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Rules are written without us?

The trans-Pacific partnership and its importance for the world and Russia

Rules are written without us?

Igor Makarov

Associate Professor, Department of World Economy, Higher School of Economics, Ph.D.
The signing of the agreement on the Trans-Pacific Partnership is a landmark event that not only has a significant impact on the economies of the participating countries and their trading partners and changes the course of integration processes in the Asia-Pacific region but is also capable of transforming the entire system of regulating international trade. The creation of a mega-regional agreement on the APR space is not simply a result of the efforts of concrete states, but also a reflection of objective processes occurring both in the region and in the world economy as a whole.

Causes of TTP
For more than half a century, the rules of international trade were regulated by the General Agreement on Tariffs and Trade (GATT). It was the GATT, and then the WTO, that became the locomotives for the rapid development of the international exchange of goods and services, which formed the basis for the processes of modern globalization.
However, in the XXI century. the configuration of international trade is changing, to which the WTO was not quite ready. First, the share in the global exports of developing countries has increased dramatically. As a result, their negotiating weight also grew, and the number of contradictions between developed and developing countries began to grow. The result was the failure of the Doha Round of WTO negotiations.

Secondly, the most important source of growth of international trade of the last one and a half decades has actually dried up: the rapid economic growth of the BRICS countries. Currently, all of them are experiencing economic difficulties, which are pronounced structural in nature. It is not surprising in this regard that in the post-crisis period, the growth rates of world exports began to decline, and in 2015, it even decreased in absolute terms, which is an absolute anomaly for non-crisis years.

Third, world trade is showing a tendency towards increasing regionalization. Regions are becoming more self-sufficient. This is promoted, in particular, by the rapid growth of incomes in a number of Asian countries, which are gradually losing their previously inherent status as a global factory working on cheap labor and becoming important consumption centers. At the same time, new competitive advantages appeared in Western countries: in the USA, the shale revolution led to a significant reduction in the cost of energy, and a huge influx of migrants to Europe sharply increased the amount of cheap labor available to it. As a result, Western countries were able to launch the “resharing” process - the return of industrial production from developing countries. The trends towards the localization of production over the next decade will be enhanced by technological innovations like 3D printing and robotization.

The above trends do not mean that the world is becoming less interdependent, and globalization is retreating. Together with the relative decline in the role of international (in any case, interregional) trade in goods in the future, other cross-border flows — people, investments, information — are only increasing. The role of virtual companies (Amazon, Facebook, Alibaba, etc.), which operate to a large extent outside of state borders, is growing. Globalization continues, changing only its shape.

In such circumstances it is not enough to have only the rules of international trade as such. Along with the regulation of commodity flows crossing the border, new norms are needed to regulate the flow of investment, ideas, labor. Finally - the very environment of the activities of companies.

The country that first caught the emerging changes in the nature of international trade was the United States. They became the main engine of negotiations on the Trans-Pacific Partnership (TTP), which culminated in the signing of an agreement between 12 countries 4 November 2015. At the same time, negotiations continue on the Transatlantic Trade and Investment Partnership (TTIP), which includes the United States and the EU countries. In this case, the US develops rules for international trade, covering more than 60% of world trade and virtually all leading economies, except China, India and Russia. In turn, China and India, concerned about this process, are negotiating the creation of another mega-regional agreement - the Regional Comprehensive Economic Partnership (RVEP). TTIP and RWEP are still at the negotiation stage, and the TTP may well face difficulties in ratifying. However, the fate of specific documents is less important than the general trend that they ask: the world enters the era of mega-regional agreements that will gradually turn into the main instruments for regulating international economic interactions.

TTP as a new type of agreement
The TPP Agreement is primarily a free trade agreement. It involves the reset of customs duties on 95-98% of product items. This value looks impressive, but the scale of tariff liberalization should not be exaggerated. First, 42 Free Trade Zone Agreements are already in place between the TTP member countries, covering a total of about 60% of the trade flows covered by the TTP. Secondly, for all countries there are individual transition periods of up to 30 years from the date the agreement enters into force.
Tariff reductions are far from the main component of the TTP agreement. In addition to it, as well as traditional instruments of non-tariff regulation (sanitary and phytosanitary, technical barriers to trade, customs procedures and rules of origin of goods), the agreement focuses on investments, intellectual property issues, government procurement and state-owned enterprises, and competition issues.

