TPP negotiations, anticipatory trade creation, and implications for European trade policy

Florian Mölders, Ulrich Volz, 23 March 2012

a

A

The Trans-Pacific Partnership (TPP) agreement has been under negotiation since 2010. TPP negotiations build on the Trans-Pacific Strategic Economic Partnership Agreement (P4) between Brunei Darussalam, Chile, New Zealand, and Singapore, which was signed in June 2005 and entered into force in May 2006. The aim of the TPP negotiations has been to create an ambitious preferential trade agreement involving the P4 countries and Australia, Peru, the United States, Vietnam, and Malaysia. At the Asia-Pacific Economic Cooperation Leaders' Summit in Honolulu in November 2011, Canada, Mexico, and Japan stated their intent to join the TPP negotiations.

Talks with the US have gained momentum as the government has called off a timeout on trade deals and is eager to bolster its political and economic presence in the Pacific Rim. Progress by the EU to clinch new trade agreements and grant its exporters preferential access abroad may have helped this new enthusiasm. The Office of the United States Trade Representative (2011) expects the TPP to “enhance trade and investment among the TPP partner countries, promote innovation, economic growth and development, and support the creation and retention of jobs”.

In the face of the passing of the Doha round (Brandi and Helbe 2011, Herman and Hufbauer 2011), the TPP might be called the most ambitious trade pact currently under negotiation. While the TPP has yet to be agreed and implemented, we will argue below that trade effects may well materialise in advance if negotiations show prospects of successful conclusion.

The prospect of a coming trade bloc in the Pacific region under leadership of the US should be a wake-up call for EU trade policy. While the EU is in itself the biggest trade bloc, total EU exports to the prospective TPP countries account for 23.8% of EU’s external exports (and 30.6% if Canada, Mexico, and Japan would join the TPP). Figure 1 depicts the importance of different markets for the EU’s external exports in 2010. Even though the members of the TPP negotiations have already initiated several bilateral agreements among themselves, the EU may be losing out in terms of market access if the liberalisation process triggers exports within the prospective TPP without simultaneously stimulating demand for European goods. Additionally, the TPP leaves significant potential for vertical integration via production networks (Baldwin 2011). The risk of trade-diverting effects of the TPP on the EU’s external trade is therefore real. Jagdish Bhagwati (2012), the most prominent and ardent critic of any kind of regional PTA, recently called the TPP a “discriminatory plurilateral FTA [free trade agreement]”.

Figure 1. Export shares of the EU, as of 2010

Source: Own illustration based on data from World Integrated Trade Solution (WITS).

Notes: Shares are calculated in relation to the EU’s worldwide exports (excluding intra-EU exports). TPP includes Brunei, Chile, New Zealand, Singapore, Australia, Peru, Malaysia, the United States, and Vietnam; RoW denotes “Rest of the World”.

The proliferation of trade deals in East Asia

Before the turn of the last century, East Asian economies had been slow in establishing trade agreements with their trading partners. Other regions, such as the EU or MERCOSUR, were much more integrated in the world economy in terms of institutional standards. Since 2000, however, the number of bilateral and plurilateral trade initiatives involving East Asian countries has surged, giving rise to talk of the Asian noodle bowl, an allusion to Bhagwati’s (1995) famous spaghetti bowl metaphor. By the end of 2011, almost 150 initiatives had been proposed, negotiated or concluded (Figure 2).

Figure 2. Number of bilateral and plurilateral trade initiatives under involvement of East Asian countries

Source: Own illustration based on data from ADB (2012).

Notes: FAS= framework agreement signed, Under neg.= under negotiation, Under impl.= under implementation..The East Asian countries included are: Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Over the past decade, the number of PTAs with participation of East Asian economies has risen significantly. Between 2002 and 2011, the number of implemented trade initiatives has increased more than tenfold. In particular, we can observe a steep increase after 2008 with a rising share of implemented PTAs. Between 2008 and 2009 alone, 12 trade initiatives were brought into force. Nevertheless, by 2011, almost three quarters of the agreements depicted in Figure 2 have been in pre-implementation stages, leaving plenty of room for future trade liberalisation in this region. The East Asian countries that are so far most active in establishing PTA relations are Singapore, Thailand, China, and Korea.

Trade creation through anticipation

While there is a large body of work that examines the ex post trade-creating effects of PTAs, only few studies have investigated possible anticipatory effects of PTAs. But why should there be any trade effect at all before an agreement enters into force? There is evidence for the existence of anticipatory investments prior to an agreements’ conclusion: investment activity may increase due to adjustment effects of firms that prepare for a changing bilateral of multilateral trade environment (Freund and McLaren 1999). Another possible explanation is that PTAs are often preceded by less official initiatives that might already give incentives to trade more intensively (Eichengreen and Irwin 1996). In the case of the North American Free Trade Agreement (NAFTA), Kose et al (2004) show that there was an anticipation effect before NAFTA became effective that triggered dynamic trade and financial flow effects. Research by Magee (2008) has indicated that in the periods preceding an agreements’ implementation (more precisely, in the four years prior to its conclusion), trade flows increase on average by 26%.

