Forget about the WTO. Here's how Obama is about to change the game on free trade.
Feel that whiplash? Trade has gone from zero to 60 in the White House's agenda just weeks after Barack Obama's second inauguration. Two blockbuster deals -- the Trans-Pacific Partnership, which Japan will soon join, and a free trade agreement with the European Union -- could finally leave the World Trade Organization's ill-fated Doha Development Round in the dust. In fact, these deals offer more hope for world trade than the WTO ever did.
At its founding in 1995, the WTO was the first global mechanism for lowering barriers to commerce. Since then, it has done very little to fulfill its primary mission. The Doha Round, projected by the World Bank to raise global economic activity by $500 billion, has dragged on for a dozen years without agreement. In the meantime, estimates of its potential economic gains have dropped as low as $84 billion -- about 0.1 percent of global output -- with just $16 billion going to poor countries.
Any deal now would be lucky to generate even that amount. The Doha Round is a failure because of its complexity and the WTO's negotiating system. Everything except military hardware is on the table, and it has been impossible to reconcile every country's views on agriculture, services, and manufactured goods. Yet because every country has a veto, that reconciliation is exactly what is required for a deal.
Throughout the past 12 years, the WTO's most ardent supporters have urged countries big and small to stay committed to the Doha Round, resulting in a massive waste of resources. This has been especially tragic for poorer countries that have only small teams of diplomats and lawyers responsible for pursuing bilateral, regional, and global trade deals around the world. Dozens of them, from Belize to the Gambia, don't even have permanent representatives at the WTO's headquarters in Geneva, and have to rely on semi-annual "Geneva Weeks" to touch base with their colleagues.
Yet in spite of the futility engendered by perennially lower expectations, negotiators have kept on meeting because, as one put it, "the problem is no one knows what Plan B is." Now there is a plan B: the formation of big trade blocs including big and small countries, which will eventually find it in their mutual interest to negotiate with each other.
This is a huge step forward. In global trade talks, a few countries -- notably France and India -- have relished the role of spoiler. Deals that don't insist on being global don't have that problem; these big trade blocs are essentially coalitions of the willing. Their members are the leaders, and the laggards will have two choices: join, or get the short end of the stick.
When Japan signaled its intent to sign onto the Trans-Pacific Partnership (TPP) last week, it joined Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States in negotiations. The most important aspect of this bloc is its diversity, which will result in big gains from trade. Together, these countries will lower trade barriers -- and get richer.
For the United States this represents the next logical step in trade liberalization: bilateral and regional deals becoming the building blocks for a bigger free trade bloc. The TPP includes several countries with which the United States already has free trade agreements: Canada and Mexico through NAFTA, plus Australia, Chile, Peru, and Singapore through bilateral arrangements.
The White House hopes to attract other members of the Asia-Pacific Economic Cooperation to the TPP, including China, Russia, Indonesia, and South Korea. It's unlikely that every country will join, but that hasn't stopped the United States before. Even though the Free Trade Agreement of the Americas failed, Washington managed to sign bilateral and regional deals with 10 of the potential members, including Chile and Peru.
Of course, those would pale in comparison to a U.S. free trade agreement with the European Union, which Obama proposed last month in his State of the Union address. The economic gains could be enormous -- these are the two biggest economies in the world -- and they could not come at a better time. But there are still plenty of legal, political, and perhaps even cultural hurdles. For one thing, any agreement would have to be consistent with the obligations of all the other pacts that both economies already have on their books, presumably including the EU's special programs for its former colonies in Africa, the Caribbean, and the Pacific.
The creation of big blocs may just change the game, however. While the United States pushes forward with the TPP, the EU has been seeking deals with members of the Association of Southeast Asian Nations, in hopes of bundling them into a regional agreement. A deal with the United States would pave the way for a megadeal between the TPP and an EU-ASEAN bloc. In total, these countries represented about 65 percent of the world economy in 2011, and a pact between them would come a lot closer to a global trade agreement than anything the WTO has done lately.
Once that happens, the world will be split into trade leaders and trade laggards. The leaders will get richer as their trade intensifies, but, as I wrote in my 2011 book, their living standards and product offerings will also converge. As a result, they'll be looking for new trading partners to restore the diversity of their blocs. At the same time, the laggards will see their own living standards fall behind, which could make them more eager to pursue foreign trade and investment.
These incentives will bring even more countries to the bargaining table, ultimately leading to trade agreements that cover the entire globe. And unlike the Doha talks, which haven't lowered a single trade barrier in 12 years, the benefits of free trade will build at every step of the way. Obama may have gotten a late start on trade, but a shift to regional deals will give him a great chance to finish strong.