Bringing positive energy to the trading system: EU, Japan and Africa move to sign mega-trade deals

Photo: Containers in HamburgTrade policy headlines are dominated today by the ups and downs of the United States-China relationship, the renegotiation of the North American Free Trade Agreement (NAFTA) and the Brexit process. There is concern on the effects that disintegrating closely linked economic partners could have on growth, jobs, supply chains, and consumers. The perils of a return to unilateralism and power-based mechanisms threaten the relevance of the World Trade Organization (WTO). Among the challenges confronting global trade governance, however, there is positive energy coming from several regions of the world in the form of renewed and pro-active leadership on preferential trade agreements (PTAs) on the part of the European Union (EU), Japan and Africa. This energy is welcome as it is a source of global cooperation, but more is needed to make sure it complements the multilateral trading system.

Leading the world to greater trade cooperation

These countries and regions have been working hard to eliminate trade barriers, develop new rules to govern the digital economy, foster more inclusive commerce, and bring greater certainty to trade and investment flows. Three of these initiatives are now coming into fruition with the recent sealing of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the African Continental Free Trade Area (AfCFTA), and the upcoming signature of the European Union-Japan Economic Partnership Agreement (EU-Japan EPA). China and a group of countries in the Asia-Pacific region are engaged in the negotiation of the Regional Cooperation Economic Partnership (RCEP), which may also be finalized in the near future.

These are very different agreements and it is maybe just a coincidence that the first two were rubricated in March while the third is up for signature next summer. Each of them is very relevant in its unique way; the three of them suggest that other countries are ready to pick up the baton and lead the world to greater global cooperation.

Japan and the revival of TPP

Under Japan’s leadership, all original members of the Trans-Pacific Partnership (TPP) minus the United States (US) have agreed to move forward with the trade agreement, now renamed CPTPP. With just the suspension of a few provisions on issues mostly of direct American interest and the revision of some specific obligations applicable to Malaysia, Vietnam and Canada, the 11 partners reaffirmed their commitment to trade integration in the face of the US decision to withdraw itself from the agreement in January 2017. And while the deal is smaller without the US, it is not without economic value: the CPTPP members accounted last year for about 14 percent of global gross domestic product (GDP). The agreement will also open new real market access opportunities. Farmers in Australia, Chile, New Zealand and Vietnam, for example, are already gearing up to sell their beef, dairy, cereals, wine and other products in Japan under favorable conditions. CPTPP was signed in Santiago, Chile on March 8 and Mexico became the first country to get legislative approval barely a month later. Other countries, including Thailand and Korea, have already expressed their interest in joining CPTPP.

Unleashing Africa’s intra-regional integration potential through AfCFTA

The AfCFTA is the most important trade initiative in Africa ever. Building on the existing regional economic communities, the mega-deal will bring together the 55 members of the African Union into a continental market with a cumulative GDP exceeding US$3.4 billion and a total population of over one billion people. It is a very significant first step that when concluded and successfully implemented, would become the largest free trade area in the world in terms of membership, opening up significant opportunities for people and firms from the region and beyond. The framework agreement establishing the CFTA and its annexes was signed in an extraordinary Summit of the African Union in Kigali, Rwanda, on March 21 by 44 African countries. Hopefully, the rest will join in the future.

Heavyweights come together in the EU-Japan EPA

The EU-Japan EPA will establish the conditions to govern trade among the two sides, which cumulatively represent close to 40 percent of the world’s GDP. Exporters of agri-food products, passenger cars, electrical machinery, pharmaceuticals and medical devices, among others, as well as providers of financial, telecommunications and transport services will find it easier to do business in each other markets. The parties have also agreed to greater cooperation in other areas, including climate change and cyber-crime. Importantly, the EU-Japan EPA consolidates a commitment to economic cooperation amongst two heavyweights, which could exert significant influence in global trade through enhanced coordination on standard setting and regulatory matters. The parties reached an agreement in principle just ahead of the G20 Hamburg Summit in July 2017 –probably as a signal to Washington. They are aiming at having the agreement come into force in 2019.

Leveraging the regional trade energy to strengthen the multilateral trading system

By opting for cooperation rather than isolation, for unity instead of fragmentation, these countries in Africa, Asia, the Americas and Europe bring hope to the world that trade integration will continue to be a powerful driver of growth and poverty reduction. Their leadership brings energy to the global trading system and increases the cost of being left out, acting as an incentive for other countries to re-engage tomorrow. It also paves the way for the future, as some of these PTAs are innovative on rule-making in new, dynamic areas of the global economy.

While the PTA energy is welcome, it can only complement, and not replace, the multilateral trading system. And there is a range of critical issues – most notably in the area of agricultural trade or subsidy reforms – that can only meaningfully be tackled at the global level. To be sure, not all regional advances need to migrate to the multilateral level, but they should not be left to operate in isolation as regulatory divergence and exclusion would not bode well for the system, nor its users. Groups such as the T20, multilateral development institutions and academic institutes can contribute to this process with more research to inform a structured dialogue on the relationship between the multilateral trading system and PTAs.

Photo: Anabel Gonzalez

Anabel Gonzalez is non-resident senior fellow at the Peterson Institute for International Economics in Washington DC, and a consultant on trade and investment. As former Senior Director of the World Bank´s Global Practice on Trade & Competitiveness (2014-2018), she led the Bank´s agenda on trade, investment climate, competitiveness, innovation and entrepreneurship to expand market opportunities, enable private initiative and develop dynamic economies. She previously served as Minister of Trade of Costa Rica (2010-2014), where she headed the country’s strategy to join the OECD, negotiated several trade agreements and contributed to attract over 140 foreign direct investment projects. She also worked as Director of the Agriculture Division at the World Trade Organization (2006-2009), where she provided support to agriculture trade negotiations, as well as technical and policy advice.

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