Does TTIP top TPP free-trade negotiations?
Business Mirror | 22 September 2013
Does TTIP top TPP free-trade negotiations?
Written by Paul Donovan / UBS
POLITICIANS negotiating international trade deals love their abbreviations. The world of global trade is a big bowl of alphabet soup—WTO, Nafta, Apec. Now, we have TTIP and TPP. These two seemingly similar clusters of letters are extremely important; they represent transatlantic and transpacific free-trade negotiations, respectively.
These trade deals have potentially huge implications for the global economy. Multilateral free trade—the sort of thing the World Trade Organization negotiates—has faded from the agenda amid disagreement and recrimination (largely over agricultural policy). Hopes for a less restricted global trading environment now rest on these trade deals.
For Asia, the transpacific deal is pretty important. Singapore, Brunei Darussalam, Australia and Japan are all involved in the negotiations, and South Korea has been invited to participate. The deal matters almost as much to those not participating as to those that are; non-participants will be at a competitive disadvantage, compared to participants, should a deal be signed. Negotiations have already undergone 15 rounds. Three of the eight most important trading nations in the world are part of the negotiations.
What the transpacific deal is mainly about is tariff reduction. At least, that is the working assumption. The negotiations have been conducted in conditions of considerable secrecy, but tariff reduction seems to be the focus, based on leaks and on available official communication. This is a good, old-fashioned sort of a trade deal that directly reduces the costs levied on imported products. To lapse (lamentably) into American phraseology, this “levels the playing field” between imports and domestically produced goods.
The transpacific trade deal will mean a better deal for consumers in the countries that sign up. A consumer should have a wider range of goods available at a lower price than what he or she has today. Trade volumes should increase, again, for those that sign up.
However, the transpacific trade deal may turn out to be the less important of the two trade agreements. Indeed, it may turn out to be the less important deal for Asia. This is not because Asia is involved in the transatlantic negotiations, which are being discussed between the United States and the European Union (EU). Rather, it is the fact that the transatlantic trade deal is a new sort of trade deal, with implications that reach beyond its participants.
The transatlantic trade negotiations began in earnest in July. They cover a large part of the world economy. The transatlantic trade deal would encompass 45 percent of the world economy and 66 percent of high-income countries; the transpacific deal, 31 percent of the former and 49 percent of the latter. But what really causes the transatlantic trade deal to stand out is the aim of the negotiations.
The transatlantic deal is not about tariffs—at least, not for the most part. The US and the EU do not have too many tariffs between them. The tariffs that do exist are insignificant, compared to the fluctuations of the bilateral exchange rates. The main aim of the transatlantic deal is not lower tariffs, but common regulation.
Regulation is costly. Today any company wishing to sell to the US and the EU will have to satisfy two different sets of regulations. It does not matter if the product coming out of the regulatory process is identical (as, indeed, it is likely to be); the costs of two regulatory processes must be undertaken. The proposal with the TTIP is to harmonize regulation, or, if not possible, to create a framework that will help harmonize future regulation. This will dramatically reduce the costs for an exporter; estimates put cost savings in a range as low as 30 percent to as high as 70 percent.
Why does this matter to Asia? Because if Asian companies wish to export to the US and the EU (two-thirds of the world’s high-income economies), Asian companies will have to meet the regulatory standards set by the US/EU agreement, as well as their own domestic standards. There will be a strong incentive for Asian regulators to copy the US/EU regulations, if only to prevent Asian exporters from being at a competitive disadvantage. In effect, the US and the EU will be setting the global standards for a wide range of goods and services. Those that do not measure up to their criteria are effectively excluded from anything other than local trade. Of course, the US and the EU have an incentive to shape those standards to their own advantage, without considering the needs of others.
The transpacific trade deal—or what we know of it—sounds like a nice, old-fashioned trade agreement—and it brings benefits. But the impact of the transatlantic trade deal, if it does come about, seems potentially more far-reaching, even for Asia.
Paul Donovan is the managing director and deputy head of global economics of Zurich-headquartered UBS. He is responsible for formulating and presenting the UBS Investment Research global economic view, drawing on the bank’s worldwide resources. Donovan took up philosophy, politics and economics at Oxford University. He holds an MSc in financial economics from the University of London. In the Philippines his column appears exclusively in the BusinessMirror once a month.
