A Trans-Pacific Strategic Economic Partnership (SEP): a case study report with a Chilean perspective

One of the main consequences of globalization has been the expansion of international trade. Bringing down trade barriers and witnessing the alleged ongoing deregulation of the global market seems to be a picture that many find quite alluring. Practitioners and academics from both developed and underdeveloped countries agree on the fact that a fair international economic integration is the best avenue to assure the consolidation of a more symmetrical world market.

Others, on the contrary, are quite pessimistic regarding the economic outputs of global trade and believe that this phenomenon is solely an instrument to exploit weak nations. Nevertheless, it is fair to state that there are several small countries that have actually been capable of benefiting from international trade. Chile is definitely one of them. Fore more than twenty years, this country has used its trade policy as a means to obtain economic growth and development, both by sustaining low tariffs and signing free trade agreements, as well as, being an active member of regional and multilateral negotiations, held in venues such as the World Trade Organization (WTO) and the Asian-Pacific Economic Cooperation Forum (APEC).

Chile, New Zealand, Singapore and Brunei Darussalam are on the brink of signing an economic partnership agreement . In this understanding, this case study report seeks to explore and reveal Chile’s international trade policy and explain why this Trans-Pacific agreement is actually only an in-depth continuation of this country’s free trade long term strategy. It also aims at highlighting Chile’s historical commitment to free trade in the last twenty years, as well as, the economic and geopolitical underpinnings of the Trans-Pacific Strategic Economic Partnership SEP.

The concluding part, explains and justifies Chile’s tactical approach to sign the Trans-Pacific SEP, by using Nickols’ definition of strategy, Liedtka’s model of the elements of strategic thinking and a strategic framework called co-opetition. It also avers that this agreement can be considered mostly an employment of means to allow Chile to continue to follow the main goal of its strategic trade policy. This goal also has other dependant objectives that go basically along the lines of assuring this country’s international market share, accessing close or highly protected markets, obtaining a geopolitical insurance trade policy (clear trade regulations and dispute settlement mechanisms) and promoting multilateral non-discriminatory trade in all venues.

Chile’s Outward Orientation: from lone ranger to team player

In the early seventies, Augusto Pinochet’s regime undertook a neo-liberal economic agenda. In order to do the latter this administration decided to unilaterally establish a flat and non-discriminatory tariff. Initially, it was set at 10% in 1979, and then due to the Chilean debt crises it was increased from 20% in 1982 to 35% in 1984, and finally declined in 1988 to 15%. Once Chile’s democracy was restored in 1990, an alliance called La Concertación de Partidos por la Democracia, decided to deepen this free trade policy by not only lowering Chile’s flat tariff to 11% in 1991 (and further in 2003 to 6%), but also by continuing to be a part of multilateral negotiations held within the objectives set forth by the Uruguay GATT trade rounds, and moreover, by expressing a keen interest in signing bilateral free-trade agreements (FTAs).

Some have assessed these bilateral efforts to be neo-structural oriented . The latter is considered neo-structural in that it revives 1960s structuralist policy which sought to promote industrialization through the forging of regional economic integration by promoting an import-substituting industrialization (ISI) strategy. The underpinning economic theory of this strategy aimed at achieving a certain amount of protection for countries in the periphery, which would enable them to build productive industrial structures and national businesses that could be used as launch pads for a diversified export force. It was a response to a temporary necessity, which promoted dependant countries to set up productive sectors that would allow them to export products.

Since 1990, Chile’s outward orientation became increasingly bold. The main objective was to sign and ratify strategic FTAs , and hence, gain free access to wider and more competitive markets in order to promote Chilean exports. This goal has been met with many countries, such as United States of America, Canada, Mexico, the European Union, Korea, Peru, among others, and is an ongoing trend. In this sense, it is fair to state that when it comes to pursuing free-trade agreements, Chile is one of the most successful countries in the world; especially if we bear in mind that this is the only nation with a foot both in the United States of America and in European Union, which are definitely the markets with the strongest purchasing power in the world.

