Elephants in a bazaar?

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2 Elephants in a bazaar? The TTIP and TPP effects on developing countries and the multilateral trade system Max Mendez-Parra, International Economic Development Group,

3 Why Mega-regionals? The developed countries strategy is to secure and make predicable trade and trade policies between their main trade partners. As tariffs applied by other developed countries tend to be low, attention is put on other behind-the-border issues. WTO negotiations struggle to achieve further trade liberalisation. Even if tariffs were reduced, there is still many behind-the-border measures that makes trade very costly. Developed Countries have pushed to address these issues without success (e.g. Singapore Issues)

4 Why Mega-regionals?. As long as WTO compatible in certain areas, FTAs are not limited by scope. Mega-regionals, in addition of including many large countries, are an opportunity for developed countries to include many of these provisions. With developing countries, the strategy is similar. However, either because the highest barriers are there or because developing countries reject further integration, they tend to focus on more shallow integration aspects. However, given the number and the size of the countries involved, mega-regionals may have important effects going beyond the countries involved. They not only may affect the trade flows between excluded countries and the megaregional partners, but they also might affect the global trade system.

5 In the short run, mega-regionals may affect developing countries trade through different channels: 1. Preference erosion effects: A competitor will have the same level of market access in the destination country. 2. Export price effects: exporters may need to adjust their prices to remain competitive in the destination market. 3. Changes in product standards exported to the agreement partners (e.g. harmonisation). 4. Investment crowding-out (e.g. investment risk is reduced in mega-regional partners). 5. Other channels affecting consumers (e.g. higher prices for imports)

6 Preference erosion The shallow integration effects of any free trade agreement (FTA) on excluded countries depend primarily on: The height of the current applied tariffs by the agreement s members (e.g. MFN) in the products of interest for the excluded countries and; The similarity of the trade structures between the agreement s partners and the excluded countries. It does not matter the existence of preferences: All excluded countries are potentially affected. The effects depend on the final offers (e.g. excluded products.)

7 The Trans-Atlantic Trade and Investment Partnership (TTIP) On average, tariffs are low in both the US (3.72%) and the EU (4.23%). Around 45% of trade between the EU-US is not subject to duties. There are important peaks. (e.g. tobacco and peanuts in the US and fruit preparations in the EU). Textiles and footwear present relatively high tariffs in both countries. Presence of non-advalorem tariffs complicates the evaluation and affects the size of the effect as export prices change.

8 Agricultural products and food present high tariffs in both the US and the EU, but tariffs on crude materials are very low.

9 Distribution of MFN tariffs in the EU and the US (2012) EU imports from US US imports from EU MFN Number of lines Share of imports (%) Number of lines Share of imports (%) 0% (0%-2.5%] (2.5%-5%] (5%-7.5%] (7.5%-10%] (10%-15%] (15%-20%] (20%-inf) Total

10 EU and US exports are very similar and typical of developed countries.

11 Exports of developing countries are different than the bilateral exports between the EU and the US Finger-Kreinin index of export similarity (years vary) EU exports in the US US exports to the EU Source: CARIS 2013

12 Particular affected products and countries, but unlikely to have an important effect. Tariffs on garments are relatively high in both the US and the EU. Likely that developing countries will react accordingly (neither the EU nor the US are major exporters of these products) Bangladesh >$ 1 millions and <$ 10millions >= 10millions Garments knitted and not knitted (42.6millions) Pakistan Garments knitted and not knitted (5.1millions) Other textile products (16.4millions) Cambodia Malawi Haiti Garments knitted and not knitted (7.8millions) Tobacco products (2.1millions) Garments knitted and not knitted (3.9millions) Source: CARIS 2013

13 Other effects? 1. Although large, neither the EU nor the US are major players in the majority of the developing countries products: No important effects on prices for the exported products. 2. SPS/TBTs disciplines. Only that may matter if there is harmonisation of standards or they become more stringent. 3. But even in this case, it depends on the country and the product. Countries with good record of compliance are likely to experience little effects (Kenya, Tanzania and Uganda have good record of compliance with SPS in both countries). 4. Can the TTIP help developing countries? (e.g Cumulation in Rules of Origin)

