rollo et al. (2013) and Fontagne et al. (2013). Fontagne et al. (2013) estimate that the average tariff protection on EU goods imported by the US amounts to only 2.2%, while US goods imported by the EU attract an average tariff duty of 3.3% in ad valorem equivalent terms.22 It is clear that tariff liberalization, while forming an important component of TTIP negotiations, is unlikely to achieve significant economic gains for either the US or the EU, with the exception of the removal of duties on a comparatively small number of sensitive products. 

More significant gains are likely to be made through the elimination of non-tariff measures and ex-ante and expost compatibility and alignment of standards regulation and systems that act as barriers to trade, investment and public procurement. Many of the non-tariff impediments and frictions cannot be completely removed (such as geographic, cultural and language barriers) and both the US and the EU recognize that there are legitimate philosophical, structural, institutional and legal differences that have resulted in different approaches to risk and regulation across the Atlantic. Still, any progress on compatibility of regulation, through harmonization or mutual recognition of technical standards, facilitation of conformity assessments, pre-market or postmarket oversight, or addressing market access impediments to providers of testing, inspection and certification services, can bring about significant reductions in the costs of trade and investment in both markets and for third-party providers. 

Compared to low tariff barriers, Ecorys (2009) and Fontagne et al. (2013) estimate that bilateral ad valorem equivalent protection between the US and the EU from non-tariff measures was significantly higher and ranged between 19% and 73% across the agriculture, manufacturing and service sectors. Ecorys (2009) estimated that roughly 50% of nontariff measures and regulatory differences between the US and the EU could be eliminated. The potential impact of the TTIP on the US and the EU has been evaluated by a number of studies.

 The earlier Ecorys (2009) study suggests that the reduction of nontariff measures would produce modest improvements in national income and real wages for the US and the EU, while changes to total exports could be more substantial. In an “ambitious” scenario, where 50% of non-tariff measures and regulatory divergence are eliminated, real income could increase by 0.3% and 0.7% in the long run for the US and the EU respectively. In a “limited” scenario (where 25% of non-tariff measures and regulatory divergence is eliminated) real income in the long term could increase by 0.1% for the US and by 0.3% for the EU. In the long term, total exports by the US could increase by 6.1% and 2.7% in the ambitious and limited scenarios, while EU exports could increase by 2.1% and 0.9% respectively. More recently, a study commissioned by the EU, effectively updating and using a similar methodology to that of Ecorys (2009), produced similarly modest results.23 Fontagne et al. (2013), using a different computable general equilibrium modelling technique and an alternative estimation of non-tariff measures, finds that a 25% reduction in non-tariff measures coupled with a full reduction in tariff duties could produce a 0.3% increase in the GDP of both the EU and the US over the long run. The volume of total exports could increase more significantly in the long run, by roughly 10% for the US and by approximately 8% for extra-EU exports.24 In contrast to these studies, Felbermeyr et al. (2013) use for the Bertelsmann Institute a gravitational econometric model approach to estimate the size of protection from non-tariff measures. They find that the implementation of the TTIP may produce substantially larger economic gains.25 They find that tariff liberalization could result in a real per capita income increase of 0.27% for the EU (unweighted mean) and 0.8% for the US. The impact is much larger under a deep liberalization scenario, with the full reduction of non-tariff measures. Under this scenario, real per capita income increases by 13% for the US and 5% for the EU. 

However, the vast difference in estimated impacts between this study and those noted previously (including the study commissioned by the EU) has resulted in the EU suggesting that the Bertelsmann Institute’s study is based on an untested methodology “that departs from the standard approach used so far in other similar studies” and that some of the results produced are “unreasonable and inconsistent” and “unrealistically high”.

 Regardless of one’s view on modelling techniques and associated results, it is clear that a reduction of non-tariff measures and regulatory differences will play a much more significant role in unlocking economic gains for both the US and the EU than a reduction in traditional tariff duties.