About Me

Friday, March 18, 2016

I am reposting this article from the EFN Asia website, written by a friend, Sethaput. One of those pro-free trade but anti-TPP papers.

As a free marketer like Sethaput, for me, the best action is unilateral, one-way trade liberalization. Just give the consumers and producers more choices, more options, more freedom where and whom to buy or sell. This is unpalatable to many sectors of course, similar to advocating significantly shrinking governments and foreign aid institutions, so its chance of being adopted is very small.

So the second-best solution is multilateral, worldwide liberalization. But this is not happening too, look what's happening at the WTO negotiations, 21 years after it was created in 1995. So the third-best solution is regional liberalization via regional trade agreements (RTAs) like the ASEAN FTA (AFTA), ASEAN Economic Community (AEC), Regional Comprehensive Economic Partnership (RCEP), and the Trans Pacific Partnership (TPP).

The no-no option or solution is protectionism, via high tariff or various non-tariff barriers (NTBs) and restrictions.

Photo below, during the panel discussion at the ALF, 19 February 2016.
From left: Julian Morris of Reason Foundation (US) as session chair/moderator, Sethaput (Thailand), Vivek Dehejia, IDFC Institute (India) and Razeen Sally, IDEAS Chair in Political Economy and Prof. at the National University of
Singapore (he's Sri Lankan).

(Remarks delivered at Asia Liberty Forum (ALF), 18-20 February
2016, Kuala Lumpur. Remarks represent the views of the author and not
necessarily those of the Foundation; sethaput@thailandff.org.)

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Let me start with a few general observations on whether
regional trading agreements (RTAs) are good for developing countries, before
moving specifically to the Trans Pacific Partnership (TPP).

First, RTAs are not as good for developing countries as
multilateral liberalization under the WTO.
Although they are often inappropriately called “free trade agreements,”
these RTAs are really preferential trading agreements, and subject to the usual
problems of trade diversion and complicated rules of origin. While individual developing countries may
benefit from the preferential access offered by RTAs, developing countries
collectively as a group would be much better served by greater progress in
multilateral liberalization.

Second, recent RTAs like the Trans Pacific Partnership
(TPP) are not just (or mainly) about trade, but about a whole lot of other
things, many of which are not in the interests of developing countries. As Jeff Sachs has noted, the TPP is really 4
deals in 1, encompassing a preferential trading agreement; regulatory standards
for trade; labor and environmental standards; and regulations covering investor
protection, intellectual property (including the expansion of copyright and
patent coverage), and service sectors.
As such, the bulk of the 30 or so chapters of the TPP agreement are not
really about trade. With the TPP, we
seem to have gone from trade agreements with some standards and other non-trade
related baggage thrown in, to an agreement on standards and regulations with
some trade thrown in. As noted by many
economists, much of this shift has probably been driven by US corporate
interests: “The TPP and TTIP seem to be about corporate capture, not
liberalism[1]” (Rodrik, 2015); “[TPP] is largely about Hollywood and pharma
rather than conventional exporters[2]” (Krugman, 2015).

Third, by design, developing countries typically have
much less bargaining power under RTAs than multilateral agreements. The TPP is no exception. As Jagdish Bhagwati has noted, the US managed
to obtain better terms by sequentially bargaining with smaller countries first
before essentially offering a “take it or leave it” deal with larger countries
such as Japan. The asymmetry in
bargaining power is reflected in the very language of the agreements. In the side agreement on labor standards
between the US and Malaysia under the TPP, for example, the words “Malaysia
shall” appeared 34 times while the words the “US shall” appeared zero
times. Perhaps in the spirit of partnership,
the words “Malaysia and the US shall” did manage to appear together once, in
the context of securing funding for some technical assistance.

More worrisome, the lack of bargaining power extends to
dispute settlement. Under the
multilateral system, developing countries have recourse to the WTO dispute
settlement mechanism. By contrast, under
the TPP, the Investor-State Dispute Settlement System (ISDS) provides
international arbitration to “ensure that Americans doing business abroad
receive the same kind of protections…that are available to companies and
investors doing business in the US under US law.” The US Trade Representative (USTR) helpfully
goes on to note on its website that “the US has never lost an ISDS case. We have had only 13 cases brought to
conclusion against us and the US has prevailed in every case.” Not surprisingly, the lack of favorable
outcomes has deterred others, with only one new case brought against the US in
the last five years.

Fourth, nevertheless, individual developing countries can
and do gain from RTAs. Estimates by both
the World Bank and the Institute of International Economics (IIE) using
computable general equilibrium (CGE) trade models of the net benefits to
Vietnam and Malaysia from joining the TPP are on the order of around 8+% of GDP
cumulatively through 2030, though these estimates are likely to be on the high
side for reasons discussed further below.
At the same time, other countries in the region, notably Korea and
Thailand, lose out from not being in the TPP.

Let me now turn to the next part of my remarks and try to
answer the following question: In light
of the above observations, what position should an old-fashioned, liberal
economist from a developing country in Asia take in good conscience towards the
TPP?

