December 21, 2009

It was all but unnoticed in the U.S. press, but a recent free trade agreement between the European Union and South Korea is a development worth pondering. In the current environment– with the US Congress reluctant to pursue new trade deals (or for that matter, even ratify the FTAs already concluded with Panama, Columbia and South Korea that have been on hold for more than a year) and with the Doha Round of global trade liberalization at best uncertain and at worst, moribund– the future of trade liberalization may well be in “second best” bilateral and regional agreements.

 

FTA’s as a Fallback?

Dynamic expansion of  trade has been a pillar of global economic growth, particularly for developing nations for whom the “export model” has been a key to success (not least, a rising Asia) particularly in the two decades since the end of the Cold War. Trade has been a key driver of economic growth and job creation. According to the USTR, trade accounted for 12% U.S. GDP and 40% of our growth in 2007. Prior to the current global economic meltdown, world trade expanded every year since 1945.  However, trade is projected to decline by some 9% in 2009.  Few doubt that one important indicator of global recovery will be when world trade begins to pick up.

But will it?   The backlash against globalization in many part of the world was growing even before the economic meltdown, as evident in continued protests at G-8, IMF meetings.  Doubts about the wisdom of free trade, a hallmark of bipartisan foreign policy consensus since World War II, loom large in the Congress. In a recent Pew Research poll, only 43% of Americans surveyed supported free trade; in a CNN poll, 51% opposed it.  

Still, whle the “creeping protectionism” we have seen as a political fallout from the current global economic recession concerns some analysts, few predict 1930’s type protectionist barriers to resurface.  Since WWII, pressing for global trade liberalization has been a hallmark of U.S.leadership.

One irony of the recent EU-ROK FTA is that it is modeled on the US-ROK FTA, and has now entered into force – to the detriment of American businesses — while the US-ROK FTA itself languishes, awaiting Congressional ratification. Part of a larger global pattern, the ROK also recently concluded a similar FTA with  India. Since 2000 there have been more than 40 FTA’s in Asia alone.  And more than 400 regional and bilateral FTAs have been notified to the World Trade Organization (WTO), the vast majority over the past two decades.

To many analysts this trend of proliferating bilateral and multilateral FTAs, one from which the U.S. has been noticeably absent, is something of a hedging strategy or “second best.”  Why? One concern about the varied FTA’s is that they are of varying quality, with some covering a wide range of sectors such as services, and competition policies, while others gradually lowering tariffs in limited areas.  One question is whether trade agreements are open to accession by other nations prepared to adhere to the terms of the FTA. Broadly, the issue many economists ask is whether some FTAs are trade creating – or trade distorting.

The preferred route would be successful completion of the Doha global trade round, which aims to liberalize nondiscriminatory trade on a global basis.  But negotiations have been faltering for nearly a decade and there's little hope in sight.

Wither the U.S?

 

Beginning with President Obama’s recent trip to Asia, an approach to trade liberalization is quietly taking shape.   He announcedat the annual Asia Pacific Economic Cooperation meeting in Singapore that the U.S.would engage with the Trans-Pacific Partnership (TPP), a modest trade liberalization process that could potentially could evolve into a major factor shaping world trade.

It began in 2004 as the four APEC members launched the P4 (New Zealand, Singapore, Chile, and Brunei). It then grew to the P7 as Australia, Peru and Vietnam joined in 2008. The Bush administration lent its support in 2008 but U.S. participation has been on hold until Obama revived it.

TPP could become an important vehicle for trade liberalization. In 2006, Bush put forward the vision of a Free Trade Area of the Asia-Pacific (FTAAP). While the idea stirred interest in the region, it never advanced beyond being an aspiration. But many consider the TPP, a WTO compatible arrangement, to be a potential building block towards the FTAAP.

Together, the trans-Pacific economies amount to more than half of world GNP.  The TPP is a high quality, comprehensive agreement,with simple rules of origin, market access for trade in goods (with customs standards, and standards, sanitary measures, etc) trade in services (the U.S. economy is 70+% services, currently not covered in the Doha global talks), intellectual property, government procurement, competition policy and dispute settlement. Importantly, it includes cooperation on issues of the environment and labor, a concern of many in Congress. It is open to economies that agree to its provisions and could become a docking mechanism for trade liberalization.

If the TPP gained momentum and larger economies such as Korea, or Japan joined the process, it could become a vehicle for moving beyond the “noodle bowl” of FTAs in the region that have emerged over the past decade, many of which are limited in scope and difficult to sort out in terms of how rules apply to various other partners.

These are all, admittedly, rather large “ifs.” A still larger unknown is how Congress responds to the administration’s desire to move forward on trade liberalization. And no doubt, that is likely to depend in no small measure on the state of the U.S. economy and the degree to which it is seen to move in to a full recovery mode with the job growth to prove it.

Regardless, it seems that the administration has been paying attention to the trend of proliferating FTAs around the globe and has begun to fashion its own approach. Stay tuned.

Robert Manning is a senior advisor to the Atlantic Council.  The views expressed here are solely his own, not those of any U.S. government agency.

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