December 2, 2013 11:56 am
World faces up to the era of regional agreements
Steaming ahead: the emphasis of the trade landscape has shifted from North America to one of regional deals
When Bob Zoellick stood before an audience at Baylor University in Texas in October to contemplate the legacy and future of the North American Free Trade Agreement (Nafta), the former World Bank president offered an intriguing take on history.
The office of the US Trade Representative at the time, Clara Hills, “was initially cool to the idea”, recalled Mr Zoellick, then counsellor of the Department of State. The reason was simple: US trade negotiators were too busy thinking about a global agreement – the Uruguay Round of the General Agreement on Tariffs and Trade (Gatt) – to consider a purely regional one.
How things change. Go to Washington these days and at the very top of the trade agenda sit two potential regional trade deals sold as having the power to boost global growth and strike a strategic blow: the 12-country Trans-Pacific Partnership (TPP) – which includes the three members of Nafta – and an even bigger EU-US deal, the Transatlantic Trade and Investment Partnership (TTIP).
Nafta unites the US, Canada and Mexico commercially and was signed into being by the three leaders in December 1992, but was based on negotiations dating back to 1986.
The future of Nafta is no longer really about North America but about a world glued together by regional trade deals, with higher ambitions and greater strategic impact. Project forward a decade, assuming that all goes to plan for policy makers in Washington, and the global economy could very well be one in which the rules of commerce have been stitched together from regional “high standard” agreements such as the TPP and TTIP, with North America at the heart of it all and the WTO a body for adjudicating disputes rather than negotiating the rules.
The US and its partners in TPP have set themselves the ambitious goal of negotiating an agreement by the end of this year, but serious obstacles remain. There are also plenty of people who argue that, for all the political will available on both sides of the Atlantic, an EU-US deal – which would hinge largely on bringing regulatory regimes in line – is frighteningly complicated. So too, potentially, are other regional efforts, such as an attempt by the 10-member Association of Southeast Asian Nations to turn its bilateral deals with countries such as China, India and Japan into the basis of a bigger East Asian free-trade community.
But these regional initiatives may fail. There is also the possibility that in Bali the world’s trade ministers are about to inject life into the WTO by agreeing what amounts to the first multilateral trade deal in a generation, as well as a “road map” for the stalled Doha Round.
There are still plenty of critics of “megaregionalism”. Pascal Lamy, the former head of the WTO, has questioned the “coherence” of a world governed by disparate regional deals. And Jagdish Bhagwati, the trade economist declared, in a 2008 book, that all trade agreements bar multilateral ones were “termites in the trading system”.
This year, when the Congressional Research Service (CRS), the US Congress’s independent think-tank, assessed the economic impact of Nafta, it offered a sobering conclusion.
US trade with its Nafta partners, the report’s authors wrote, had more than tripled since the agreement took effect, and increased more rapidly than trade with the rest of the world. Between 1993 and 2012, the CRS calculated total US trade with Mexico had risen 506 per cent, while US trade with Canada had gone up 192 per cent.
However, much of that growth could have happened without Nafta, the authors pointed out. Especially as, during that same period, US trade with non-Nafta countries had increased by 279 per cent.
Moreover, while politically Nafta may remain a toxic brand in the US, the CRS found the truth was that it was neither as bad nor as good as critics and defenders argue. “Nafta did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters,” the CRS wrote. Its overall effect on the US economy appears to have been relatively modest, it concluded.
Still, there is little doubt the momentum in the global trading system is with those who are pushing regional agreements.
Defenders of the multilateral system may argue that any alternative is “suboptimal”, but to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, and a leading defender of Nafta and other regional agreements, that ignores reality.
“It’s like saying that one world government would be more optimal than a disparate group of nation states. It’s just a dream,” Mr Hufbauer says.
The dream for students of Bismarck, like Mr Zoellick, is really a strategic one: to build on Nafta and create a North American core for the global economy that might rival rising powers such as China. In his October speech at Baylor, he said there are eight fronts on which Canada, Mexico and the US should move forward to ensure North America assumes that role.
The Nafta partners need to work more closely to advance a unified position in global diplomatic and economic debates, he said. They could also co-operate more on security and help each other to improve the efficacy of their governments. But to improve Nafta, the partners need to update and link their energy and border infrastructure better, do more to manage human capital and the prickly subject of immigration, as well as look after environmental resources. Already included in the TPP discussions, Canada and Mexico should also have a role in the EU-US negotiations some day, Mr Zoellick argued, for clear strategic reasons.
The “global weight of three democracies of almost 500m people” self-sufficient in energy, with an integrated infrastructure as well as interlinked manufacturing and services industries and a common foreign policy outlook would be substantial.
With that, North America would be well positioned to contend with 1.3bn Chinese, he said.
This is the era of megaregionalism. It is also the era of the strategic imperative in trade.
Copyright The Financial Times Limited 2013.
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