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The Regional Route to Global Free Trade

MADRID – With the moribund Doha Round of multilateral free-trade talks awaiting its last rites, a new wave of regional trade negotiations has de facto taken up the mantle of establishing a global trade regime. President Barack Obama’s administration has placed the United States at the center of this shift, embracing two major simultaneous negotiations: the Transatlantic Trade and Investment Partnership (TTIP) with the European Union; and the Trans-Pacific Partnership (TPP) with 11 countries in the Americas and Asia.

As the only party to both initiatives, the US is well placed either to move them forward in harmony or to leverage the progress of one negotiation against the other. Beyond affecting America’s immediate negotiating partners, the latter approach would gravely damage progress in establishing a rule-based global system.

The new strategy of regional negotiations can succeed and provide a foundation upon which an international trading regime can be built only if the TTIP and the TPP are balanced and approachable to the wider international community. Otherwise, there is the danger of creating expensive global imbalances and even fragmentation.

Europe has an important role to play in this regard. Broadening the discussion beyond a focus on the big two agreements – and beyond some of their substantive issues – will create a sense of urgency and purpose, pushing the US to engage actively or risk losing its central role in the global trade agenda. The EU is well placed to foster a conducive atmosphere by parlaying its existing trade partnerships, beginning with TPP members Mexico and Chile, with which it has longstanding free-trade agreements, and Singapore, with which it recently completed free-trade negotiations.

More significant are Europe’s other ongoing trade negotiations, which could be used to push the TPP/TTIP agenda forward. The EU-Canada talks, which should become a building block for harmonizing the TTIP and the TPP, have stalled and must be revitalized. Even smaller ongoing negotiations, like those with Malaysia and Vietnam, offer some opportunity. Most important, however, are the recently launched EU-Japan free trade talks.

Europe and Japan are both facing difficult challenges, including rapidly aging populations and sputtering economies. Yet Japan enjoys the significant advantage of national cohesiveness, which occasionally allows for the type of bold and decisive action lacking in Europe.

This assertiveness has been on full display under Prime Minister Shinzo Abe, who has vowed to attack Japan’s prolonged economic morass using “three arrows”: expansionary monetary policy, aggressive fiscal policy, and structural reform.

Abe’s determined pursuit of the first two prongs has been well documented. Structural reform, however, is a more difficult proposition, with strongly entrenched interests and cultural values militating against change and opening up a partly closed economy. Indeed, the OECD ranks Japan last among member states in terms of regulatory restrictiveness with respect to inward foreign direct investment. The Abe government has touted trade agreements as a good way to push through needed reforms, and, although it is too soon to know what Japan’s true position will be, indications are that it is a motivated negotiator.  

For Europe, which is seeking to expand its footprint in Asia, a strong link with a reformed Japanese economy would be a boon. Indeed, investment in Japan currently accounts for less than 3% of the EU’s total outward FDI. More significant, an engaged Japan that is willing to reach a deal will be a useful ally in pushing a forward-thinking and balanced trade agenda, particularly as the TTIP and the TPP appear headed for difficult waters.

Japan’s entry into the TPP this spring was a game changer. With a GDP matching that of all other TPP partners combined (with the exception of the US), Japan adds significant economic heft. But it also brings added complexity, reflected in the reluctance shown by the US Congress immediately after Japan announced its desire to join the TPP negotiations, as well as in recent comments by American auto executives. The TPP is already in its 18th round of discussions, and, with some rumblings that China may join the negotiations, it appears that the talks will be prolonged significantly.

Meanwhile, the euphoria that surrounded the TTIP in February, when Obama included it in his State of the Union address, has faded. Talk of “one tank of gas” has been drowned out by the drumbeat of lexception culturelle and the revelations of US spying on Europe made by the rogue American intelligence contractor Edward Snowden.

The EU-Japan negotiations could be lithe in comparison. The bilateral nature of the talks makes them less unwieldy than the ever-expanding TPP. The disparity between the parties in terms of economic size – the EU’s GDP is almost three times larger than Japan’s – is not so wide as to lead to the strong-arm tactics seen in the EU-Canada talks (a relationship in which Europe has a tenfold advantage in terms of output). Moreover, the EU-Japan talks lack the historical, cultural, and emotional baggage of the transatlantic relationship, and relatively subdued attention to them provides an easier environment in which to hash out difficult issues, such as government procurement and food safety.

Trade negotiations are never easy, and the EU-Japan talks will be no exception. But if these two big players, both struggling to regain their luster, recognize the potential for the talks to be an engine for global trade reform, vital political will could and should be generated – particularly if European officials can develop a bit of Abe’s boldness. If we are to keep this de facto regional trade round moving forward, we need more than just the TTIP and the TPP to do the peddling.

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