E-book Think Piece N°2 – 3 June 2016

Defining the 21st century governance – Impact of TPP on global trade governance
By Xinquan TU, Dean and Professor, China Institute for WTO Studies, University of International Business and Economics

 

The Trans-Pacific Partnership (TPP) is widely considered as a great challenge for the multilateral trading system. However, in a more historical perspective, the TPP could be considered as a pathway to the next stage of multilateralism. Whether this is going to happen or not finally depends on how many peoples and countries accept the principles and values of the TPP.

 

Multilateralism and leadership

The multilateral trading system is not inherent all the time but an historical process. When the GATT was created, it was hardly a multilateral organization but more like a “club of developed countries”. But its non-discrimination principles attracted more and more countries into it, making it multilateral finally during the Uruguay Round which included more than one hundred parties. In particular, the period from 1990 to 2008 marked the climax of globalization and multilateralism. There were a bunch of good conditions in favor of multilateralism, such as the end of the Cold War, the unprecedented dominant position of the United States, the proliferation of the neoliberalist doctrine and the Washington consensus. With China’s membership in 2001, the WTO could claim to be a truly multilateral organization.

Until recent years, multilateralism has been flourishing for almost seventy years. Under the GATT/WTO system, all major economies are voluntarily compliant with the same set of international trade rules. This is an absolutely great achievement in human history. However, it is subject to certain conditions. While these conditions go away, it could possibly fade out. In my opinion, the two conditions of multilateralism are the leadership of a hegemon and the existence of a shared ideology. The hegemon in the multilateral trading system is undoubtedly the United States. Its willingness and capability to provide the necessary leadership is critical to the birth and expansion of multilateralism. Meanwhile, economic neoliberalism became the dominant ideology all over the world in the 1980’s and 1990’s. Market-oriented reforms in China and India highlighted the victory of free market economy. However, a low comes after a high. Since the 2008 global financial crisis, multilateralism has lost its momentum and especially its leader. The United States is no longer powerful enough to force emerging economies to liberalize and is not willing to tolerate them not to liberalize because the emerging economies don’t fully believe in free market economy but prefer more governmental interventions. Without a common leader or a shared ideology, the multilateral system experiences difficulties to move on. LIDCs, and especially LDCs, have been enjoying Special and Differential Treatment (S&DT) under the WTO framework. The deadlock of multilateralism will surely impair their interests. Some commitments on preferences to LDCs in Doha Round could be delayed or even nullified. However, LIDCs have a little say in the power politics of the world trading system. What they can change is themselves. While outside environment is important for their development, domestic capabilities and endeavors are vital. The ability to adjust to the changing environment is also one of them.

 

The TPP considered as a palliative to inertia?

Therefore, the TPP is a reasonable and natural choice for the US government facing divergent interests and minds in the WTO. The TPP is quite similar to the GATT at its beginning. A new set of rules among a like-minded group of countries are designed to shape the future global trade governance. The US should not be blamed for being self-interested. It is just responding to the changing world situation with a new approach of organization. What the US is insistent on is to keep further liberalization in trade. The United States always believes that its multinational firms will win as long as other countries have no barriers or governmental supports. The values of free and fair trade and investment underpin every provision of the TPP.

However, the impact or fate of the TPP depends on how many peoples and countries accept the principles and values in the TPP. For now, it is still quite unclear. Even inside the United States, all the leading presidential candidates oppose it, behind which is the strongest sentiment of anti-globalization and raising populism in the United States in recent decades. One of the main reasons is that during the last two decades, income disparity in the US has increased and most American middle class people have not got income raise. The Harvard Professor Dani Rodrik once pointed out the political trilemma among hyper-globalization, democratic politics and national sovereignty which is happening in the case of the TPP. Actually, what the TPP is working hard to push is exactly the hyper-globalization as Professor Rodrik defined it. A big part of TPP rules touch upon behind-the-border measures which will possibly have great effect on domestic affairs such as labor, environment, State Owned Enterprises (SOEs), anti-corruption, e-commerce, etc. All these rules will require members to transfer critical national sovereignty, especially for those less developed countries. Meanwhile, in those developed countries, the distribution effect of hyper-globalization is not in favor of labor with less mobility. Even according to USITC[1] official evaluation, the additional US GDP growth gained from TPP will only amount for 0.15%. This means that the main benefits of TPP will not be enjoyed by people residing in the US. The last two decades have proven that the distribution of globalization dividends favor richer people. It would be difficult to convince the ordinary American people that this even higher hyper-globalization would be good for them.

 

Conclusion

The current world might not so urgently need further hyper-globalization. The stalemate of the Doha Round has proven the divergences between rich and poor countries while the possible failure of TPP ratification will show disagreements between rich and poor peoples, in addition to divergences among countries. Therefore, the key issue here is not which liberalization approach is better, but what kind of liberalization should be pursued. There is a Chinese saying: “great haste is not always good speed”. Major economies should pay more attention to domestic adjustment needed to adapt to globalization. The globe is destined to be globalized. So a smoother process might be more important that the final target. Just be patient.

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