The Transatlantic Trade and Investment Partnership as a New Strategy to Marginalize Emerging Powers: A Divided Free Trade Order in the Making?

Abstract: The global financial crisis abruptly ended the golden age of neoliberal globalization (1990s-2008) for both the European Union (EU) and the United States (US) and caused a relative loss of their economic power. Simultaneously, the BRICS not only continued to catch up with an impressive pace (6% average GDP-growth), but also expanded their influence in multilateral organizations and intensified their mutual relations. Now, times seem dire enough for the old transatlantic partners to close the ranks by creating the biggest preferential trade agreement ever. The Transatlantic Free Trade Agreement (TAFTA) or Transatlantic Trade and Investment Partnership (TTIP) currently negotiated between the EU and the US has the potential to become a game changer: 1) TAFTA | TTIP offers a way to set up new rules and norms (first mover advantage) based on EU and US interests that, due to the deadlocked Doha Development Round, could no longer be carried through within the framework of the World Trade Organization (WTO) (withdrawal from multilateralism), 2) TAFTA | TTIP provides a strategy to contain the rise of China and other emerging powers by manifesting a new trench system of global trade, undermining production networks and diverting the flow of goods. Hence, TAFTA | TTIP is a reactionary move in the global geo-economic game and a warning that our world might become more divided than united.

Soon our globalized system of free trade may reach a decisive turning point: TAFTA | TTIP would create by far the largest free trading zone in history. It will put the vast markets of the EU and the US under one common umbrella yet, at the same time, it nurtures concerns among emerging powers that they might be left standing in the rain (Doody 2013). The BRICS which are still situated at the economic semi-periphery, largely dependent on demand from the Western core, and, besides other negative implications, might face trade diversion and a disruption of their production networks if TAFTA | TTIP is signed. So, it is not surprising that leading politicians of the BRICS have – at best – mixed feelings about what is currently negotiated in Washington and Brussels. But, why are the former economic champions on both sides of the Atlantic suddenly among the least supportive of global free trade and aspiring to create a new bilateral closed club? The reasons are manifold: TAFTA | TTIP has to be analyzed against the background of a deadlocked World Trade Organization (WTO) and a corresponding standstill of multilateral trade liberalization since 2001, an accelerated power shift towards the BRICS due to the global financial crisis of 2008, as well as eroding competitiveness and a lack of economic growth in the West vis-à-vis the emerging powers. Hence, from a geo-economic perspective, TAFTA | TTIP is a reactionary move of the pressured West with the aim to turn the tables on the BRICS. However, since it is particularly signified by exclusion rather than inclusion, it inherits the risk that it may trigger unanticipated reactions from the affected emerging powers. A dangerous division of the global trade order may be the outcome.

 

The Imperative of ‘Free Trade’

Stephen D. Krasner (2000, 20) prominently argued that the structure of global trade is strongly linked to the interest and power of states that aim to maximize their national goals: i.e., to aggregate a nation’s income, to obtain social stability, to gain political power, and to foster economic growth. Accordingly, the structure of global trade is anything but stable over time, yet may significantly vary in between periods of closure and openness as an ultimate response to alterations in the international distribution of state power and diverging national interests (ibid., 36). Historically speaking, the past proneness to free trade rather appears to be an exception than a norm and can be explained by the rare supremacy of a single state (ibid., 20). This so-called ‘global hegemon’ is said to have a strong preference for an open trade structure, since it is in an advantaged position to reap most of the benefits and has the capacity to either convince or, even, force other nations to join the prevalent trade order (ibid., 23).

This had particularly been the case under the rule of the British Empire (using a mix of attraction and gunboat diplomacy), until it was contested in the early 20th century, and is surely true for US hegemony (with a focus on international institutions) since the Second World War – until most recently. Even though, these two prominent cases should not obscure us from the fact that our current system of global free trade, which is taken for granted without being anything like the “natural order of things”, could quickly dissolve (Rodrik 2011, 47). In fact, the historic pendulum might soon swing back from the currently open to a more divided and protectionist trade structure, as it has already been the case during the 1930s, when Great Britain proved to be unable to uphold its hegemonic position and a new distribution of power was unclear. Now, the hegemonic US together with its European allies have come under pressure for which reason trade-based globalization, as we know it, may be at stake. To go even further, the case of TAFTA | TTIP might prove that we are already at the beginning of a transitional period that will result in a return to warring and fiercely competing trade blocs, in which brute power politics and national egoistic interests may prevail.

