Mercantilism in trade agreement rules-setting makes weaker economies slaves to the interests of economic hegemons.
A piece of news recently became popular in China: Germany is now the world’s largest trade surplus “bogeyman,” thanks to its persistent adherence to mercantilist policies. Germany’s high trade surplus – the biggest ever recorded in German history – attained amidst a wobbly economic recovery in Europe reminds China that the latter is hardly alone in pursuing economic policies that prioritize national interest over global and regional considerations of economic efficiency and political stability.
The classic mercantilism, the one associated with the idea that the precious metals obtained through a favorable balance of foreign trade were essential to a powerful nation, may be historically obsolete. The core of the mercantilist view, namely that self-interested states maximize economic development by optimizing political control to strengthen national power, is very much alive and well. Indeed, the vitality of mercantilism as a state of mind may have infiltrated every corner of the international political economy. If one considers the essence of mercantilism through Robert Gilpin’s definition – the attempt of governments to manipulate economic arrangements in order to maximize their own interests – multiple examples immediately come to mind: Japan’s “economic totalitarianism” system in which the entire society was united in deterring foreign competition in the postwar period, China’s ascendance since 1980s through an export-led development mode underpinned by a deliberately undervalued currency, and Germany’s unprecedented trade surplus accrued from the stringent austerity imposed on its economy to sustain competitiveness in the aftermath of the euro crisis.
Compared to those national triumphs of classic mercantilism, there is a less visible showroom, but one in which mercantilism presents itself over and over again in the form of legal mercantilism. This would be free trade agreements (FTAs), negotiations of which are usually kept in the dark. In bilateral FTA negotiations, legal mercantilist governments endeavor to impose their own (or desirable) trade rules and economic policies on other sovereign countries, usually with the aid of a combination of economic immensity, political hegemony, and asymmetric trade dependence, to create a sort of “international best practice,” favorable trade rules, and legal gains that can be leveraged and multilateralized at a regional and/or global level. The “competitive liberalization” strategy aptly pursued by the U.S. since 2002 is one such legal mercantilist policy, which aims to create another “gold standard” in international trade standard setting to project U.S.-friendly economic policies all over the world. In short, the U.S. expects the trade policies of other nations to follow those of the U.S., in the same way that their currencies used to peg to the U.S. dollar.
The U.S.–Peru FTA (PTPA) marks the very first success of Washington’s attempts to subordinate other countries’ sovereignty to its own national interest by squeezing non-trade-related provisions into a bilateral trade liberalization agreement and overriding foreign national laws. To provide a level playing field for American companies, the PTPA lays out detailed measures that Peru is obliged to take to govern its forest sector. The Forest Annex of the PTPA requires Peru to set up an independent forestry oversight body and even enact new Forestry and Wildlife Laws to legalize key provisions of PTPA. The U.S.–Colombia FTA (CTPA)’s labor provisions represent an “even more blatant assault on another country’s sovereignty.” Meanwhile, Colombia was forced to agree to establish a dedicated labor ministry; endorse legislations outlawing interference in the exercise of labor rights; double the size of its labor inspectorate; and set up a phone hotline and an internet-based system to deal with labor complaints. Examples of similar provisions abound: Don’t forget that the U.S.-Panama FTA has “helped” revamp Panama’s tax policy on behalf of Panamanians.
In a similarly coercive fashion, the EU has never been shy of imposing its own will on other countries in trade. Last week, a November 2011 diplomatic cable between Ecuador’s then-ambassador in Brussels, Fernando Yepez Lasso, and the Ecuadorian vice minister for Foreign Relations, Kintto Lucas Lopez, was leaked. The confidential communication suggests that Ecuador was “bullied into a EU trade agreement.” Denouncing it as “biased,” Ecuador was convinced the agenda was set to prioritize the trade liberalization component of the agreement that was able to accrue immediate gains to the EU over two other pillars of the EU-Andean Association Agreement, namely, an economic cooperation agreement and a forum for political dialogue, which were of more long-term significance to Andean states. So Ecuador pulled out of the talks in 2009. To compel Ecuador to return to the negotiating table, the EU resorted to stark threats of economic isolation as the Ambassador admitted in the cable that “[t]he proposal of the European Commission, which includes criteria that could exclude Ecuador from the preferences framework [...], is an element of pressure on Ecuador to join the free trade agreement.” Afraid of being left out and sustaining a $1.2 billion loss to its economy if trade ties with EU was disconnected, the Ecuador government crumbled and finally inked the agreement on July 17. This painful experience has taught Ecuador a lesson that what governs trade negotiations is the law of the jungle and prompted Ecuadorian President Rafael Correa to comment in an interview after signing the FTA that free trade “is the most anti-historical thing that exists; almost no developed country used it.”
