The Trans-Pacific Partnership is one of the largest trade agreements ever attempted. The treaty will bring about significant economic benefits, but it may also lead to the further economic isolation of Russia unless Moscow begins to embrace greater trade liberalization in Asia-Pacific.
Demonstrators rally for fair trade at the Capitol in Washington. The signs refer to the proposed expansion of the Trans-Pacific Partnership, TPP, an international trade pact, and, to fast track negotiating authorityal, so called trade promotion authority or TPA, for trade agreements negotiated by the president. Photo: AP
For a very different take read "Why the TPP free trade pact does not make sense for Russia"
The U.S. Senate’s May 22 passage of fast-track legislation is likely to boost negotiations on the Trans-Pacific Partnership. Already, participants in the trade talks claim that they are in the final stages of discussions after more than five years of debate. If signed by the U.S. Congress, however, the TPP could have negative trade and economic consequences for Russia, especially given its recent pivot to Asia-Pacific.
The Trans-Pacific Partnership (TPP) is a proposed trade and investment treaty between twelve countries across the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The conclusion of the TPP will constitute the creation of one of the largest trade agreements ever attempted.
TPP countries account for nearly 40 percent of global GDP and about one-third of world trade. As with any trade liberalization, TPP will bring about important economic benefits – estimates show that, thanks to the agreement, the annual welfare gains for the world economy will amount to $104.3 billion by 2025.
The main beneficiaries will, of course, be the participants of the agreement, with the U.S. alone projected to gain $13.9 billion annually. These welfare gains are measured in terms of so-called equivalent variation – the amount of money the economy would need to be paid without the trade liberalization to be as well-off as in case the liberalization actually takes place. The benefits will result from more efficient allocation of resources, enhanced productivity and increased product variety available for consumers.
The implications of fast track authority for TPP
Although the primary talks on a possible trade agreement (the Trans-Pacific Strategic Economic Partnership Agreement) between some of these countries took place as early as 2002, the key advancement in trans-Pacific trade liberalization was when the United Stated joined the negotiations in 2009, after Barack Obama took presidedntial office.
Indeed, the Obama administration treats TPP seriously – it is one of the main goals of its trade agenda, and Obama hopes to conclude the agreement before he leaves office in 2017. Unfortunately, there have been some delays in negotiations because of disagreements among the parties involved, for instance related to intellectual property rights protection, but also due to the peculiar instrument of “fast track authority” given to the U.S. President by Congress.
Fast track authority (also called trade promotion authority, or TPA) is a temporary power given to the President of the United States by Congress to negotiate trade agreements with other countries which can be either accepted or rejected but not amended by Congress. The United States Constitution states that this is the authority of Congress to regulate commerce with foreign nations.
By giving TPA to the President, Congress renounces a part of its power and enhances the bargaining strength of executive power in trade negotiations. Without fast track, the President’s hands in negotiations are somewhat tied and commitments are not fully credible, as they can be amended by the Congress before ratification.
Fast track has a long history. Introduced by the Trade Act of 1974, it has been given to every president since Gerald Ford, with the exception of Bill Clinton, who failed to obtain it between 1994 and 2001. Fast track authority has been granted for periods of different length, with its authority often lasting beyond one presidency. The last extension of TPA expired in 2007, before the negotiations on TPP were launched.
The Obama administration has strived to renew this fast track authority since 2012, primarily in order to conclude TPP, but has run against much opposition to the agreement (which has thus translated into opposition to TPA). Interestingly, as TPP is supported by usually pro-trade Republicans and opposed by some Democrats loyal to labor unions, the agreement and fight over TPA has created an odd coalition of Republicans in Congress and a Democratic president.
This will be a crucial step forward towards the conclusion of the agreement, as the other eleven countries have made it clear that they will not present their final offers unless Congress gives TPA to the President. This means that fast track authority is a condition sine qua non for the successful completion of the agreement. Once President Obama is given this power it is likely that trans-Pacific trade liberalization will come true soon, at least before 2017.
TPP and geopolitics
But while TPP stands to generate impressive economic gains, these benefits are not the sole motivation for engaging in trans-Pacific trade liberalization, and geopolitics matters here as well.
By participating in TPP, the U.S. may be hoping to blunt the strength of other powers across the Pacific (especially China), increase its presence in the Asia-Pacific area (the world’s fastest growing region), and promote a liberal economic order around the world.
For other countries of the agreement, the TPP is a way to become less dependent on the large Asian powers – specifically, China – and to increase linkages with the U.S., which remains still the strongest economy in the world.
TPP’s consequences for Russia
And what of Russia? Since the disintegration of the Soviet Union, Russia has not been particularly interested in its Pacific regions and has tried to act as a European, not Asian, country. Recently, however, with Europe a more hostile environment for the Russian economy, Putin has made a sustained political pivot to Asia.
But there is great potential for the TPP agreement to stall the momentum that Russia has made in Asia; it is estimated that Russia will lose on TPP in economic terms, by 2025 sustaining a $1 billion welfare loss. Again, this is measured by equivalent variation – how much money needs to be deducted from the Russian economy in case of no TPP to make it as well-off as when TPP comes into force.
Equivalent variation is here negative, which means that Russia would be better-off without TPP. Russia loses because enhanced trade takes place somewhere else, it cannot enjoy productivity gains and better allocation of resources resulting from trade and Russian consumers do not have access to more varieties.
Moreover, the additive effect of TPP in the east, coupled with another big free trade agreement between the U.S. and the EU, i.e. the Transatlantic Trade and Investment Partnership (TTIP) in the West, will contribute to the further economic isolation of Russia.
Russian President Vladimir Putin recognizes this possible threat and has treated TPP as “another U.S. attempt to build an architecture of regional economic cooperation that the U.S. would benefit from.”
Moreover, Russian leaders have expressed the belief that TPP will be mostly ineffective without the participation of Russia and China. Indeed, some experts claim that TPP is merely a basis for a broader trade agreement between all 21 countries of the Asia Pacific Economic Cooperation forum, including Russia and China. Such an eventuality could mean Russia would be able to blunt U.S. influence in the Pacific Rim.
In fact, if this concept of the Free Trade Area of the Asia-Pacific (FTAAP) ever comes true, Russia will be the second greatest beneficiary (after China). Thanks to productivity gains and broader choices for consumers, Russian welfare is projected to rise by $152.3 billion (a large portion of the estimated world gains of $862.2 billion).
Certainly Russia cannot ignore these estimates, but as for now it has chosen to observe what will result from TPP and to focus on the integration project in which it is a leader, i.e. the Eurasian Economic Union. This shows an orientation towards the former members of the Soviet Union rather than the Pacific; this may be due to the fact that it is the undisputed leader of the Eurasian Union, while in the Pacific it needs to deal with stronger partners (the U.S. and China).
At this point, it looks like the imminent extension of fast track authority to President Obama will accelerate the conclusion of TPP, a consequence which likely will not be beneficial for Russia both in economic and geopolitical terms. It is probably that the treaty will deepen economic isolation of Russia, as well as worsen its position in Pacific region.
To avoid these effects, Russia needs to swallow its pride and try to become a part of trans-Pacific trade liberalization, which doesn’t necessarily have to be through TPP. In fact, the best option for Russian leaders seems to be an active promotion of the idea of FTAAP, in which almost all countries of the Pacific Rim are involved. By positioning itself as a leader in inclusive and expansive liberalization, Russia and the region will both stand to gain.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.