Consequently, Chile has been capable of not only signing North-South FTAs, but also South-South FTAs, with other meridional countries or blocs of countries that have viable economies of scale.
What is free trade? How do you get there?

According to Jagdish Bhagwati, even in an imperfect market trade without restrictions (trade barriers and non-trade barriers) remains almost always and everywhere, the soundest policy. He argues that people against free trade fail to:

...understand the essential insight of Adam Smith: that it pays me to specialize on what I do best compared to you, even though I can do some things better than you can do. Economists call this the Law of Comparative Advantage: each nation would profit from non coercive free trade that would lead to such specialization .

This economist claims that protectionists are more worried about assuring their own slice of the market cake, than of the actual size of it, and hence, overlook the fact that importing and exporting protectionism makes everyone less wealthy . He points out the avenues to get to free trade, by prescribing the implementation of both conventional unilateralism (reduction of one’s barriers) and multilateral non-discriminatory reciprocity, as well as, formulates three propositions:

- Go alone if others do not go with you
- If others go with you, that is still better
- If you go alone, others may liberalize later

As stated earlier, Chile’s recent history proves that this nation has embraced each one of Bhagwati’s propositions. Not only did Chile lower its tariffs unilaterally, but since the mid seventies it has been a pioneering paradigm, by trying to convince others to follow them on the highway of international free trade.
Chile’s multidimensional trade policy for open and additive regionalism

The economy of Chile is open to the world, mostly due to its dependency on foreign economies of scale. This fact implies that Chile is continuously exposed to impacts from external crises and also has a weak voice in international trade negotiations, meaning this that it is very complicated for this country to influence international trends on an individual basis.

Bearing in mind the aforesaid, it is fair to argue that Chile’s strategy of open or additive regionalism has aimed at taking advantage of regional liberalization, but without putting at risk the binding principals that the multilateral system promotes. Van Klavaren asserts that the openness of this strategy can be found in three tendencies. Firstly, different accessible regional markets are considered complementary and not necessarily exclusive. Secondly, these regional agreements are not closed for new memberships. Thirdly, broadening regional systems usually is compatible with global trade because they avoid new trade barriers to be created for products or services that are imported from out of the region.

Chilean policymakers agree on the fact that their additive regionalism should not divert trade by assuring to other non-member countries that they will still be able to maintain their volume of trade among the region o partners. The main objective of this strategy is to increase the bulk of trade among partners, without diverting it.

Is Chile’s trade policy strategic according to Liedtka’s Model?

According to Liedtka strategic thinking has five major features. It has a holistic understanding of systems that create value and their contextual interdependencies (internal and external), a strategic sense of direction or destiny, an openness to new experiences (emergent strategies), a capability to connect the past with the present and link it to the future, and enough flexibility to be both analytical and intuitive at the same time.

Following the abovementioned and the facts stated earlier, we can conclude that Chile outward orientation has met all of these features. It was clearly designed in a manner to foresee the incoming trends in international trade way before most countries did. The latter proves an economic and political understanding of the interdependencies within the international trading ecosystem. It also shows a strong long term sense of direction and commitment towards enhancing free trade, as well as, a capability to recover the truth from the past (the discarded stories) and stretch it through the present in order to link it with a unified outlook of the future. In this sense, Chile was capable in the early seventies of embracing the discourses that were discarded by structuralism, and therefore, was bold enough to choose conventional unilateralism, when no countries in Latin America were following that aggressive strategy.

Moreover, not everything has been deliberately decided from a top-bottom perspective. In this sense, it is good to remember that Chile’s trade policy has been selective (choosing trading partners) but yet very comprehensive (sticking to WTO standards). In a way it has been conducted by a learning umbrella strategy that has enabled policy implementers to work quite freely within the boundaries deployed by Chile’s foreign orientation. It has been a pattern which enables negotiators to select in each case the soundest tactics in order to always meet the ultimate ends of Chile’s outward strategy.

