New Rules of Engagement: Understanding TPP AND TTIP, With Valbona Zeneli

 

Since its founding in 1948, the World Trade Organization (WTO) and its precursor have remained quite tightly targeted on the trade and investment zone. With its particular focus on tariff reduction and trade negotiations, it serves as the pre-eminent glorious knight battling on behalf of consumers.

However, all that began to change in the past two decades. Success attracted allies. The number of WTO members rose from 27 in 1948 to 162 today. Decisions of the WTO remain consensus based, which means that all votes have to be unanimous. Pervasive terror threats, encouraged politicians to focus on the high-intensity and visibility politics of national security and war, as opposed to the low-intensity politics of trade and investment. Progress was also slowed due to shifts in the center of trade gravity and challenges in current markets by rapidly growing new competitors. The global recession intensified the tendency to ignore international economic issues, as attention shifted to domestic job creation and the protection of domestic credit markets. In consequence liberalization has stepped outside of the WTO. The last two decades brought a do-it-yourself approach, defined by mega-regional agreements and preferential pluri-lateral trade negotiations, tailored for only a limited number of players.

The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are key to this development. TPP is a free trade agreement covering 12 countries from North and South America to the Pacific Rim, while TTIP represents a free trade agreement between the United States and the European Union. The TPP negotiations concluded in October 2015 after four years of intensive talks. Legislative ratification will be the next step. TTIP has been under negotiation since June 2013; hopes are for completion by the end of 2016, making use of the transition time for U.S. administrations and Congress.

The combined trans-Pacific and trans-Atlantic space covered by these agreements encompasses 60 percent of the world economy, and 22 percent of its population, according to the International Monetary Fund.

But the economies differ in terms of per capita incomes and living standards. The TPP economies represent 27.3 percent of world GDP and 10.7 percent of the world’s population. The TTIP economies represent 33 percent of world GDP, with 11.2 percent of the population. However, there are also notable differences in the scope and goals of the agreements themselves. TPP is focused at opening markets and eliminating tariff barriers on trade and investment. TTIP mainly concentrates on tackling costly non-tariff barriers and strengthening Foreign Direct Investment (FDI) rules.

Trans-Atlantic average tariffs at 4 percent are much lower than the trans-Pacific ones. TTIP is much more about investments than free trade, with both parties extensively embedded in each other’s economies. Such relationship has produced more income, created more jobs and generated more wealth than trade alone.

TTIP is more ambitious in comparison to TPP. In addition to to the financial and economic benefits, TTIP will have a larger geostrategic impact, since it reinforces the strong ties that exist between Europe and the United States. TTIP is a natural Western partnership, with mature, well-developed and consolidated markets, and a strong mutual defense relationship based on the North Atlantic Treaty Organization (NATO). Both components are missing in Asia. However, this might change with a tumultuous re-formation of the EU and perceived instability of the region.

Economic realities emphasize TTIP as well. The trans-Atlantic economies are the innovation powerhouses of the global economy, and a crucial element of future growth and balance. The United States and the EU are by far the two largest trading blocs in history. Given the size and scope of the trans-Atlantic economy, standards negotiated by the United States and the EU could become a leading benchmark for future global rules, and slow down the acceptance of competing standards.

TTIP and TPP are strategically interlinked with each other. Both agreements are important in terms of how the various partners, including the pivot of the United

States, jointly relate to newly rising powers, and whether the West still has the energy and dedication to set new standards for the international economic order. Both TTIP and TPP take on an increasing strategic importance in light of the continuously growing role of China, and other emerging markets in the global economy. A simplification of trade and investment relations via the two agreements would also push the WTO to expand its useful life.

TPP is also important for the EU. Higher growth rates in the trans-pacific region will help Europe through increased exports. TPP also reinforces the geopolitical reality of rebalancing Asia.

Achieving progress in the simplification of trade and investment relations is important to global prosperity. The approaches taken by TPP and TTIP may well indicate the future of trade negotiations – tightly focused talks between selected participants aiming for improvements in fields of comparative advantage within a clearly defined time frame.

Michael Czinkota (czinkotm@georgetown.edu) works at Georgetown University and is a former Deputy Assistant Secretary of Commerce in the United States Department of Commerce. His key test is International Marketing, 10th ed. Cengage

 

Valbona Zeneli (valbona.zeneli@marshallcenter.org)  is a professor at the George C. Marshall European Center for Security Studies. The views presented are those of the author(s) and do not necessarily represent views and opinions of the Department of Defense or the George C. Marshall European Center for Security Studies.

The WTO: An Analysis of Impact, Change and Prospects, Michael R. Czinkota & Valbona Zeneli, Journal of Business Administration Research

In 1948, after years of negotiations, more than 50 nations signed the Havana Charter to create the International Trade Organization (ITO). But in the 1950s, President Truman decided not to resubmit the ITO charter to Congress for ratification, due to perceived threats to national sovereignty and the danger of too much ITO intervention in markets (Guide, 1994). The result was the much more limited General Agreement on Tariffs and Trade (GATT), which brought rules and regulations to world trade.

