A few years ago, The Economist published an article on a currency war being waged between China and the rest of the world. The main premise of the article was that “countries blame each other for distorting global demand, with weapons that range from quantitative easing (printing money to buy bonds) to currency intervention and capital controls.” That war had a main culprit: the growing presence of the Yuan in the global economy.
Recent dynamics in global trade integration—or lack thereof—raise a different question: Are we witnessing a regional trade bloc war?
In an era of mega regional agreements and trade partnerships, an innovative approach to trade regulations is necessary. Though not yet in force, the Trans-Pacific Partnership (TPP) was signed on February 4, 2016 by its twelve member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. Faced with being encircled by new trade bloc, China did not stay quiet and formed its own the Regional Comprehensive Economic Partnership (RCEP) as an alternative.
RCEP, on the other hand, launched its negotiations in November 2012 at the Association of South East Asian Nations (ASEAN) Summit in Cambodia. China brought Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam and the six states with which ASEAN has existing free trade agreements—Australia, India, Japan, South Korea and New Zealand—in the group. The leaders of each participating country have already endorsed the “Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership.” How will certain nations, which are part of both agreements, reconcile the differing trade models? Moreover, is reconciliation necessary?
The truth is that both regional initiatives are monumental in scope and historic in importance. With 40 percent of global GDP in the TPP and 30 percent in the RCEP, both trade blocs will change the rules of global trade and likely lead to the creation of new trade standards. But it will be a while until these trade agreements are finally in place and operational. What will happen until then, and what does this mean going forward?
Exceptions to the rules of the institution intended to govern global trade –the World Trade Organization (WTO)– have become the rule. Greater flexibility is crucial if the WTO is to remain relevant in a fast-paced global economy where multilateral agreements are the new norm. The TPP and RCEP are a clear example of that. Today, more than 625 notifications of Regional Trade Agreements (RTAs) have been received by the GATT/WTO. Of these, 419 are in force. It clearly is time to rethink international trade regulations.
One place to start is by reducing the non-discrimination exceptions to the WTO. The current rules in place were set up when China was not a part of the WTO, meaning prior to 2001. The major economies should, however, re-invest in global trade and re-think the rules of negotiation within the WTO. The way in which multilateral agreements are made should also be reconceptualized—the stalled Doha rounds are the quintessential example of why we should move beyond this model. The problem, however, is not in the nature of RTAs per se, but in the resistance of many countries to liberalize their economies.
Article 30 of TPP could provide a useful model. Said Article points out how and when the TPP will enter into force. It can happen one of two ways: (1) If all twelve countries ratify the agreement in accordance with their domestic laws and so notify the depository, it will enter in force 60 days after the last ratification is notified. (2) If that hasn’t happened within two years of the date the agreement was signed, but at least six of the twelve have ratified and those six represent 85 percent of the total GDP of the twelve countries at the end of 2013, it will enter into force 60 days after the two years. If at least six countries meeting the 85 percent haven’t ratified within the two years, it will enter into force 60 days after a country notifies its ratification that gets the total number of countries to six or more and the percentage of GDP they represent to 85 percent. Of course it could be difficult to imagine this kind of mechanism for a multilateral system.
Granted, this could potentially engender a bigger gap between countries that are part of new agreements and those that are not, but in becoming the new standard, it could be the push many countries need to fully integrate into the global economy. Otherwise, the widening gap could result in a world divided not only between developed and underdeveloped countries, but also between countries with “advanced international regulations” and those without; a gap that will likely break along the same lines as developed and underdeveloped countries. The World Trade Organization needs restructuring and reshaping. Advances in the TPP and RCEP provide the necessary window and excuse for this process to begin.