Thought leadership from our experts

TPP, TTIP, and US/China/EU/WTO – A trade policy trifecta?

The two largest trade negotiations in history, the Trans-Pacific Partnership and the Trans-Atlantic Trade And Investment Partnership, are currently underway, with major changes likely to the world economy and somewhat lesser changes for the practice of international trade law (the two negotiations are larger than past GATT rounds, because they seem likely to produce much deeper trade liberalization, even though among fewer countries).

TPP includes Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Japan, Singapore, Peru, Vietnam, and the United States, representing somewhat over 40% of world GDP. It looks likely to include major tariff elimination, some liberalization of trade and services, some regulatory cooperation, nascent rules for state owned enterprises (with many exceptions, but with many of those temporary), and a number of other trade liberalizing rules (such as a ban (with perhaps a few exceptions)) on export bans. TTIP, between the European Union and the United States, also covers over 40% of world GDP. It will cover many of the same areas as TTP, with a very significant advance in the areas of regulatory cooperation. It is possible, though not all certain, that TTP will be signed in 2015, ratified in 2016, and go into effect in 2016 or the first day of 2017. All of that, of course, is subject to political vagaries too numerous to mention. The TTIP schedule depends somewhat on the TTP schedule, as both the US and Europe will probably want to see the TTP text before proceeding to complete their own agreement. TTIP also faces many political vagaries. Both TPP and TTIP depend on US congressional passage of trade negotiating authority for the President, commonly referred to as TPA, and that is subject to extreme political challenges in a Congress which for the last few years had difficulty agreeing.

That said, one of the interesting aspects of both TPP and TTIP is the almost complete lack of economic opposition to either agreement in the United States. The most obvious objection to TPP comes from the US clothing and footwear industries, which will face significant competition from imports from Vietnam once the very high US tariffs are dropped. But there is now virtually no US footwear or apparel industry – the US produces less than 1% of its footwear consumption, and less than 2% of its retail apparel sales. While the remnants make a lot of noise, the harsh reality is there are not enough workers and not enough states and congressional districts to prevent passage. Meanwhile, formerly protected agricultural sectors, such as dairy and beef, are now highly export-oriented, and need to sell overseas to avoid a glut at home. Following the law of physics "that gas expands to fill the available space," other relatively minor issues are blown up to large proportions, but will not block the passage of either agreement. For example, the politically fraught disputes in Europe over understandably sensitive topics, such as investor-state dispute settlement (ISDS) and cybersecurity, will need to be resolved, but are not the types of economic forces which are likely to block agreement. Still, these are sensitive issues and the rejection of the Anti-Counterfeiting Agreement (ACTA) by the EU Parliament suggests caution in making forecasts.

The most immediate consequence of TPP and TTIP will be enormous pressure on a number of countries to join one or the other. Turkey and Switzerland, for example, will have to compete more intensely within the EU market with the US, while losing sales in the US market to EU rivals. Similarly, it is generally expected that Korea, Colombia, Costa Rica, and perhaps Philippines and Thailand will be under similar pressure to join TPP. This "snowball effect" means that the combined size of TPP plus TTIP (given that EU is likely to sign free trade agreements with all TPP countries with which it does not already have FTAs) is likely to represent somewhat over 70% of world GDP. This leads to the even larger consequence of the two agreements. The beginning of the TPP negotiations led to expressions of concern in China that TPP might represent a US strategy of containment of China (more likely, it was a US strategy of building up bargaining power to be able to negotiate with a rapidly growing Chinese economy). China is one of the five BRICS (along with Brazil, Russia, India and South Africa) which loudly denounced the negotiation of the plurilateral Trade in Services Agreement, but China has now announced that it is "studying" TPP, and will see the same unavoidable numbers as everyone else. It is unlikely that China for many reasons would want to formally join TPP (so far, China has indicated an interest only in a narrower investment treaty with the US), but it also seems likely that China will seek some form of arrangement with the US and Europe to ensure full access by China to both the TPP and TTIP economic blocs, rather than tie its future to the falling Russian economy, the slower growth in India and South Africa, and in Brazil. Russia is quite unlikely to make any such moves successfully, and it would be a major political problem for India and South Africa. That leaves Brazil as the question mark on the table. Brazil, and also China, could well see an incentive to seek to put new energy into the WTO and/or also join TTP/TTIP in some form.