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Global Weekly: How do “new generation” trade agreements such as the TPP differ from traditional free trade agreements?

Global Macroeconomics Team's picture

On October 4, 2015, 12 Pacific Rim countries concluded negotiations on the Trans-Pacific Partnership (TPP). As a deep and comprehensive “new generation” trade agreement, the TPP covers traditional barriers to trade in goods and services, investment activities, and other trade-related areas.

  • In the 1990s, before the surge in bilateral and smaller regional agreements of the 2000s, two large Regional Trade Agreement (RTAs) emerged: The European Union (EU) Single market (established in 1993) and the North American Free Trade Agreement between Canada, Mexico, and the United States (NAFTA, established in 1994). Several other RTAs were established in the 1990s, including Mercosur in South America in 1991, the Association of South East Asian Free Trade Area (ASEAN) in 1992, and the South Asian Preferential Trading Arrangement (SAPTA) in 1993. By 2015, the number of RTAs reached 274. Earlier RTAs began as initiatives to reduce tariffs (Figure 3). Over time they grew to reduce non-tariff barriers. More recent regional negotiations have, from the outset, focused on more ambitious, deep, and comprehensive agreements. In addition to the TPP, major new negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian economies, and the Trans-Atlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. An even larger Free Trade Area of the Asia-Pacific (FTAAP) among 21 Asia-Pacific Economic Cooperation (APEC) economies is also in early stages of discussion.
     
  • The rise of regional agreements has rekindled debate on whether they support or impede global efficiency and activity in member and non-member countries. RTAs open markets between partners, leading to a more efficient division of labor, technology spillovers, and related productivity growth. RTAs are also often a step toward larger agreements through the process of competitive liberalization. For example, the European integration project has expanded from six to 28 members so far. NAFTA grew out of an agreement between Canada and the United States, and while it did not itself expand further, it did spawn a network of agreements between its members and third partners. Studies of the political economy of trading blocs point to other positive impacts of RTAs. The domino theory of regionalism argues that as a bloc grows, potential partners likely benefit more from joining, and therefore offer better deals to secure admission. Outside the bloc, the bloc’s policies could become an external anchor for institutional reforms in potential future member countries.
     
  • While RTAs may significantly benefit members, they can hinder economic activity for non-members. The competitiveness gains developed in these new blocs could potentially divert trade away from more efficient non-member exporters towards less efficient ones – the “trade diversion” effect. In addition, RTAs can result in the erosion in the value of preferences given to Least Developed Countries (LDCs) under existing duty-free, quota-free, preferential schemes, such as the ‘Everything but Arms Initiative” of the European Union and “African Growth and Opportunities Act” of the U.S. RTAs within natural trading blocs – among countries that already trade intensively with each other – tend to have modest diversion effects. As a percentage of their total trade, trade among the prospective member states of TPP, FTAAP, and RECP already exceeds that within NAFTA (Figure 4).
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FIGURE 3 Earlier RTAs predominantly aimed at reducing tariffs.
 
FIGURE 4 Trade among the prospective member states of FTAAP, TTIP, TPP and RCEP already exceeds that within NAFTA.