What happened recently?
“We, the trade ministers, of Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States of America and Vietnam, are pleased to announce that we have successfully concluded the Trans-Pacific Partnership.”
This announcement just ruffled the economists, the political scientists, the traders and the businessmen of the world. The USA presents this trade pact as the one to promote economic growth, enhance competitiveness, raise living standards, and reduce poverty. With extensive analyst reports, there remains no doubt that Japanese automobile industry stands to gain the most with cheaper access to the US market, biggest export market for the Japanese car makers. With Vietnamese eyes set on access to Japanese and US markets, it is likely that China loses its market share to players like Vietnam. Certainly, this historic agreement might change China’s position in the global trade spectrum.
No matter which country are you in, Trans-Pacific Partnership (TPP) is seen to gear one economy while slacking off another at the same time. But this might not happen immediately. And a lot more trade pacts are on their way which will together shape the trade world of late 21st century. What is surprising and needs attention is that while the world is sinking into protectionist policies, political leaders of 12 countries sat on a table to sign this common trade pact. This is more political than economic. While economic impact will take time to roll off, the immediate political effect can already be seen in the form of insecurities among other states, which are not a part of TPP. And the story is not very different for Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU.
If I am Morocco, I see TTIP happening and am keen on joining the European Union; if I am China, TPP is a big blow to my face; if I am India, I am one country being really left out; if I am Brazil, I would rather not discuss my case.
But are these major agreements like TPP and TTIP the only triggers? The answer is No. There is increasing focus on regional integration with immediate neighbours witnessed by South African Development Community (SADC) and ASEAN Economic Community (AEC), forming their own regional blocs. Countries like the US which have no neighbours are turning cross Pacific or cross Atlantic towards agreements like the recent Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP).
Even more than regional integration, countries are increasingly looking for bilateral relationships. Bilateral agreements are at their zenith, running fast ahead of the multilateral ones. A country like Canada, which ranks high on trade openness (trade forming 64% of its GDP), has signed 7 bilateral Free Trade Agreements (FTAs) in the last 7 years with Korea, Honduras, Panama, Jordan, Colombia, Peru and European Free Trade Association, and TPP bus is on its way. The list is long. These FTAs are raising eyebrows on the very existence of an institution like World Trade Organization (WTO) which does not support bilateral and regional agreements in the first place.
Despite the WTO regulations, countries are increasingly taking measures to play the game their own way. Lately, the Doha round aimed a major reform in the international trading system through reduction of trade barriers. With countries failing to agree on the agreements, be it on account of food security, domestic protectionism or any other, it can be said that the future of the Doha round is uncertain, if not fully bleak.
Today, people don’t know what is coming next. With increasing openness across borders, it is close to impossible to ascertain the source of prospective pain points. No wonder, countries are inclining towards domesticizing their economies. There are more capital controls than capital openness. China has imposed new capital controls on cash withdrawal; Cyprus took similar steps in 2013; Ukraine in 2014 limited the purchase of foreign currency; Argentina is the one with significantly high capital and foreign exchange controls. Relaxation of capital controls high up in the presidential campaign in Argentina stands testimony to the fact how capital control is one of the most contentious issues, in the life of a common Argentinean.
Increasingly, companies might not want to play global. For example, with a stronger dollar and volatility in China, Russia and Latin America, companies in the US are in a dilemma if they should rather focus on catering to the domestic demand, thereby increasing their domestic shares. If you export, you bring dividends back home in the foreign currency – not a very prospective scenario for the American manufacturers today.
Overall, trade in value is contracting. What is worrisome is that the trade in volume is also contracting. The world has seen the third consecutive year in which the trade grew at less than 3%.
There is a situation of overall slowdown and hence a global panic. Every country is navigating its own way, trying to buffer itself from the shocks in the global market. The battle rests with the one who navigates using the right compass.
Published in Huffington Post India