The Trans-Pacific Partnership, the largest regional trade agreement to date, is likely to bring economic and political losses to Russia, unless it changes its policy and decides to become a part of trans-Pacific trade liberalization in the future.
Japan's Prime Minister Shinzo Abe (L) takes the lectern as US President Barack Obama takes his seat during a State Dinner at the White House on April 28, 2015 in Washington, DC. Photo: AFP / Brendan Smialowski
The Trans-Pacific Partnership (TPP), a trade and investment agreement between twelve countries across the Pacific Rim (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam), was finally concluded on Oct. 5 after years of tense negotiations. This means that the largest regional trade deal in history has become a reality, with TPP signatories accounting for nearly 40 percent of global GDP and about one-third of world trade.
The benefits of TPP will be significant for the global economy. The annual welfare gains resulting from the agreement are estimated to account for $104.3 billion annually (0.1 percent of world GDP) by 2025, with the participants of the agreement benefitting the most. For example, the U.S. is projected to gain $13.9 billion annually (0.07 percent of GDP) due to reductions in trade costs, while Japan should gain $30.7 billion annually (approximately 0.58 percent of its GDP).
Indeed, the larger benefits of the trade liberalization that TPP creates result from better allocation of resources, increased productivity, and more product variety available for consumers. They 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 the event the liberalization actually takes place.
Moreover, the gains are also broad-based, with sectors such as services and exporters standing to see the most benefit; in the U.S., the food sector will benefit from TPP’s market access provisions, while Japan is likely to see gains in the transport equipment industry for the same reason.
Although the benefits for parties of the agreement are clear, the question is whether other countries can also gain thanks to the trans-Pacific trade liberalization. The abovementioned estimates show that other countries left outside of the agreement will lose on TPP, with China estimated at losing $15.7 billion annually (0.09 percent of GDP) and Russia losing $1 billion annually (0.03 percent of GDP) by 2025.
These welfare losses result from the diversion of trade from these two countries (in the language of equivalent variation, these numbers represent how much money needs to be deducted from an economy in case of no TPP to make them as well off as when TPP comes into force).
The fact that TPP is potentially costly for the Russian economy is probably the reason why Russian President Vladimir Putin recently suggested at the United Nations that some nations, including almost certainly the U.S., are in favor of a narrow group of the privileged, which are not required to take into account the interests of external actors.
This assertion may be true on its face, but only if we define “narrow” as the approximately 796 million people who will benefit from TPP. Moreover, the TPP is a regional trade agreement, thus negotiated outside the World Trade Organization (WTO) and without the requirement to consider the interests of other countries not part of the trade pact.
However, one must remember that this is a common approach in economic policymaking internationally, and a reflection of the current trend away from multilateralism in trade negotiations. Another important point is that the emergence of big regional trade deals in recent years is a direct consequence of no progress in the Doha Round negotiations, i.e. the inability of WTO to bring further trade liberalization.
It is also important to remember that so far the Russian experience with trade liberalization has not been promising, as Russia became a member of the WTO only three years ago and has continually used trade as a political weapon.
The trade liberalization process requires concessions and compromise, two approaches, which are not welcomed with open arms by Russian leaders (probably one of the reasons why Russia was not invited to the negotiations on TPP).
Russian protestations against regional trade agreements also ring hollow given its own regional integration initiative, the Eurasian Economic Union (EEU). Putin wants all former Soviet republics, except the Baltic States, to join the EEU, an organization that researchers at CASE have already shown has difficulties in defining its reason for existence.
Where Putin may rail against a “narrow group of the privileged,” Russia’s own trade policies seem to show that liberalization is considered only when it is done with weaker parties.
Of course, the creation of the EEU has not only been done for strictly economic benefits, an issue that also may be at play in TPP. While it is obvious that regional trade agreements change the world trade landscape, the economic dimension is not the only perspective that is important to consider in weighing the benefits of TPP.
The geopolitical issues matter here as well, perhaps even more for Russia than for TPP signatory countries. For the U.S., TPP is a way to promote a liberal economic order around the world and intensify their presence in the Asia-Pacific region (as part of the now-famous pivot to Asia). Thanks to TPP, other members of the deal can reduce their dependence on larger Asian powers – namely China, India and Russia – and intensify their relationship with the U.S.
Russia, though, seems not to be the most important in this geopolitical jigsaw puzzle. Commentators often indicate that the agreement is first and foremost intended to counterbalance China.
U.S. President Barack Obama himself claims that one of the most important arguments in favor of TPP is that if the U.S. does not write the trade rules in the region, China will do it. That is why, although Russia keeps complaining about TPP, it is perhaps flattering itself into thinking that TPP is directed against it.
In fact, it seems that the losses for Russia result via a more important geopolitical game between the U.S. and China. Indeed, the situation of Russia is different from that of China. Despite the fact that Russian leaders are hesitant to show any weakness, Russia (especially of late) is not as strong politically and economically as China.
Regardless of intent, Russia is being squeezed by TPP on one side and the further economic integration of the Western world, i.e. the Transatlantic Trade and Investment Partnership (TTIP), on the other. The fact that Russia is currently outside the two largest regional free trade agreements ever attempted and cannot benefit from them certainly poses a threat to Russian economic interests.
But although Russia was never considered as a possible party of TTIP, there is no denying that it could be the participant of trans-Pacific trade liberalization in the future. Such a possibility is not only analyzed by experts who believe that TPP can be a basis for a broader trade agreement among the 21 nations in the Asia Pacific Economic Cooperation forum. This claim is also present somewhere in minds of Russian leaders, which was reflected by the statement of Putin that TPP would be ineffective without the participation of Russia and China.
That is why one cannot exclude the possibility that someday the idea of the Free Trade Area of the Asia-Pacific (FTAAP) may eventually come true. Under this scenario, Russia should gain $152.3 billion in terms of equivalent variation, while China is estimated to gain $318.7 billion (the benefits for the U.S. are somewhat smaller – they account for $62.9 billion – although still larger than in case of simple TPP without China and Russia). The whole world would increase its welfare by $862.2 billion, showing that the larger the scope of trade liberalization is, the greater the benefits are.
As the TPP agreement is already signed, it seems that the best option for Russia to avoid economic losses and isolation is to promote the idea of FTAAP instead of complaining that it is not at the negotiation table.
Actually, by involving all countries of the Pacific Rim, FTAAP may by a good substitute for the WTO negotiations and should not be accused of not taking into account other important parties that are affected. The tool for improving the welfare of Russian citizens is then at hand for Russian leaders, and only the political will is needed. The door for further trans-Pacific trade liberalization is always open.
The opinion of the authors may not necessarily reflect the position of Russia Direct or its staff.