The Trans-Pacific SEP: more about tactics than strategy

Fred Nicklos argues that strategy and tactics together hold the role of a conveying bridge between means and high-order goals. Strategy aims at deploying resources which are at hand, whereas tactics seeks to employ them. This strategic thinker uses the following drawing to offer a clearer picture of his notion a strategy: [graph]

After going over this figure, it is possible to assert that strategy is all about arranging resources or means strategically to meet the goals of a policy, where as, tactics, is more about using these resources in the manner they have been deployed. In this sense, Chile’s willingness to sign the Trans-Pacific SEP can be assessed more as a tactical5 geopolitical manoeuvre than a strategic one. The latter can be considered as an employment of means to invigorate the continuum force of Chile’s additive regionalism.

By applying this tactical approach, Chile seeks to ensure the flow of its mayor strategic goal: promote free trade to a worldwide extent. The Trans-Pacific SEP is more an effort to operationalize the strategy developed through strategic thinking, and to support the strategic thinking process.

Getting the fog out of the way

Additive regionalism can only be justified if it is capable of increasing a nation’s beneficial volume from international trade and enhancing its negotiating force in the WTO, as well as, minimizing the risk of being left out of regional economical blocs.

Following the justification mentioned above, and bearing in mind that currently there is very little commodity trade among all the potential members of the Trans-Pacific SEP, all the economies involved are very small, none of them are key players internationally, and they are competitors in several productive areas, this economic agreement seems to not comply with the requirements of additive regionalism, and moreover, it seems to contradict them, having more cons than pros.

Nevertheless, if Chile is creative in the deployment and employment of its negotiating resources, this agreement could be considered an excellent opportunity to actually secure this countries outward orientation over the Pacific and Asia. This accord may not be strictly about trade among its partners, but it is definitely an opportunity to create a consensual legal framework that will enable Chile to access large third markets. In this sense, this agreement has both an economic and acute geopolitical perspective.

Thinking out of the box: creating co-opetitive synergies among partners to get the fog out of the way

Even though strategy is not the same thing as tactics, there is not doubt that both concepts are heavily related and distinguishable only by a very thin line. Without strategy there is no tactics and vice-versa. Therefore, and as stated in James Quinn’s quote earlier on, determining what is strategic or tactical depends a lot on the beholder of such assessment. For the President of Chile, a Trans-Pacific SEP can be considered just another step in the consolidation of his strategy of open regionalism, where as for the director of DIRECON9 (Chile’s FTA negotiating body), this agreement can be viewed quite strategically.

For Chilean tacticians at DIRECON, their strategy must seek the goal of justifying, by means of a cost-benefit analysis, that this agreement is in line with this government’s major trade strategy and that it will be useful (financially viable) to deliver such higher policy.

According to the reasoning stated formerly, the Ambassador of Chile in New Zealand thinks that a way to actually justify this economic partnership is by thinking “out of the box” and taking a forward-looking approach. How do we accomplish this endeavour? By applying what is know in business strategy as co-opetition, which refers to a framework for applying game theory into management practice in order to cooperate in making markets (a bigger pie), but compete in dividing them. In this understanding, this theory recognizes that business does not have to always result in a win-lose scenario (zero-sum games), in which one player’s winnings equal the other player’s losses, and on the contrary, prescribes that corporations should change the game of business into win-win game propositions, where there can be multiple winners. The objective is to maximize your return on investment, regardless of how well or how poorly other companies perform.

Brandenburger and Nalebuff named this bigger pie the value net, which represents an encompassing system of value creation with its players and interdependencies. This net is composed by a company, its competitors, complementors, suppliers and customers. Knowing how to read the value net accurately and being capable of perceiving how much others value your role in the system grants organizations a great business advantage. Thinking strategically in this case, means to be able to view several interlinked value nets and read them simultaneously, in order to act ahead of time, and therefore, create a business environment where your organization will make a profit, but will enable others to do so as well.

