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Chile Moves Forward: The importance of the Trans Pacific Partnership for developing countries

February 23, 2016

 

 In early October 2015, twelve Pacific Rim countries concluded the negotiations of a mega regional trade agreement, the Trans Pacific Partnership (TPP). This trade agreement was negotiated among like-minded countries that consider further trade liberalization and deeper commercial integration as the best policy for development and growth. All of the TPP members have signed bilateral trade agreements before, and on average, each TPP member country has four trade agreements with other TPP members.

 

Only one of the twelve countries, Chile, has negotiated bilateral trade agreements with every other member of the TPP already, and despite this, Chile decided to participate in the negotiations to join. The obvious question that arises from Chile’s decision is what would it gain from this agreement if it has already reached bilateral trade agreements with all of the other members? According to Chile’s authorities, being part of the TPP brings the country additional benefits that the bilateral agreements were not able to provide. To understand Chile’s position, it is important to first review the main characteristics and significance of the TPP.

 

The TPP: Two sides of the same coin

 

The TPP has three key features: the countries that are participating in the agreement, the number of chapters included and their scope. The 12 countries participating in the trade deal are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. Together they have a population of 800 million, a combined GDP of USD 28 trillion, and around 36% of the world´s GDP, making it the biggest and most important trade agreement ever reached.

 

 

Source: US congressional research service, July 2015. World Bank, February 2016. Produced by author

 

This agreement also creates a vast free trade region and a powerful trading bloc, given the market size and purchasing capacity of some of its members. In 2014, the TPP members were responsible for 23% of the world exports and 26% of the world imports. During the same year, trade among member countries reached an estimated USD 2.082 trillion, which is expected to increase after the agreement is ratified.

 

At the same time, the importance of the TPP lies in its sheer size and scope.  The agreement is made of 30 chapters and covers a vast number of trade and trade related topics. Among them, it regulates and establishes standards on new areas that no other trade agreement covers, such as E-Commerce, State-Owned Enterprises, Regulatory Coherence, Financial services, and more. In addition to these new areas covered, in chapters such as Market Access for Goods, Intellectual Property, and Rules of Origin, the commitments of the member countries go far beyond past trade agreements. The TPP reduces more than 18,000 tariffs across all member countries and sectors, including sectors considered sensitive for certain countries due to the political or economic importance they have, as in the case of agricultural and dairy products, automobiles and parts.

 

However, the agreement’s large coverage of so many issues and its extent beyond the WTO and other trade agreements in certain aspects is one of the causes for serious criticism against it. Several civil society groups, scholars, and certain lobbyists see the extended reach of the agreement with hesitation, given that many topics included are highly sensitive. Topics including intellectual property rights, patent laws, and company-state dispute settlement mechanisms will require many countries to change internal regulations and laws in order to comply.

 

The inclusion of such topics is also problematic given that they were negotiated under a trade liberalization framework and possibly without considering the effects of such changes on other issues regarding the environment, human rights, state sovereignty and public health, to name a few. Furthermore, the negotiations were done in secret, without public scrutiny of the terms negotiated. Scholars like Stiglitz and Hersh (2015) argued that such practices give too much power to certain industrial lobbies and interest groups, and that as a result, the TPP “is an agreement to manage its members’ trade and investment relations – and to do so on behalf of each country’s most powerful business lobbies.”

 

Finally, recent and ongoing developments in the international trading system plays a large role in the TPP’s strategic significance.  Over the past several decades there has been a proliferation of bilateral trade agreements, particularly among developed countries and their most important trading partners within developing countries. Several scholars have linked this explosion of agreements to the formation of transnational production networks across the globe, and multinational companies and governments’ need to regulate this increasing trade and investment. However, this has resulted in what Bhagwati (1995) calls the “Spaghetti Bowl Effect”, the fragmentation of the international trading system with multiple rules and regulations among different trade deals, complicating the expansion of trade and investment among different trading frameworks.

 

Thus, the formation of the TPP, along with other mega-regional trade agreements, such as the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU, and the Regional Comprehensive Economic Partnership (RCEP) between more than 15 countries in the Asia-Pacific, both currently in negotiation, responds to the need to homogenize the multiple rules and regulations of the international trading system among a greater number of countries in order to allow for a smoother expansion of the global production networks.

 

Chile’s support for the TPP

 

Chile has understood these factors and the strategic importance of participating in the TPP and views them as positive gains for the country. To start, a clear benefit for Chile is the elimination of new tariffs that were not included in previous trade agreements. This provides Chilean exports with greater access to a key region, considering that 30% of Chile’s exports go to TPP countries, and that the agreement includes Chile’s second and third biggest export markets, the US and Japan.