In the rule making of regional and mega-FTAs, the U.S. likewise is not afraid to pressure other negotiating parties to move their stance closer to Washington’s. Although the multilateral nature of mega-FTA talks ensures that the U.S. may not be able to have it all its own way – for instance, the U.S. failed to pressure Brazil to agree to excessive concessions under the framework of the Free Trade Agreement of the Americas (FTAA) in the 1990s – mega-FTAs, once formalized, will curb potential adversaries’ dexterity in pursuing unfriendly or incompatible economic policies provided they are lured by a potential membership.
A case in point is the Trans-Pacific Partnership (TPP). Widely seen as an “anyone but China club” in the Pacific Rim as a politically constructed economic alliance to counterbalance China’s growing economic clout in the region, the TPP as a strategic legal undertaking to socialize China is rather less appreciated. TPP envisions locking-in economic reform efforts in China and encouraging it to further integrate into the world economy. As a trading bloc accounting for 40 percent of world trade with four out of China’s top ten trading partners potentially on board, the TPP represents a potent economic magnet for China. However, by explicitly claiming the TPP to be a 21st century trade agreement with a high bar in areas such as intellectual property, labor and environment protection, government procurement, e-commerce, and state-owned enterprises – all areas where China has a tarnished track record – the U.S. is sending a clear signal to Beijing: If China hopes to join the TPP one day, it will have to abandon its mercantilist policies and play by U.S. trade rules.
From China’s perspective, even if it wants to join the TPP, it will face a set of established TPP rules as a fait accompli, a formidable and well-articulated legal fortress guarded by all the savvy signatories. There is no possibility that the TPP will cater to the special needs of China by creating a set of exceptions, since the China-specific rules will undermine the initial strategic objective of using rules to contain China. Indeed, if new exceptions were to be created for China, it makes no sense whatsoever for existing TPP members to negotiate stringent rules in the first place. U.S. Trade Representative Michael Froman confirmed this point by asserting that “[o]ur goal is to have high standards. It’s not worth it to have another country join just to lower the standard.” As such, China will not seek TPP membership since it has no control over the process and outcome of TPP rule-making. It will have to pay a high premium for late TPP accession as a rule-taker and not a rule-maker. Given the maturity of TPP negotiations after twenty-one rounds of talks, the likelihood of Chinese participation is minimal.
China is well aware that it is hard to win a game when your opponent gets to write the rules; therefore, it’s highly likely that China will not play the game of TPP at all (although a high-ranking Chinese official did recently make positive noises about TPP membership). Washington’s penchant competitive legalization will also galvanize China to join the global trade legalization race, to fill the legal vacuum in those areas where no multilateral rules exist. Discarding its longstanding favoring of voluntary codes of conduct over formally binding rules in foreign economic relations, China has become more devoted to the Regional Comprehensive Economic Partnership (RCEP), a similar but much less ambitious trading bloc being negotiated among ASEAN and its six ASEAN+1 FTA partners. China sees RCEP as a platform to multilateralize China-friendly rules. A more plausible scenario for the legal rivalry is that these two gargantuan and largely self-sufficient trade blocs will write different trade rules at the expense of each other, eventually giving rise to the fragmented trade structure outlined by Michael Hudson in his book Global Fracture.
FTAs will never be free. The irony is encapsulated in the titles of the mega-FTA, Trans-Pacific Partnership, Regional Comprehensive Economic Partnership, and Transatlantic Investment and Trade Partnership, which all very noticeably lack the word “free.” FTAs pose an enormous threat to the ability of economically weaker governments to regulate their own economies, and the give economically stronger economies undue control over the domestic affairs of other sovereign states, making the latter slaves to the national interests of those economic hegemons. To paraphrase Jagdish Bhagwati, if you want to join a golf club, you need to play golf. But you shouldn’t have to go to church and sing hymns with the other club members.
Ji Xianbai is PhD candidate at S.Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. He holds the prestigious Nanyang President’s Graduate Scholarship (NPGS), and is also Associate Fellow at European Union Centre in Singapore