None of the these studies on anticipatory effects distinguishes between the different stages of implementation of the respective agreements but rather focus on foregoing time periods that are not necessarily linked to any particular (pre-) implementation stage. In a recent paper (Mölders and Volz 2011), we complement previous research on anticipatory trade effects of trade initiatives by taking into account the degree of implementation for the respective agreements. We include a higher level of sensitivity and go beyond a mere look at foregoing time periods. We use data on trade agreements and their respective stages (Table 1) from the Asian Development Bank (ADB 2012), which provides comprehensive information on the progress of trade liberalisation in Asia and the Pacific. This gives additional information for possible anticipatory trade effects by pointing precisely toward the stage that potentially triggers the trade flows.

Table 1. Definition of different statuses/stages of free trade agreements

Source: ADB (2012).

Our findings, which are based on PTA negotiations under participation of East Asian economies, confirm the above-cited studies. Moreover, they suggest that positive trade effects may not only be expected after a trade agreement gets implemented but that a positive influence on the trade volume may be realised already at the negotiation stage. This conclusion rests on one major restriction: the phenomenon is statistically significant only for bilateral PTAs, not for multilateral ones. Our estimates suggest a trade increase of around 39% when a bilateral agreement is negotiated.

The differences in statistical significance of anticipatory effects between bilateral and multilateral agreements can be attributed to the perception that the former are more likely to be realised quickly since multilateral agreements may be more complicated to negotiate due to the multiple parties involved. The assumption that multilateral agreements may be more difficult to conclude is reflected by the average time period that it takes for PTAs to reach a consecutive stage. Bilateral trade agreements correspond to a more rapid implementation process than multilateral initiatives.

What do these results imply for economic policy? Even though our estimates suggest that negotiations of bilateral trade initiatives are more likely to reap anticipatory trade effects compared with a multilateral alternative, anticipatory trade effects will depend on more than just the number of participating countries. The more credible the negotiations are, and the greater the prospects of successful conclusion and implementation, the greater the chances to realise anticipatory effects in terms of increased investment and trade. If policymakers involved in the TPP negotiations can credibly signal that multilateral trade liberalisation will be achieved, TPP may yet have its desired impact ahead of coming into force. Therefore, given potential trade-diverting effects, the TPP could have a direct impact on the EU’s trade relations with the Asia-Pacific region sooner than Brussels may realise.

Instead of standing idly by, the European Commission should become more active and seek to strengthen trade ties between the EU and the prospective TPP countries. One option for the EU would be to try to advance its current bilateral PTA negotiations with Malaysia and Singapore and enter trade talks with Japan, Brunei, and Vietnam, which have been under consideration for a while. The second option, which is more ambitious, and likely to yield greater benefits not only for the EU but for the entire world economy, would be to revive global trade talks by offering more concessions on market access for agricultural products from developing countries and cutting agricultural subsidies at home.

References

ADB (2012), “FTA Trends”, Asia Regional Integration Center, Asian Development Bank, Manila.

Baldwin, Richard (2011), “The US is Painting Itself into a Corner on 21st Century Trade Policy”, VoxEU.org, 28 April.

Bhagwati, Jagdish N (1995), “US Trade Policy: The Infatuation with Free Trade Areas”, in J Bhagwati and A Krueger (eds.), The Dangerous Drift to Preferential Trade Agreements, Washington, DC: American Enterprise Institute for Public Policy Research.

Bhagwati, Jagdish N (2012), “America’s Threat to Trans-Pacific Trade”, East Asia Forum, 10 January.

Brandi, Clara and Mathias Helbe (2011), “The End of GATT-WTO History? – Reflections on the Future of the Post-Doha World TradeOrganization”, Discussion Paper 13/2011, German Development Institute, Bonn.

Eichengreen, Barry and Douglas A Irwin (1996), "The Role of History in Bilateral Trade Flows," NBER Working Papers 5565.

Freund, Caroline L and John McLaren (1999), "On the dynamics of trade diversion: evidence from four trade blocs", International Finance Discussion Papers 637, Board of Governors of the Federal Reserve System.

Herman, Lawrence and Gary Clyde Hufbauer (2011), “Doha Is Dead”, Foreign Policy, 26 September.

Kose, M Ayhan, Guy M Meredith, and Christopher M Towe (2005), “How Has NAFTA Affected the Mexican Economy? Review and Evidence”, in Rolf J Langhammer and Lucio Vinhas de Souza (eds.), Monetary Policy and Macroeconomic Stabilization in Latin America, Springer 35–81.

Magee, C.S. (2008): "New Measures of Trade Creation and Trade Diversion", Journal of International Economics 75 (2), 349–62.

Mölders, Florian and Ulrich Volz (2011), "Trade Creation and the Status of FTAs: Empirical Evidence from East Asia", Review of World Economics, 147(3):429–56.

Office of the United States Trade Representative (2011), “Trans-Pacific Partnership”, http://www.ustr.gov/tpp.

Topics: International trade
Tags: Asia-Pacific, Canada, Japan, Mexico, trade policy, Trans-Pacific Partnership

Florian Mölders
PhD candidate and Researcher, DIW Berlin
Senior Researcher, German Development Institute (DIE); and Visiting Professor, Peking University