 

Source: Trade Map, February 2016. Produced by author.

 

In addition to market access, Chile considers that belonging to the TPP gives the country an advantage to integrate itself in the global value chains of production. This benefit will come from the rules of origin and accumulation clauses established in the TPP. The rules of origin state that one country can buy primary and intermediate products from another member country in order to produce finished goods and export them within the TPP region as its own locally produced goods. This allows them to enjoy the tariff reduction and other benefits established in the agreement, while promoting production linkages among member countries. With this in mind, Chile has identified certain sectors that can benefit from these rules, such as preserved and tropical fruit juice, tropical wood furniture, electrical panels and dairy products.

 

Furthermore, according to Chile’s authorities, the chapter that regulates investment will bring further benefits to the country. They explain that since some of the bilateral agreements signed with certain TPP members did not include an investment chapter, the TPP will help to establish a uniform legal framework among the member countries to provide a clearer investment atmosphere capable of attracting more foreign investment.

 

The Chilean government’s outlook on these benefits demonstrates that it has understood the strategic significance for the country to participate in global production networks as a way to maintain an advantageous position within the international trading system. The 12 members will now be able to homogenize their regulations on topics like trade, investment and intellectual property rights, thus facilitating the integration of their economies with the expansion of foreign direct investment and the consolidation of global value chains among its members.  

  

It is important to mention, however, that Chile is already one of the most open economies in the region, and has signed trade agreements with a great number of countries, including the US, the EU, Japan, and China.

Therefore, Chile´s participation in the TPP will not require big changes in its legislation, standards and current tariffs, since many of these commitments were established in previous trade agreements.

This situation makes it easier for Chile to focus on the benefits of participating in the TPP and without having to consider as much the potential short term costs associated with such commitments. In the case of countries with more closed economies that have no trade agreements or only very superficial agreements, such as Bolivia and Ecuador to name a few, participating in the TPP means a new challenge given the new standards and regulations they will need to implement and the economic and political costs such implementation will represent, at least in the short term.

 

The way forward

 

Given the scope and reach of the agreement, it is likely that the TPP will become the new standard for future trade agreements, as countries seek to adopt the same standards and concessions. Under this logic, and considering the importance of trade for countries´ development and growth, it is not wise for countries to turn their backs to such agreements, as they will be closing off their economies to the new order in the international trading system. Such exclusion can result in trade and investment deviation away from countries that are not part of an agreement, and towards members that enjoy the same rules and regulations, which provide a more predictable and secure environment for investment and trade.

 

Instead of debating whether to participate, countries should do so in a way that allows them to adapt these new rules to their own specific local contexts. Chile's policy decision is therefore a key one. It demonstrates its capacity to understand the new developments in international trade, and illustrates how it plans to reap the benefits that the agreement can bring to the country. Cautious governments should take the time to analyze the effects of such agreements on their economies, while considering at the same time the costs of exclusion. Rather than simply thinking of promoting its main and traditional exports, countries should analyze their capacity to participate in certain networks of production. Once these sectors have been properly identified, countries need to seek, within the agreement, to establish a clear and favorable investment framework that stimulates and promotes foreign investment into the country, and in particular, in these sectors. By doing so, countries will encourage technology transfer, develop new sectors of the economy, and increase exports of new products: all of which will produce higher quality growth and development.

 

 

Esteban Tinoco is an international trade, political economy and development specialist. He holds a Master’s degree in International Economic Policy from Sciences Po and a Master´s degree in International Political Economy from the LSE. Born in Ecuador, he currently works in Ecuador´s Ministry of Foreign Trade and speaks Spanish, English and French.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sources:

  • Baldwin, R. E. (2006), Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path of Global Free Trade. The World Economy 29(11): 1451-1518.

  • Bhagwati, J. (1995), US Trade Policy: The Infatuation with FTAs. Discussion Paper Series No. 726, Columbia University, New York.

  • CEPAL (Oct 2015), Panorama de la Inserción Internacional de América Latina y el Caribe 2015. La crisis del comercio regional: diagnóstico y perspectivas. División de Comercio Internacional e Integración. Santiago, Chile.

  • DIRECON (Dirección General de Relaciones Económicas Internacionales) (2015), Acuerdo Transpacífico TPP. Santiago, Chile.

  • Rosales, O., et al. (2013), Las negociaciones Megarregionales: hacia una nueva gobernanza del comercio mundial. CEPAL, Serie Comercio Internacional. Santiago de Chile.

  • Stiglitz, J. Hersh, A. (2015), The Trans-Pacific Free-Trade Charade. The project-syndicate. New York, USA.

  • Williams, B (2015), Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis. US Congressional Research Service. Washington, USA

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