How this week's TPP trade deal will affect the developing world

8 October 2015
Articles and blogs
This week the United States, Japan, Canada and others, including some developing countries, reached an agreement on the establishment of a free trade area that will cover around 40% of the world trade.

Although the agreement still needs to be ratified and many details are yet to be addressed, this is a major development. The Trans-Pacific Partnership, or TPP, is the first ‘mega-regional’ agreement to actually be concluded.

What has been agreed?

For a start, most of the existing tariffs and duties applied on the trade between TPP members will be eliminated.

The agreement includes other disciplines beyond typical trade policy, such as government procurement rules, competition policy, and the controversial investor-state dispute settlement (ISDS) mechanism, which grants an investor the right to use dispute settlement proceedings against a foreign government.

It includes enforceable provisions – which can trigger trade sanctions – if environmental and labour standards are not met. This might have important implications for workers in countries like Malaysia and Vietnam, where labour unions will need to be authorised.

(It’s worth noting that developed countries had tried to include many of these so-called behind-the-border trade provisions in the current WTO negotiations, and met with significant resistance.)

It also includes a very phased liberalisation schedule in many agricultural products of interest for developing countries.

So what does the TPP deal mean for developing countries?

The effects on poorer countries are in two main areas: ‘preference erosion’, or other countries matching the level of preferential access available to the poorest countries; and what this all means for the main liberalisation forum – the WTO.

A domino effect?

In general, the TPP will only have a minor impact on most developing countries. The existence of previous free trade agreements between many TPP members means minimum additional tariff reductions eroding the preferences that benefit developing countries. And given that trade patterns between developing countries and TPP members are different, wherever there is a tariff cut as a result of the TPP, it will not affect developing countries.

But in the long run, the TPP may present challenges for the least developed countries. For example, some of the developing countries affected by Vietnam’s improved market access in the US – Kenya, Pakistan, Bangladesh – could decide to join the agreement (which, in principle, is open to every country). This would generate a knock-on effect, with other affected countries wanting to join as well to avoid being excluded from agreements involving their competitors.

Although they haven’t officially said so, Colombia, Costa Rica, the Philippines and Laos, among others, have already expressed interest in joining the agreement. They might trigger the interest of more countries. 

The problem here is that the TPP was designed primarily by developed countries with their own concerns in mind. Poorer countries may feel pressured to join, despite not really being ready to adopt many of its provisions and having had no opportunity to help shape it.  The consequences could be serious: a poor country will have to spend scarce resources litigating with a firm in a foreign court, thanks to the ISDS mechanism.

A challenger to the WTO

This brings us to the second challenge: the competition that the TPP presents for the WTO. The existence of a big alternative designed without developing countries’ needs in mind risks emptying the WTO negotiations of value for developing countries.

Although the TPP may provide a fast track to improve market access in many countries, it includes rules that may not address developing countries’ needs. Only the WTO negotiations can reduce all trade distortions affecting products and markets. The TPP implies another set of distortions in the world trade system.

The least developed countries need to become more aggressive in the WTO negotiations. Meanwhile large developing countries like China, India and Brazil should show greater leadership and), together with developed countries, be prepared to open their economies more to the poorest countries.

The WTO is the forum where developing countries’ trade interests are better represented. Developing countries must ensure it is these negotiations that lead to the main global outcomes on trade rules and liberalisation.

What’s your view? Leave a comment below and join our event next week to discuss mega-regional trade agreements and their impact on developing countries.