This is not such an easy call. Do we tap into our collective or national
conscience? The TPP undermines the
multilateral approach and thereby yields an inferior collective outcome for
developing countries. But despite very
uneven bargaining power, it can generate benefits for the individual developing
countries who decide to join the club.
Do we give greater weight to politics or principles? Trade agreements have an unfortunate tendency
to bring out a wide variety of NGOs and special interest groups in protest, for
protectionist or other reasons.
Bedfellows matter. If we take a
position against the TPP, do we want to be seen to be allied with such
protectionist interests? Alternatively,
do we want to be seen supporting a RTA like the TPP which has such illiberal
parentage and baggage? The TPP extends
copyright and intellectual property (IP) protection far beyond the WTO TRIPS
guidelines. The TPP also seeks to impose
higher environmental and labor standards on trading partners in an attempt to
promote what it sees as “fair trade.” But
what does it really mean for trade to be “fair”? The USTR provides some insight into its
thinking on this question on its website: “When the rules are fair, Americans
can out-compete anyone in the world.” A
corollary must be that if Americans can’t compete, then trade by definition
isn’t fair!

On balance, this old-fashioned liberal economist from
Asia would tend to say “no” to the TPP, for reasons of both principle and
pragmatism. Why?

First, principles and precedents matter. We should not abandon the principle that RTAs
should be first and foremost about trade and establish a precedent whereby RTAs
are commonly and excessively loaded with all manner of other non-trade related
baggage. As Jagdish Bhagwati has written
in the context of India and the TPP:

“We are open to trade liberalisation in PTAs but we will
not sign on to all the non-trade features built by US lobbies into the TPP
under the pretence that these are the marks of a ‘modern’ trade agreement. Thus, if we want to join a golf club, we must
know how to play golf; but we cannot be expected to go to Church and sing
madrigals with the other members! – Jagdish Bhagwati[3]

The TPP risks undermining other principles as well. In a “governance-challenged” region such as
Asia, probably the single most important principle to uphold is the rule of
law. However, the TPP provides a means
for US corporations and investors to circumvent the rule of law by resorting to
arbitration under the ISDS mechanism.
What kind of signal does this send regarding equal treatment under the
law? Excessive corporate recourse to
arbitration has already started to raise such concerns even in domestic court
cases in the US. Think of how easy it
would be to fan the flames of protectionism here in Asia by claiming that these
trade agreements provide one law for locals but another for foreigners.

Second, from a purely pragmatic standpoint, the economic
gains and losses from TPP for individual countries are not all that large and
are probably less than commonly supposed.
Let’s start with the losses.
Thailand has the unfortunate distinction of being the country that is
usually estimated to lose out the most from TPP, but even here the losses are
not huge: only around 0.9% of GDP cumulatively through 2030, or a CAGR of less
than 6 basis points. If I were to
compromise my liberal economic principles, I would want to do it for more than
just 6 basis points. What about the
gains? The devil is in the details as
each country’s circumstances are different, but chances are that the gains to a
Thailand or Indonesia would be less than those to Malaysia and Vietnam just
because new entrants to the TPP would have to negotiate with all the other
signatories.

Of course, for many signatories, geopolitical and other
non-economic considerations are likely to be an equally important part of the
TPP calculus. But there are several
reasons for believing that the estimated gains to signatories might be less
than commonly supposed. First, not
surprisingly, the estimated gains focus solely on the stuff that can be
quantified, basically trade and investment flows. The models and estimates pretty much ignore
the much more difficult to quantify effects of the TPP such as the higher labor
and environmental standards, much tighter IP protection, and ISDS. But just because these effects are difficult
to quantify doesn’t mean that they have zero cost to developing countries. Second, the models rely on historical time series
data for their calibration, data which may not reflect future prospects. The World Bank model, for example, relies on
data up to 2011. But trade growth prior
to 2011 was much higher than it is today or it is likely to be going forward
for some time. Less trade means less
gains from trade which probably means less benefits from TPP.[4]

This brings me to my last point. Mega-RTAs like TPP, TTIP or RCEP undermine
the multilateral trading system. A
dangerous, self-fulfilling dynamic is created.
We decide to participate in RTAs because we can’t conclude Doha and we
can’t conclude Doha because we decide to participate in RTAs. Big trade deals get a large amount of policy
and public attention and eat up a lot of political capital. Do we really want to use what scarce
political capital we have for an illiberal trade deal like the TPP? Even if we were to believe that the
multilateral route is dead and that RTAs are the only game in town, we should
make sure that we choose the best game for us.
Why not try instead to work on RCEP to make it the best of all possible
RTAs, one loaded with much less non-trade baggage and one which makes best use
of the best principles and elements of the multilateral system?

[3] Jagdish Bhagwati, “India should not toe the US line
on the Trans-Pacific Partnership,” Hindustan Times, 28 Sep 2015

[4] A third and more subtle reason has to do with the
specification of the baseline or counterfactual scenario. As is typical, most of the modeling effort
and attention is focused on analyzing the policy scenario at hand, i.e.,
TPP. But the baseline is equally
important in determining the size of the estimated gains since the gains are
just calculated as the difference between the TPP and baseline scenarios. But what if the right baseline scenario to
use is a world where multilateral liberalization is more successful? Or if RCEP is quickly implemented? The corresponding gains from TPP would
probably be reduced.