A breakthrough occurred in 1994. Negotiators conceived of a totally new organization, which the Uruguay Round (1986-1994) negotiations agreed on—the World Trade Organization (WTO). The crucible of the WTO’s formation and success was how it would be able to manage the changes that had occurred in international trade and its public sector structure since the Havana Charter of 1948. The context at the time of the Charter’s passage was that of a gradual increase in overall trade, combined with several powerful macro- and microeconomic shifts such as increased globalization, the emergence of new regional and plurilateral trade initiatives, and the global activities of Asia. As a key trade driver, financial flows overtook trade flows in determining exchange rates.

Since 1948, world trade has grown very rapidly, with trade in goods growing yearly by an average of 6 percent a year in real terms (WTO, 2016). In 1948, total world trade was valued at just above $58 billion, with the United States accounting for 34 percent of free world trade flows. Japan’s imports exceeded U.S. exports by 160 percent (Yearbook 1956). By 1994, world trade exceeded $4 trillion and the United States had a share which had declined to  12 percent. Almost twenty years later, in 2013, total world trade in goods and services amounted to $20 trillion. The United States held a world market share of 19 percent at $3,848 billion, heavily influenced by a high level of imports. Germany’s share was 13 percent and Japan’s $1,547 billion represented a share of 7 percent (OECD, 2014). The United States, the European Union and China have been the three largest global players for international trade since 2004 when China passed Japan (Eurostat, 2016).

On the microeconomic front, there had been exponential transformations of computer technology, expanded communication via the Internet, and major supply chain extensions. Also considered, but questionable even at the peak of the momentum and optimism surrounding the Uruguay Round, was whether the WTO could effectively handle social issues including labor laws, competition, and emigration.

Today, with aspiring provisions and a rejuvenated framework of multilateralism enabled by global political shifts brought on by the fall of communism, the WTO seeks to reduce tariffs, eliminate trade barriers and quotas, and expand coverage of services, intellectual property, foreign direct investment, and agriculture.

In light of recent changes in the trade context and decreased multilateralism, the WTO should become more inclusive, introduce smaller and more limited negotiation events based on subject areas, and transition into a more social-network based platform to include civil society and private sector in rule-making and agenda setting of future trade agreements.

Professor Michael R. Czinkota,  Georgetown University Washington D.C., USA

Professor Valbona Zeneli, Marshall Center, Garmisch, Germany

Full article can be found at: http://www.sciedupress.com/journal/index.php/jbar/article/view/9672

Does the WTO still contribute to World Trade? (With Prof. Valbona Zeneli)

In 1948, after years of negotiations, more than 50 nations signed the Havana Charter to create the International Trade Organization (ITO). But in the 1950s, President Truman decided not to resubmit the ITO charter to Congress for ratification, due to perceived threats to national sovereignty and the danger of too much ITO intervention in markets. The result was the much more limited General Agreement on Tariffs and Trade (GATT), which brought rules and regulations to world trade. A major breakthrough occurred in 1994. Negotiators launched a totally new organization, which the Uruguay Round (1986-1994) negotiations agreed on—the World Trade Organization (WTO).

After two politically and economically charged decades, we find that the WTO has been one of the most successful international institutions. With a rejuvenated framework of multilateralism enabled by global political shifts brought on by the fall of communism, the WTO now seeks to reduce tariffs, eliminate trade barriers and quotas, and expand coverage of services, intellectual property, foreign direct investment, and agriculture.

The WTO has encouraged international trade to prosper by fostering openness and lowering trade barriers, increasing confidence and encouraging fair trade practices. The WTO’s agreements have helped countries develop by increasing international confidence and cooperation in the system. Thought there are no WTO black helicopters for enforcement, its dispute settlement process had advanced progress.

Since 1948, world trade has grown very rapidly, with trade in goods growing yearly by an average of 6% a year in real terms. In 1948, total world trade was valued at just above $58 billion, with the United States accounting for 34 percent of free world trade flows. Japan’s imports exceeded its exports to the U.S.  by 160 percent. By 1994, world trade exceeded $4 trillion and the United States had a share of 12 percent. Almost twenty years later, in 2015, total world trade in goods and services amounted to $23 trillion. The United States held a share of 19 percent at $3,848 billion, heavily influenced by a high level of imports. Germany’s share was 13 percent and Japan’s $1,547 billion represented a share of 7 percent. The United States (3), the European Union (1) and China (2) have been the three largest global players in international trade since 2004 when China passed Japan.

This new international trading system has provided more choices of products and qualities for the consumers, raised incomes internationally, has stimulated economic growth, increased standards of livings. The trade system promoted by WTO has also helped promote peace and encouraged good governance. Economies that have been more open to embrace the international trade and investment policies have grown quicker than the more closed economies. Higher interdependence has allowed countries to specialize in areas where they can be more competitive using their best advantages and opportunities.

The multilateral system has produced new energy, growth, rising incomes and better standards of living throughout the world, both in developed and developing countries. China is a perfect example of developing countries that have benefited greatly from liberalization of global trade and investment. 600 million people have been lifted out of poverty in only 30 years only, and moved up from a poor country with less than $400 per capita (on a purchasing power parity basis) in 1980, to a middle-income country in 2015 with $13,801.