In addition, the TTP agreement covers areas such as the environment, electronic commerce, and labor standards. In this sense, it is truly unprecedented, because the WTO distanced itself from these issues. A key feature of the TPP is that it implies not only and not so much trade liberalization, but a change in the institutional environment of companies. In particular, the agreement contains requirements for the existence of regulatory bodies and labor legislation in the TTP member countries (for example, a law on the establishment of working hours), environmental protection, investment protection, and intellectual property rights are required. In addition, the TTP has a set of provisions on the basic rules for the activities of state enterprises and public procurement, which involve expanding the access of foreign companies to state tenders for a number of industries, determined individually for each country. The purpose of creating a common institutional environment is to facilitate the conduct of trade and economic operations and improve the investment climate in general in all countries of the agreement.

Although this agreement is certainly much broader than the WTO rules to which all its participants are subject, the trade regime under the TTP is fully consistent with the WTO rules. For example, anti-dumping measures are applied only after the WTO decision, they can not be considered in any of the TTP bodies. However, under the TTP provisions are still more stringent than in the WTO. For example, to substantiate the use of phytosanitary measures, TTP provides for special requirements - scientific research should be carried out within 6 months.
A special role in the agreement is assigned to sectoral technical barriers - for each of the following areas there is a separate application: pharmaceuticals, cosmetics, medical equipment, patented formulas for pre-packaged foods and food additives. The TTP establishes mandatory deadlines for the consideration of such barriers (which are only recommended in the case of the WTO); in addition, in the future it is expected to develop a common approach in these industries.

The TPP provides for national treatment and most favored nation (MFN) treatment for investments in the WTO-plus TRIMS format (WTO Agreement on Trade-Related Investment Measures). An important element of the agreement is also the existence of an investor-state dispute resolution mechanism, which allows a foreign legal entity to file a claim against the host state if it violates the rights of investors. In the tradition of American law, when an investor files a claim under the TPP, it is he (the plaintiff) who bears all the costs of collecting evidence. With regard to international services, they are provided with national treatment (except for the movement of individuals). Financial services are regulated by the WTO.

Special attention should be paid to the issue of trade in intellectual property - in the case of TTP it is regulated in the format of TRIPS-WTO-plus (Agreement on Trade-Related Aspects of Intellectual Property Rights), based on US law. At the same time, the term of protection of copyright is 70 years, the term of validity of the patent is 8 years (and not 5, as in the case of the WTO).

The deviation of certain provisions of the TTP agreement towards the US legal standards is evident. In many ways, it is about the expansion of American institutions of regulation of trade and investment to other parties to the agreement. This allows both many experts and the general public to believe that the main beneficiaries of the TTP will be American corporations, which were the main lobbyists for its signing.

TTP and economies of the region
TTP unites countries representing 40% of GDP and 28% of world trade. However, these countries are extremely heterogeneous: most of these indicators provide only two countries: the United States and Japan. Half of the participating countries (Brunei, Chile, Malaysia, Mexico, Peru and Viet Nam) are in general developing countries, and the space of economic standards differs significantly in them compared to the more developed economies of the TTP.

It is expected that the TTP agreement will positively affect the volumes of foreign trade of all participating countries. A high level of liberalization will allow them to expand the access of goods to the markets of other countries of the agreement (regarding trade flows not covered by existing FTAs), and improving the institutional framework will contribute to their economic and social development. However, this is accompanied by costs in the form of reducing the level of protection of national industries.

The largest trade flow, not regulated by the previously existing FTZ, but subject to the TTP, is the US – Japan flow. The most acute issue in the bilateral trade of these countries is the reduction of tariffs for cars under the TTP. As for the rest of the participating countries, with a smaller contribution to the volume of trade within the TTP, large beneficiaries may be Vietnam (due to increased exports of textiles and footwear products), Brunei (due to increased foreign trade and diversification of the economy), Malaysia (as much as possible trade partner countries in the duty-free zone at the expense of the TTP). It is also possible that the spread of US standards in the field of investment regulation will lead to an increase in US investment in the TPP countries. The negative effects of the agreement for most countries are connected with the opening of the domestic market for agricultural products (in particular rice, meat and dairy products), as well as the long term patent for pharmaceutical products - for those countries that import it and are not able to produce it themselves.