14 The Trans-Pacific Partnership (TPP) It builds on the existence of multiple previous trade agreements in different stages of implementation. Members are very heterogeneous. It is open to everybody (Korea, Colombia, Costa Rica, The Philippines and Laos have expressed desired to join). They have to comply with the agreement s provisions. It includes many behind-the-border measures to deliver deep integration effects such as investment and competition policies, government procurement rules and the state-investor dispute resolution mechanism among others #hashtag

15 Compositional average MFN tariff applied between TPP members (in green pair of countries with notified free trade agreements Reporter Australia Brunei Darussalam Canada Chile Japan Malaysia Mexico New Zealand Peru Singapore United States Viet Nam Source: Mendez-Parra & Rollo (2014) Australia Brunei Darussalam Canada Chile Japan Malaysia Mexico New Zealand Peru Singapore United States Viet Nam

16 Share of selected TPP members in developing countries exports (in %) Proximity points to the potential affected countries. African countries would be the least affected The trade with the US is, in general, key to identify the effects (although, for Pacific Is. Trade with AUS-NZ is more relevant.) United New Rest of Rest of Japan Australia Canada States Zealand TPP World Ghana India Kenya Nigeria Pakistan South Africa Bangladesh Rest of Africa Rest of Asia Caribbean Pacific Source: Mendez-Parra & Rollo (2014)

17 Viet Nam improved market access in the US might have some effects It gains preferential access in products that competes with other developing countries. Textiles (Ch 50-63) Footwear (Ch 64-67) Share in US imports Share in total exports to the US Share in US imports Share in total exports to the US China China Vietnam Vietnam India Italy Mexico Indonesia Indonesia Mexico Bangladesh India Pakistan Dominican Republic Honduras Bangladesh Cambodia Brazil

18 So, in the short-run In general, preference erosion effects are limited. Around 1/3 of MFN tariffs in the EU/US are zero. Many developing countries export these products. TPP is built on previous FTAs. No additional tariff reduction effect. Trade structures between developing and members of the TPP and TTIP are different. Tariff reductions affecting products not exported by developing countries. Exceptions are in textiles and footwear associated with the improved access of Vietnam in the US. Small effect in these products as a result of the TTIP.

19 In the long-run, a knock-on effect? The improved market access in textiles and footwear for Vietnam in the TPP might motivate affected countries to apply for TPP (e.g. Pakistan and Bangladesh). These affected partners might generate additional interest in other excluded partners in other products. (e.g. access on agricultural products in Japan?). In the long run, countries eliminate tariffs and introduce many behind-the-border disciplines that boost trade, sparking economic transformation and development. This suggests a triumph of the stepping stones over the stumbling block idea behind FTAs.

20 Mega-regionals were not designed with developing countries in mind They include many of the disciplines rejected at the WTO (Singapore Issues) by developing countries. Although it includes disciplines about the environment and labour conditions (e.g. labour unions in Vietnam), other disciplines are hard and onerous to be complied by developing countries. They put them at permanent risk of being challenged for non-compliance by other members. State-investor dispute resolution mechanism: Small developing countries cannot afford being taken by a large corporation to a foreign court. It is unclear how these agreements (TPP) would be notified (art. XXIV and Enabling Clause), but the room for Special and Differential Treatment is minimum.

21 Final comments The knock-on effect may force countries to join mega-regionals and adopt disciplines that either were already rejected and that they might not be prepared to adopt. Moreover, the WTO negotiations may be vacuumed of value Mega-regionals may constitute a risk for the multilateral trade system based on levelling the playing field but taking in consideration the differences in development between members. In Nairobi, developing countries have to adopt a more aggressive strategy. This might imply reviewing some traditional positions (e.g. preference erosion) This implies that it is at developing countries hands to deliver in Nairobi an agreement that puts the WTO at the centre of the global liberalisation efforts.