China’s accession to WTO in December 2001 paved the way for its economic rise and significantly contributed to increasing world trade. Two decades ago, China was only entering the playing field of international trade; in 2015, China dominates trade after an unprecedented growth spurt. In the last decades, China’s growth has seen an exponential rise, with its Gross Domestic Product representing only 7.4 percent of the global economy in 2000, and almost 17 percent of it in 2015.

Tax inversions and other cross-border expansion of manufacturing chains and free trade zones have further globalized corporations. The predominance of both the English language and the U.S. dollar as global reserve currency has kept this process energetic and unifying. All this has reduced the psychic abyss of 20 years ago into a pre-Alpine hillside, supported by standardized and affordable communications.

The WTO’s unenviable position over the last two decades is similar to a team trying to score on a field that was constantly changing in size, with the teams and positions frequently becoming newly named and defined, and the sports equipment taking on different weights and shapes.

The hopes for an ambitious multilateral trade deal at the WTO level have diminished, and the stalemates of the Doha round have forced countries to pursue Regional Trade Agreements. Services and agriculture remain tough to resolve. Also, the marginal benefit from additional resolutions seems less in the Doha Round, as all the “low-hanging fruits” have already been picked. According to Ambassador Moore, former Director General of the WTO, multilateralism has yet a chance to triumph. It will take some of the newcomers and participants who have only recently found their voice and power, specifically African countries and India, to come to an agreement, before other nations can get much accomplished.We appreciate the research support by Jozsef Szamosfalvy of Exworks Capital in Washington D.C.

We appreciate the research support by Jozsef Szamosfalvy of Exworks Capital in Washington D.C.

WTO sees up to $3.6 trillion boost to trade from TFA deal

The Trade Facilitation Agreement (TFA) sets forth a series of measures for facilitating the movement of goods across borders inspired by best practices from around the world. It is the first multilateral trade agreement to be concluded since the World Trade Organization (WTO) was established 20 years ago.

Initially it was thought that the benefits of the treaty could reduce trade costs by more than 14 percent for low-income countries and 13 percent for upper income countries. Once the new rules come into effect, it will cut red tape at the borders, standardize customs procedures such as waiting times, lessen the potential for corruption, and hasten foreign direct investment into weaker economies. Recent calculations by the WTO however have estimated that it could add close to $3.6 trillion to the $19,002 billion annual global merchandise exports. That will do more to boost trade than if all the world’s import tariffs were removed, cutting costs 9.6 to 23.1 percent.

“You could say that it’s global trade’s equivalent of the shift from dial-up internet to broadband,” WTO Director-General Roberto Azevedo said.

The agreement, which was created in December 2013, will come into full force when two-thirds (or 106) of the 161 WTO members have ratified it. An amendment protocol for the TFA was adopted by the General Council in November 2014 to bring he TFA into the WTO’s legal framework. Hong Kong was the first member state to accept the agreement and to date 50 members have ratified it. Azevedo hopes that the agreement would conclude by the end of 2016.

Sources:

 

Global Benefits of Trade

The effects of growing global influences on domestic economies have been significant. Policymakers have increasingly come to recognize that it is very difficult to isolate domestic economic activity from international market events. Decisions that were once clearly in the domestic purview have to be revised due to influences from abroad. At the same time, the clash between the fixed geography of nations and the non-territorial nature of many of today’s problems and solutions continues to escalate. Consider, too, that some of today’s products would be nearly impossible to build if manufacturers were unable to source supplies from and sell resulting goods into multiple global markets.

At its root, international trade assumes that trade will improve the quality of life for the consumers, both as individuals and as a nation. The WTO identifies ten core benefits of trade:

  • The system helps promote peace
  • Disputes are handled constructively
  • Rule make life easier for all
  • Freer trade cuts the cost of living
  • It provides more choice of products and qualities
  • Trade raises incomes
  • Trade stimulates economic growth
  • The basic principles make life more efficient
  • Governments are shielded from lobbying
  • The system encourages good government

To some extent however, the complex links that trade fosters between nations have turned the economic world inside out. For example, trade flows once determined currency flows and exchange rates. Recently, currency flows have taken on a life of their own, increasing from a daily average of $18 billion in 1980 to a record $5.3 trillion in 2013. As a result, currency flows have begun to set the value of exchange rates, independent of trade. These exchange rates, in turn, have now begun to determine the level of trade.

To regain some power to influence policies, some governments have sought to restrict the influence of world trade by erecting barriers, charging tariffs, and implementing some import regulations. However, these measures too have been restrained by the existence of international agreements forged through institutions such as the WTO or by bilateral negotiations. World trade has therefore changed many previously held notions about the sovereignty of nation-states and extraterritoriality. The same interdependence that made us all more affluent has also left us more vulnerable.

This is an excerpt from the book by: Michael R Czinkota, Ilkka A Ronkainen, and Michael H. Moffett. Fundamentals of International Business (New York: Wessex, 2015), 50-53.