Integration: Benefits from Failure

Evgeny Vinokurov

Director of EDB’s Centre for Integration Studies

At the stroke of a pen Donald Trump, just as he had promised, put an end to the agreed and signed Trans Pacific Partnership (TPP). This is a landmark with a host of consequences, for Russia in particular.

What could the TPP become? Its ratification would form the largest free trade zone in the world encompassing twelve nations, 1 billion people and 40% of the global GDP. These twelve countries included all the world’s largest economies with access to the Pacific Ocean, except China, South Korea and Russia. It could ensure an increase in the member countries’ GDP and trade by 1.1% and 11% respectively in the long term.

Why had Trump arranged a campaign against this agreement and why did he sign the respective document the next day after he had taken office? There is no special doubt that the net effect of the agreement would be positive for the U.S. The nation would win in terms of GDP. However, who would be the direct beneficiary? Large-sized businesses and high-tech sectors would be the main winners. In essence, the agreement lobbied the interests of American corporations in innovative sectors (pharmaceuticals, biotechnology, IT, electronics). In the course of negotiations, the U.S. insisted vigorously on the provisions governing intellectual rights protection, as well as technical and environmental standards, thereby creating a comfortable platform for their manufacturers. Patent protection was to be enhanced: in fact, the rigid mechanisms of intellectual rights protection used in the U.S. were to be imposed on trade partners. The U.S. used their weight and promoted their standards in an attempt to secure their position as the generator of the rules of trade, standards and technical regulations in Asia-Pacific and – if the Transatlantic Partnership becomes reality – most parts of the global economy.

In return the U.S. would zero almost all import duties on industrial goods and most duties on agricultural produce (a total of 18,000 tariff items). This would result in an outflow of jobs to Asia. This was Trump’s main argument: "obese cats" should not enrich themselves at the expense of the American working class, neither should the Silicon Valley and Boston fatten at the expense of the Middle West.

There is logic in this position. The supporters of the TPP, however, also have their logic, pointing out to macroeconomic effects such as strengthened competition in the leading sectors having the highest added value, increased taxes, and benefits for American consumers due to cheaper imports.

The U.S. now intends to develop bilateral agreements with partnering countries. As the new Secretary of Commerce Wilbur Ross put it, America is "always stronger" and can obtain better conditions in bilateral negotiations.

Why is this story important to Russia and the Eurasian Economic Union (EAEU)? The World Bank’s calculations suggest that the TPP will have a zero effect on Russia and a mildly negative one (-0.3%) on China. These estimates help to understand the direct trade effect. In the longer term, however, if both TPP and the Transatlantic Partnership emerge, the EAEU would find itself in trade and investment isolation. The integration bloc which accounts for a mere 2.5% of the global GDP cannot afford this. It needs comfortable access to world markets and comfortable conditions to integrate into international division of labour and global value chains not only as a supplier.

Systemically, therefore, Russia benefits from TPP’s failure. The U.S. withdrawal from the partnership creates a window of opportunity for Russia and the EAEU. The EAEU’s current foreign trade strategy envisions the creation of a number of free trade zones with additional components, including, in the first place, investment treatment regulations. This strategy is correct in that it corresponds to the current challenges. I would like to remind that the EAEU has been vested with the authority to form the single customs tariff and enter into free trade zone agreements.

So, it would be easier to prepare and execute such agreements in Asia-Pacific. The free trade zone with Vietnam is already functioning. On 20 December 2016, the EAEU’s supreme authority considered it advisable to launch negotiations on a free trade zone agreement with Singapore. Negotiations are expected to be divided into two tracks: the Eurasian Economic Commission and the member states will negotiate trade in goods while the member states, with Russia’s coordination, will negotiate trade in services and investments.

It could be that New Zealand, which withdrew from negotiations in the spring of 2014, will knock on the door of the Eurasian Economic Commission once again. It is also quite possible that it will be easier to move on with South Korea, Indonesia, Thailand and Chile. Although trade with countries such as Chile is insignificant, these are useful bases and trade tends to grow when favourable conditions are created. As for South Korea, a joint research group estimated that the effect on Russia of a free trade zone, if created between the EAEU and this nation, may be between 0.17% of GDP (if only import duties on commodities are zeroed) to 0.64% of GDP (if both duties on commodities and services are zeroed and non-tariff regulations are reduced by 50%). Therefore, the estimated effects for South Korea suggest that deeper free trade agreements are advisable. The door, which closed behind the TPP, opens a window of opportunities for Russia and the EAEU to develop trade and economic relationships with the Asia-Pacific countries.