Trade, Regulations and TPP

The Trans-Pacific Partnership (TPP), the twelve-country trade initiative, is often billed by United States to be a “gold standard” trade agreement for the 21^st Century. It should usher trade agreements into a new era of trade policy in which administrative and regulatory barriers to cross-border commerce, not just tariffs, should be reduced, if not eliminated.

It is desirable ambition: an agreement that frees up trade in the Asia-Pacific region would give not only the region but the entire world economy a needed shot in the arm. Others countries would benefit, too, including China and Europe. As outsiders to the agreement, we should fear TPP failure rather than its success.

So it is all the more disappointing to witness how Asia-Pacific free trade talks now are scaling down the ambition to free up trade – and increasingly look to TPP as a mechanism to promote new regulations that compromises the grand free trade intention. This should be a wake-up call for anyone who cares about a trading system based on non-discrimination and rules to protect traders against disproportionate regulations.

Malaysia and the United States sent out a ‘canary in the coalmine’ some months ago when releasing proposals that would exempt tobacco products from the protection of TPP trade rules. No one can seriously claim trade agreements to be good instruments to promote public health by reducing tobacco use. Like the famous case in the World Trade Organisation when Indonesia sued the U.S. for discrimination of clove cigarettes, trade restrictions in tobacco support domestic production rather than public health.

Knowing that tobacco is a safe target, and that some regulations they are playing around with – like plain packaging – may be difficult to defend under current trade agreements, the U.S. is now doubling down on TPP regulations that oppose trade.

And not just in TPP – and not just the United States. The European Union, and several other countries, is injudiciously using its trade agreements to advance non-trade regulatory objectives. They have fallen in love with the cherished NGO idea that trade agreements should be about regulating production as well as freeing up trade. It is the grand bargain they think is needed to get reluctant deputies to ratify trade agreements – “we open up for trade if other countries raise the cost of their export products”.

An increasing number of sectors are refused the embrace of freer trade: timber, pulp and paper, chemicals, food and beverages, and pharmaceuticals. To name just a few. The new regulatory drive increasingly manifests itself in creeping trade restrictions or product-specific trade regulations. The trend is the antithesis to free trade – and has nothing to do in free trade agreements. It is also the main source of opposition to TPP now that the U.S. is pushing hard to secure an end-year  “principle accord” on key issues. Several other TPP countries are beginning to understand that a regulation heavy trade agreement is a Faustian pact that will hurt their chances to grow their economies through trade.

Mega-regionals like TPP, or big-to-big country FTAs like the one between the EU and the U.S., are consequences of the WTO being a dysfunctional mechanism to negotiate new trade agreements. But they can do a lot of damage to global trade if they effectively mean that new multilateral trade agreements have to incorporate the regulatory idiosyncrasies of the big and developed economies.

As several studies of recent measures of protectionism have shown: the biggest threat to the open world economy is not escalating tariffs but murky protectionism masquerading as appropriate regulations. New trade agreements should reverse that trend, not codify it.