In addition, reforming the institutional environment of the company’s activities will require from some countries an agreement to substantially restructure their economic development models based on a relatively high degree of state intervention in the economy. Such a restructuring can be quite painful.

In all chapters of the agreement, there are provisions aimed at stimulating cooperation and dialogue in each of their areas - it is supposed to create various Councils that regularly discuss compliance with the provisions by the participants, as well as advisory bodies that can provide recommendations for improving the positions of the TPP countries in international trade. The agreement can be further developed - with the approval of the participants, new provisions can be included in it, and not only directly relating to the liberalization of the exchange of goods and services. In the future, other areas related to trade can be included in the regulatory scope of the agreement - in addition to investments, public procurement and state-owned enterprises, the environment, e-commerce and labor standards. In this case, a large-scale agreement will have an even stronger impact on the economies of the member states.

It should be noted that the signing of an agreement on TTP at the ministerial level does not mean the momentary implementation of all its points. For the agreement to enter into force, it will require ratification within two years of at least 6 by countries that account for at least 85% of the total GDP of the TPP countries. Especially acute is the question of ratification of the agreement on TTP by the US Congress, given the upcoming presidential elections and the country's serious discussion about the feasibility of the agreement - unlike Barack Obama, both presidential candidates do not support TTP, claiming that it threatens American jobs.

TTP for Russia: opportunities and threats
Standard general equilibrium models demonstrate that the direct effect of a TTP agreement for Russia is minimal. The share of countries participating in the agreement in Russia's trade is small — less than 10%. The key articles of Russian exports (in particular, hydrocarbons and products of the military-industrial complex) do not depend on the preferences provided by the TTP. Export deliveries of the TTP countries to Russia can also hardly be reoriented to other parties to the agreement after it enters into force. Most of the potential losses will come from Russian agricultural producers supplying products to Asian markets. However, the volume of this export is so small.

Nevertheless, in this case, the models hardly reflect all the areas of TTP impact on the Russian economy. The Russian government has ambitious plans for integration into the Asia-Pacific region, the implementation of which is impossible without the accelerated development of the Far East and the diversification of the sectoral structure of the economy. According to the concept currently in force, it is planned to develop high value-added industries in the region that are focused on exports to the APR. It is for these TTP plans that there is some danger. However, it should not be exaggerated, because the main market for Russian potentially new exports is China, which is not covered by the agreement.

At the same time, the TTP provides Russia with new opportunities. So, preferences within the framework of the agreement are provided for goods with a localization level of production of at least 45%, so Russia has good prerequisites for industrial cooperation with TTP member countries with subsequent withdrawal of joint products to the markets of other participating countries on favorable terms. This is especially relevant for interaction with Vietnam, with which the EAEU has a free trade zone.

The value of TTP should also be considered in a broader context. First, it is an element of the US integrated foreign economic strategy aimed at creating new rules for international trade and international economic interactions on the whole, along with the TTIP. If both projects are implemented (and given that they meet the objective challenges of the new stage of globalization, there is little doubt about this), these rules will be written without Russia's participation. Given that some provisions of the TTP Agreement (including provisions on state companies, government procurement, protection of intellectual property rights, etc.) conflict with the economic model built in Russia, the gradual extension of their rules to the whole world can become a serious A challenge for the Russian economy.

Secondly, the TTP agreement can activate a whole range of other processes and initiatives that are directly related to Russia. For example, China can accelerate its movement to the West, the key element of which is the initiative “One belt - one way”. The process of negotiations on the RVEP is continuing, participation in which Russia, unlike the TPP, does not seem impossible, especially given the increasing support for the ideas of developing comprehensive economic cooperation in Greater Eurasia. Finally, the success of the TTP may be an important impetus to the long overdue reform of the WTO, which is in a protracted crisis.

Let the current direct impact of the TTP Agreement on the Russian economy be small, to regard it as something that has nothing to do with Russia is counterproductive. TTP is an important part of the new world. And it is time for Russia to think about its role in it.

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