The value net can be visualized as follows: [graph]

After going over the basics of co-opetition, a question does araise. Can this framework work in the complexity of international relations? Robert Grant would answer yes to this question. He states that, on one hand, international relations are worried about peace keeping, and warfare is only conducted as an exception based on diplomatic failure, and on the other hand, that business relations typically comprise a duality between cooperation and intense competition, but rarely becomes destructive among established rivals. Hence, this economic agreement must be viewed as an effort made by a group of countries that are at the same time complementors and competitors, but that view their value net in a similar way. They seek to create strategic synergies to promote a stronger voice in international venues (WTO), in order to promote free trade, and thus, ensure not only a bigger international market, but also a larger slice of the same. All the members of the potential Trans-Pacific SEP are know to be very committed to promoting free trade, and thus, view this opportunity to set a win-win international and geopolitical benchmark.

Another aspect that must be taken into account while analyzing this economic partnership is the role that cooperation has in indefinitely repeated prisoners’ dilemma and free rider games. The latter can be accomplished by understanding Anatol Rapport’s Tit-for Tat strategy, in which a player must respond in one period with the same action her opponent used in the last period, meaning this, that if one of the players defects, he will be retaliated in the same way by the other player in the next period. Consequently, repetition of this game enables players to enforce an agreement themselves spontaneously, without the influence of an external agent, like a nation-state.

This cooperative point seems feasible among people in societies, but does it trigger spontaneously among competing states? Being in mind the nature of international politics and the fact that international relations are mostly governed by power and a good share of anarchy, it is not farfetched to state that this cooperative international outcome would never upraise spontaneously, only based on conventional unilateralism. In this sense, forging a co-opetive economic partnership would enable Chile, New Zealand, Singapore and Brunei Darussalam to consolidate a strong joint voice in international venues, and hence, advocate and lead a cooperative southern free trade coalition, which could have an expanding effect over other Asian Pacific economies.

Even though, this case study report highlights the soundness of the Trans-Pacific SEP, this does not mean that an agreement of this nature does not raise some problems. Bhagwati fears that the proclivity to forge these agreements will create more bureaucracy, potential corruption, and alas, incentives to rush into them to obtain political dividends. Multilateralism is far too slow so politicians prefer FTAs, because they allow them to deliver and point out specific results of their administration, and thus, benefit politically from these achievements. Another severe risk is the overlapping force of bilateral and regional FTAs that have created what is known as the spaghetti bowl effect, which produces a state of costly unclear rules of origin that in the long run could hinder free trade to a certain extent. In spite of the latter, it seem that Chile’s additive regionalism has borne in mind these hazards, and is bound not to be affected by them, because it is has always been an enthusiastic member and promoter of the WTO’s principals.

Conclusions

The Trans-Pacific SEP has a clear strategic, tactical and geopolitical orientation. This legal and political framework is a very important step in the consolidation of Chile’s long term strategy of additive regionalism. It will improve international connections among its members, and create a sophisticated and balanced benchmark in APEC, as well as, trigger a powerful pro-free trade demonstration effect for the WTO.

Chile’s international market share will not immediately expand because of this agreement, but nevertheless, in a near future it will be a reliable means to access highly protected markets and a geopolitical insurance trade policy, that binds clear trade regulations and dispute settlement mechanisms and promotes multilateral non-discriminatory trade in all venues.

Besides promoting free trade, this economic alliance will disseminate and defend liberal democratic values that will facilitate knowledge sharing experiences regarding technology and best practice guidelines about free trade and public governance.

And last but not least, the Trans-Pacific SEP is both strategically and tactically sound in the sense that it aims at a current reality but manages to bind the gap between the creation of the alignment necessary to support the operational efficiency and effectiveness and the potential disruptiveness (desired future) of Chile’s free trade strategy. This economic partnership will definitely be a step forward in the broadening process of integration between Asia-Pacific and Latin American markets. Chile is in a unique position to lead this global development in the name of Latin America. There is no doubt that they seem to be already doing so.

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