RBС. Offside: Will the Trans-Pacific Partnership help the global trade?

Offside: Will the Trans-Pacific Partnership help the global trade?

Evgeny Vinokurov, Director of the EDB Centre for Integration Studies

Yaroslav Lissovolik, Chief Economic at EDB

The establishment of a new major alliance, the TPP, is associated with both opportunities and risks for the global economy. These will be determined, to a significant extent, by the impact the alliance will have on the Chinese economy.

The Era of Transcontinental Alliances

The quantitative growth of integration unions in the global economy in recent decades is entering a qualitatively new stage that can be described as the creation of transcontinental blocs or mega-regional trade agreements.

On 4 February negotiations on the establishment of the Trans-Pacific Partnership (TPP), comprising twelve countries and led by the U.S., ended. The TPP will unite over one billion in population and account for 40% of the global GDP. There are also negotiations to set up a Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the EU. This union will cover almost 800 million people and over 50% of the global GDP. However, despite the seemingly constructive impetuses, orientated towards trade liberalisation within mega-alliances, concerns are growing as to risks for the global economy and its regulation, which arise as a result of such developments in regionalism.

In January 2016, the World Bank published Global Economic Prospects, with forecasts for the TPP. The authors estimate that the macroeconomic effects of this agreement will allow increasing the member countries' GDPs and trade by 1.1% and 11% respectively by 2030. Vietnam and Malaysia will benefit to the greatest extent (10% and 8% of GDP, respectively) from reductions in tariff and non-tariff barriers in larger markets such as the U.S., Canada, and Australia.

The NAFTA (North American Free Trade Agreement) countries should expect an insignificant positive effect at 0.6% of GDP. The reasons are the size of their economies and the relatively low level of trade with the Pacific countries.

Among the countries beyond the TPP, the East and Southeast Asia countries will face the greatest losses (Thailand 0.9% of GDP, South Korea 0.3% of GDP). The effect for Russia will be zero, according to the World Bank. Other countries and regions to suffer losses from trade diversion effects include China (-0.2% of GDP), India, and the EU.

With relatively low absolute effects for the U.S. economy, why do Americans need this initiative?

First, the agreement promotes the interests of American corporations and innovative sectors (biopharmaceuticals, IT, electronics) in Asia-Pacific markets. In the course of negotiations, the U.S. insisted vigorously on the provisions governing intellectual rights protection and the unification of sanitary and phytosanitary measures, and environmental standards, thereby creating a comfortable platform for their manufacturers. Economic benefits for American companies lie, to a greater extent, in the investment sphere rather than in trade dividends exclusively. Here the following motive emerges.

The tariff protection of markets is not that important at present. Non-tariff protections, regulations and technical standards, and intellectual property protection are significantly more important. The U.S. played a dominant part in establishing the TPP and now have all chances to become the central developer of trade rules, standards and technical regulations in the Asia-Pacific region. In addition, if the TTIP is effected with the EU, the existing, relatively balanced system of global trade regulations within the WTO will be actually substituted with a new system based on the dominance of two "mega-blocs."

Third, the TPP helps the U.S. to outstrip its main competitor in the region, China. However, the Chinese aspect may be the most important issue for the Pacific region and the global economy as a whole as regards the U.S.' dividends from establishing the TPP.

The Pacific Fault

The creation of the world's largest trade bloc, which excludes China and Russia, is equivalent to the creation of economic division lines in the region determining, to a significant extent, the growth of the global economy. That said, China's non-participation in the TPP worsens the situation with sales markets while export was the main source of high economic growth for decades. As a result, it becomes more difficult for China to "shift gears," from economic growth based on export and investment to increased consumer spending.

Moreover, with China being in many respects the determinant of the global economy, raw material prices and stability in the global financial markets, the loss by China of its trade and economic positions in the Pacific region can have an adverse impact on the global economic growth. In several recent decades, it was China that played the key part in stabilising the global economy both in the Asian crisis in 1997 and the global crisis of 2007-2008.

When the key support for the global economic growth starts to show the signs of instability, China's loss of its positions in trade may escalate concerns over the prospects for its growth and increase volatility in financial markets. That said, the negative effects for the Chinese and global economy will be not only through trade, but also investment channels, and this is not factored in fully in the current studies of the effects of TPP creation. In addition, a static analysis of influences on the Chinese economy fails to take into consideration the effects of TPP expansion and greater trade diversion effects, after the possible joining of other large players such as Indonesia, Thailand and South Korea.

All these TPP's negative effects on China may be multiplied after the Transatlantic partnership is launched, where the effects of diverted trade and investment flows will be most probably significant for China.

Chronically Slow Growth

In a more general context, the formation of the TPP and the TTIP is sort of global economy reload and reformatting that can weaken economic interaction between China and the U.S. In recent decades the stability of the global economy and its growth were ensured, in many respects, by intensified trade and investment cooperation between the two countries. At that, China played the key part in financing the U.S.' external deficits. With the slowdown in the global economic growth, this "reload" can become "overload" for the Chinese economy and a risk for the recovery of the world's economic growth. Without stabilisation or recovery of economic growth in China, low growth indicators in the global economy can become chronic.

These arguments do not exclude that both China and Russia will need to look for ways to interact with the TPP. However, a more detailed analysis of both positive and negative effects of the creation of transcontinental mega-alliances would be needed to determine the Russian strategy for cooperation with mega-blocs.

The TPP's negative impact on the economic growth of China, which is Russia's largest trade partner after the European Union, can affect the Russian economy as well. A slowdown in China's economic growth may impact raw material prices while the Russian economy is sensitive to such developments. Finally, Russia's dividends from the TPP should also be evaluated in terms of prospects and opportunities for the creation by it of trade and economic alliances in the Pacific region.