In any case, the award-winning South Korean economist Ha-Joon Chang (2007, 23) provided evidence that the “conviction that free trade […] is the key to global prosperity” is far from being a reality, but has to be seen as an imagined history which so far helped to sustain the dominance of the West and the dependency of the ‘rest’. As a matter of fact, the concept of free trade developed out of a two centuries-old historical narrative that repeatedly had the purpose to justify and solidify the respective global hegemons’ pursuit of power (Magnusson 2004, 7). Thus, what is now widely accepted as an economic doctrine is to a large extent based on an invented tradition that goes back to the (mis)reading of Adam Smith, David Ricardo, and other worldly philosophers, and was later backed up by – often disputable – empirical evidence from the Western-dominated economic discipline. However, the free trade doctrine “barely lived up to its theoretical claims”, as compliant weaker nations remained largely exposed to strong competition from the West, which secured its place at the commanding heights of the global economy (Shaikh 2007, 51; 57). However, in the past it was both leading European states and the US that belonged to the worst defectors of the hegemonic doctrine: They “relied heavily on trade protection and subsidies, ignored patent laws and intellectual property rights and generally championed free trade only when it was to their economic advantage”; yet later on prohibited others from repeating their path of success (ibid., 50; Ha-Joon 2007). That is to say, the given rules of the trade game are not only biased towards the nations of the West, which leads to an asymmetrical distribution of global wealth and welfare, but are also repeatedly ignored by them (Nayyar 2007, 80).

Nonetheless, some rather maverick countries – now referred to as emerging powers – managed to rapidly catch-up in this system of double standards and have come to challenge the West’s prerogative of making and interpreting rules. Consequently, the hegemon and its Western allies are increasingly reluctant to maintain a globalized free trade order in which others become more influential and start to similarly benefit. Thus, the EU and the US not only choose to slowly retreat from their once created free trade order, but – by means of TAFTA | TTIP – try to remix the cards in the global geo-economic power game (Rodrik 2011, xiv).

The Transatlantic Urge to Sustain Power

In spring 2013, President Obama’s sudden announcement of trade talks between the EU and the US took many observers by surprise; even though the idea of TAFTA | TTIP is far from being new and rested in the drawers since the 1990s, when it was first considered but soon failed due to political hesitancy in Washington and because of strong opposition coming from some European member states. Hence, what we see right now could be described as the return of TAFTA | TTIP, yet under far better global conditions of completion. This is the case since two decisive moments in the last decade have significantly raised the stakes for the West:

2001: China – the former politico-economic pariah – not only joined the Western-dominated WTO but quickly ascended to one of its biggest stakeholders and became an advocate of the interests of emerging powers. In addition, the arising stalemate in the Doha Development Round started to send a strong (and lasting) signal that the ‘rest’ was no longer willing to bow its head to the West and its ambivalent policies.

2008: The global financial crisis, which unexpectedly spread from the heartland(s) of the global economy, abruptly caused a significant loss of power and influence for the transatlantic allies vis-á-vis the BRICS, and ended what can be called the golden age of Western-dominated and institution-based neoliberal globalization (1990s-2008).

Today, in late 2013, we may have reached a critical juncture: The ‘heretical’ BRICS (6% average GDP-growth) have not only continued to be highly successful in their catch-up process, but have also started to offer veritable alternatives to the – so-far – dominant neoliberal dogma championed by the US (2% growth) and core EU-states (nearly no growth) (Gusenbauer 2013). Moreover, based on the most recent trends, the BRICS might relatively soon reach the point that they even surpass the joint economic power of the EU and the US (IMF World Economic Outlook 2012). As a matter of fact, the latter two have come to realize that their historical preponderance is significantly endangered by the urge of emerging powers to rebalance the global economy after a long period of Western domination (Alcaro & Alessandri 2013, 3-5; Campanello 2013). So, a re-strengthening of the transatlantic ties and further bilateral integration seems to be the only viable way for Brussels and Washington to at least slow down – if not even reverse or stop – this epochal transformation by “sending a strong signal to China and the rest of the BRICS that there is still life in the good old nations of the West” (Techau 2013).

Hence, TAFTA | TTIP is an attempt to alter the geo-economic dynamics by: 1) putting the transatlantic partners back in the driver’s seat of a global trading system they had once created and solely dominated, and 2) by containing the rise of China and of other emerging powers (Ash 2013). No doubt about it, TAFTA | TTIP – if signed – will surely become a game-changer in the global trade order. Yet, the crucial question is: in what specific way? Is it going to exert enough pull-capacity and force emerging powers to once more swallow the bitter pill of adapting to Western rules and standards or will it rather push the BRICS into forming a balancing trade coalition that will be joined by the weak and disappointed? Among the proponents of the former outcome is Richard N. Rosencrance (2013), who stresses that TAFTA | TTIP will reconsolidate the still-advantaged position of the West (still reflecting 50% of global output) by forcing China and other economically highly dependent powers, with low value-adding production capacities and limited innovative capabilities, back into line. However, this may turn out to be short-term thinking.

Even if TAFTA | TTIP will buy some time tor the transatlantic partners by creating a short economic resurgence and first-mover advantage, we should not underestimate the negative psychological effects on dynamic emerging powers (Felbermayr 2013, 11). Not unlikely, the BRICS will react by further intensifying and deepening their mutual bonds in order to increase their global leverage and joint negotiation power. So, the idea that TAFTA | TTIP will become something like a ‘circuit-breaker’ that may render possible a return to Western-led multilateralism by providing an attractive benchmark for others seems rather naïve, as it does not reflect the increased role and self-image of proud emerging powers (Suominen 2013). Instead, the BRICS may perceive the transatlantic trade initiative as an attempted blackmail as well as an instrument to marginalize them in the global economy (Mildner & Schmucker 2013, 5).

