RTAs and the Economics of Disintegration

December 7, 2017

The growing appeal of populist messages and doubts about the benefits of globalization materialized into two major developments in 2016: the referendum that led to decision of the United Kingdom to leave the European Union (EU) – i.e., Brexit – and the election of Donald Trump in the USA. These developments add to concerns about the future of the liberal trade order and, in particular, of its institutional underpinnings associated with the World Trade Organization (WTO).

The performance of international trade flows is of particular interest for the discussion of the future of the global trade order. Merchandise trade had been growing on average 7 per cent per year before the onset of the global financial crisis. Since 2008, however, trade growth has been anemic and in some years below the expansion of world output (e.g., 2.3 per cent at market exchange rates for global GDP versus 1.3 per cent for global trade volume in 2016). Weak aggregate demand and uncertainty (dragging down business investment which tends to be trade-intensive) in the aftermath of the global financial crisis are often characterized as the main culprits behind the slow-down of international trade.

But there seems to be more structural forces at work. The long-run elasticity of trade with respect to world GDP, for example, which used to be above 2 in the 1990s, is estimated to be much lower now (around 1.3 for the period 2001–2013), suggesting that trade has become less responsive to GDP growth. The shortening of supply chains to better cope with environmental and geopolitical risks, increased recourse to trade protectionism in some markets, the domestic integration of the Chinese market leading to increased local content in exports, and the evolving shift toward services in the world economy are some of the usual suspects in this context. Moreover, the process of product fragmentation associated with Global Value Chains (GVCs) seems to have stalled and even reversed in recent years.

The rise of protectionism as a policy priority for the Trump administration and the implications of Brexit for intra-European trade flows do not bode well for global trade in the medium-term. International institutions and trade agreements can foster the ability of nation-states to cooperate. But there is broad consensus that the multilateral trade system is facing major challenges as illustrated by the 

“terminal coma” of the Doha Development Agenda negotiations and the leadership vacuum at multilateral level. Expectations about progress at the upcoming WTO Ministerial Conference in Buenos Aires (December 2017) are subdued at best. Can RTAs reverse this trend and provide a new platform for substantive trade liberalization?

The latest major development in this area was the Trans-Pacific Partnership (TPP) agreement that was originally signed in early 2016 by 12 countries in the Pacific Rim. Although its fate remains unclear following the withdrawal of the US, the TPP is important in indicating the potential direction of trade governance – whether through RTAs or the WTO. On November 11, 2017, eleven of the original TPP twelve signatories announced that they would be willing to go ahead with a new agreement – the so-called Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – that builds upon the TPP text. There was also a decision to suspend 20 sensitive provisions of the original agreement, on topics such as express shipments, investor rights, and, particularly, IPRs. The suspension of these provisions, rather than simply eliminating them, suggests that the CPTPP partners want to keep the door open for an eventual return of the United States to the agreement in the future.

The future of the CPTPP, as well as the outcome of the Brexit negotiations, are some of the main variables to consider in evaluating the potential of RTAs to become important actors in fighting the danger of economic disintegration. At this stage, the answer is an ambiguous YO (a combination of Yes and No). RTAs can be an important “laboratory” for new international rules (e.g., for digital trade, labor movements, IPRs, trade and investment relations…) and they can provide the political drive for trade liberalization. At the same time, they promote discrimination against outsiders (those that are not members of the preferential club) and they may foster trade frictions. In short, the jury is still out about their role in reenergizing the globalization process.

 

Carlos A. Primo Braga is an Associate Professor, Fundação Dom Cabral, Brazil. He is also a Visiting Professor at IMD, Switzerland.  He was Professor of International Political Economy at IMD and Director of the Evian Group (2012-15). Before that he was the Special Representative and Director for Europe, The World Bank. He was also Director, Economic Policy and Debt (2008-10) and, in 2010, he was the WBG’s Acting VP and Corporate Secretary and Acting Executive Secretary of the Development Committee. He was a Fulbright Scholar (1988/89) at the Paul Nitze School of Advanced International Studies (SAIS) where he also taught as a visiting professor (1988-98). He was also an Assistant Professor of Economics, University of São Paulo (USP), and Senior Researcher at FIPE in the 1980s. He received a degree in Mechanical Engineering (1976), Instituto Tecnológico de Aeronáutica and an MSc (1980) in Economics from USP.  He holds a PhD (1984) in Economics from the University of Illinois, Urbana-Champaign, USA.   

 

Topics: REGIONAL TRADE AGREEMENTS (RTAS)

Authors: CARLOS BRAGA

RTA

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