The Global Division of Trade

It does not come as a surprise that the insurmountable confrontation of the West and the ‘rest’ and the related paralysis of the WTO have led to an unprecedented increase in the popularity of bilateral FTAs; a precarious development which Jagdish Bhagwati (1995) once coined as the ‘spaghetti bowl effect’. Today, this effect has indeed materialized: more than 200 FTAs have been signed since 2001 in order to insure nations against the ongoing crisis of multilateralism and to prepare them for insecure times of increasing global competition and a return to power politics (Dieter 2013, 48; Suominen 2013). According to Joseph E. Stiglitz (2013) it is therefore an utter misunderstanding to believe that TAFTA | TTIP is about the (re-)establishment of a beneficial-for-all free trade system; instead he characterizes it as a ‘charade’ since we will see the creation of a managed trade system that – once more – is going to serve the special interests of the West. Hence, in the end, TAFTA | TTIP may neither become a ‘stepping stone’ nor a ‘stumbling stone’ – as some might argue – but the tombstone for the WTO and multilateralism in our still globalized trade order. What may happen afterwards is fully open to imagination. In the worst case scenario, the WTO could end up becoming something like the 21st century economic counterpart to the miserably failed League of Nations in a rapidly de-globalizing world. This is actually what economist Douglas A. Irwin (2009, 3; 23) refers to when he states that our world is on the brink of a severe ‘globalization backlash’.

It becomes obvious that the transatlantic partners are now in the defensive and need to prove that they are still capable to shape and lead the global trade order. However, in this regard, TAFTA | TTIP is both an ambitious and a risky undertaking. On the one hand, TAFTA | TTIP is surely ambitious in the sense that it should enable the US and its junior partner EU to better work around the WTO and “regain regionally the ground they have lost multilaterally”, besides being a means to achieve fundamental concessions from the BRICS “in terms of market access, compliance with intellectual property rights, access to government procurement, and subsidies to state companies” (Laidi 2013; Berger & Brandi 2013). Yet, on the other hand, TAFTA | TTIP is extremely risky as it will bereft the WTO of its formerly biggest supporters and could turn out to become the final straw that may break the neck of multilateralism in trade and change the face of globalization as we know it (Dieter 2013, 50). Especially so because the US “has no real interest in revitalizing multilateral trade negotiations” since bilateralism is “more effective in extracting concessions from emerging powers” wheres TAFTA | TTIP offers an eligible way to prepare the EU and the US “for the economic battle with the BRICS” (Laidi 2013; Sapir 2013).

Consequently, it does not surprise that particularly China is worried: it has committed itself strongly to the WTO and now observes the slow withdrawal of the US and the EU with utter disappointment (Razeen 2008, 104). Momentarily, decision-makers in Beijing express their concern that TAFTA | TTIP (in interaction with TPP) may harm China’s growth and prosperity by cutting the country off from the global economy (interruption of production chains, trade diversion, decrease in competitiveness) on which it so depends to continue its unprecedented success story (Li 2013; Doody 2013). Thus, as a direct reaction to TAFTA | TTIP, discussions gained momentum shortly before the 5th BRICS Summit in March 2013 that BRICS members should likewise “create a free trade agreement to increase the power and voice of emerging economies in the world economy” (ibid.). To go even further, Chinese state media already sees a potential trade Cold War in the making (Grant 2013). Even if this appears highly exaggerated at this point in time, such negative perceptions could quickly spread among other emerging powers and may turn current projections of a BRICS-trade bloc into a soon to come reality. Admittedly, the highly dissimilar BRICS so far mainly concentrate their efforts on gaining further ground in multilateral organizations whereas not a single bilateral FTA has been concluded among them (Doody 2013). Yet, TAFTA | TTIP could trigger dynamics and create new challenges for our globalized world that are not yet sufficiently taken into account: what is surely doubtful is that the BRICS will allow the West to endanger their ascendancy for which reason they finally are going to react in one way or the other. In this regard, the emergence of a divided free trade order in which at least two large trading blocs will confront each other in fierce competition or even brute conflict does not appear to be the most unlikely future.

Conclusion

To conclude, TAFTA | TTIP is a reactionary move of the West in an intensifying geo-economic power game and a warning that our world might soon become more divided than united (again!). In general, the moment might already have passed that a bilateral agreement between the waning global hegemon and its troubled partners will succeed to halt or even reverse the further rise of the BRICS. More likely, it will only slightly reduce the pace of the ongoing process by buying some additional time for the West to prolong its global preeminence. Meanwhile, globalization as we know it may wane as emerging powers might feel the urge to create a veritable counter-force in trade to free themselves from centuries-old Western domination. This again may not only result in a fiercely competitive trench system of free trade zones (e.g. alike the 1930s) but will prove that globalization is not a historical one-way-street yet is always based on man-made decisions and strategic choices.

 

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