The Accidental Trade Policy

Author: Uri Dadush
Originally published by Politica Exterior

American trade policy is very different than it was a decade ago. Then, it was focused on the quest for a comprehensive multilateral trade round, the Doha Development Agenda, and the pursuit of several relatively minor bilateral trade agreements whose main effect was to spur “competitive liberalization,” or induce countries to engage in bilateral deals and the Doha process to avoid being left out.

Today, American trade policy has essentially written Doha off. And instead of small bilateral deals, Washington is pursuing two “megaregional” arrangements, the Trans-Pacific Partnership (TPP) and, most recently, the Transatlantic Trade and Investment Partnership (TTIP), both of which are intended to be “gold standard” deep and comprehensive trade agreements. These giant negotiations, comprising in total 39 “like-minded” countries, are not dissimilar from the negotiations of a multilateral trade round and are, in many respects, more ambitious. In fact, the combined participation in the TTP and TTIP talks recalls the Geneva Round of negotiations on the General Agreement on Tariffs and Trade (GATT) that occurred in the late 1950s. Of the 26 Geneva Round participants, most of which were advanced economies, twelve are participating in the TTIP, three are participating in the TPP, and one—the United States, positioned once again at the center of the system—is participating in both.

What to make of this epic shift in approach to the global trade system by its postwar architect? What does it mean for China, which has recently surpassed the United States and Germany to become the world’s largest exporter and which is not currently part of the TPP even though it is widely expected to become the dominant trading power of the twenty-first century? And does it signal that the World Trade Organization (WTO), whose membership now spans 159 countries and more than 95 percent of world trade, will definitively be relegated into obscurity by pacts driven overwhelmingly by the same advanced economies that once drove GATT negotiations? The shift in American trade policy is comparatively recent, and even if it is too soon to discern its full implications, there can be little doubt that they are far-reaching.Far from the grand multilateral design of John Maynard Keynes and Harry Dexter White at Bretton Woods in 1944, which paved the way to the GATT and later the WTO, the new policy has a makeshift and fortuitous character. The new American strategy arises out of a piecemeal reaction to the failure of Doha, sharply increased security concerns in Asia, and pressure from European allies worried about the United States’ trumpeted “pivot” to Asia. Happenstance and opportunism have played a big role, too. The TPP originated as a trade pact among four small nations that the United States eventually agreed to join, was expanded to include Canada and Mexico in the last year, and invited Japan in just the last month, following a major shift in that country’s economic policy with the election of Prime Minister Shinzō Abe. The TTIP, in turn, appears to have gained momentum only once the scope of the TPP became apparent to European nations concerned about their exclusion.

The new American trade policy brings to mind Columbus’s famous voyage. The great explorer sailed from Cadiz, leaving a familiar world behind in search of a Western passage to the Indies. Although his purpose was clear, he had no idea how to get there, and he certainly never expected that what he would find was a new world.

Like Columbus’s voyage, America’s attempt to move on from the apparently insurmountable Doha logjam to explore a different and very ambitious approach to promote trade (and, in the process, strengthen its alliances) may turn out to hold great promise. But, also like Columbus’s voyage, it carries large risks. It is important to be aware of these dangers from the start and to be realistic about the likely benefits and costs of the new policy.

Despite the announcement of tight deadlines to complete negotiations (the end of 2013 for TPP and the end of 2014 for TTIP), when—and, indeed, whether—the agreements will be concluded and implemented is highly uncertain. If and when they are implemented, their liberalizing effects are likely to be more modest than the sanguine estimates suggest. This is in part because trade among the parties already flows freely and, where it does not, it is frequently because the political obstacles have proven impassable.

Still, as scholars such as Jeff Schott of the Peterson Institute and Kati Suominen of the German Marshall Fund of the United States have argued, if it succeeds, the new trade policy may impart new momentum to the trading system and help the United States to reassert its sorely lacking leadership in trade relations. In the process, together with the European Union (EU) and its TPP partners, the United States can raise the bar on the many standards, regulations, and disciplines governing trade and trigger a new wave of trade agreements by countries searching for new opportunities or trying to avoid exclusion.

The main risk of the new approach stems from the possibility that powerful countries left out of the agreements, namely China and the other members of the so-called BRICS (Brazil, Russia, India, China, and South Africa), among others, will reject these approaches and respond in hostile and counterproductive ways. If, for example, the new American strategy comes to be perceived as an attempt to isolate China and, while doing so, re-create a kind of turbocharged GATT system driven by advanced countries, it is bound to deepen the division between advanced and developing countries that was largely to blame for Doha’s demise.

Similarly, the negotiation of megaregional agreements will, if not carefully managed, further marginalize the WTO and could irretrievably weaken the organization. If, on the other hand, these agreements find ways to engage China and the other BRICS—and, crucially, these countries are inclined to respond—the multilateral system could eventually emerge strengthened.

The TTIP: Can the Gains Materialize?

To misquote Carl von Clausewitz, trade policy is the pursuit of diplomacy by other means. A central aim of the impending trade negotiations between the United States and the European Union is to cement the alliance between two blocs that share interests in security, development assistance, democracy promotion, environmental policy, labor standards, and many other areas.

At the core of these relations, the United States and the European Union have the largest and most extensive bilateral economic relationship in the world. Their exports to each other represent about one-fifth of their total exports, and each allots over half of its outward foreign investment to the other. Together, they account for almost a third of global trade and half of total global foreign investment. Members of the European Union combined with the United States and other TPP partners account for about 60 percent of world trade, although the rest of the world exhibits much faster growth (See figures 1 and 2).

The talks between the European Union and the United States aim for an ambitious free trade deal that would eliminate all tariffs, free up services provision as well as trade in goods, and reduce red tape and all forms of nontariff barriers. It would also liberalize and secure foreign direct investment, open up government procurement, strengthen intellectual property rights, and address conformity of competition and other policies. Moreover, if they succeed, the negotiations could provide a platform from which to effectively determine global standards for everything from car safety, fuel economy, and emissions to accounting and insurance regulation, sanitary and phytosanitary standards, and patent and copyright law.

Although the notion of creating the world’s largest free trade zone holds considerable appeal to the business communities of both parties and is supported by some major trade unions, the challenges that will emerge throughout the negotiations are formidable. Ultimately, there is no assurance that agreement will actually be reached. The points of contention on which compromise will be most difficult to achieve emerge from a long history of well-documented disagreements and disputes. Over the last few years, there have been rows over animal welfare, privacy laws, defense contracts, subsidies for aircraft manufacturers, and genetically modified food, to name only a few.

Moreover, nongovernmental organizations are already mobilizing around the actual or perceived detrimental effects such an agreement may have on health, environmental, and food safety standards. In agriculture, the irresistible force of powerful U.S. export interests will meet the immovable obstacle of the EU’s Common Agricultural Policy. Highly contested issues such as genetically modified organisms, use of hormones in beef, and sanitary standards will provide grounds for a great clash.

A key interest for the EU will be government procurement. For example, the 2009 “Buy American” provision stipulates that funds authorized for the American Recovery and Reinvestment Act, better known as the stimulus package, may only be used on projects in which “all of the iron, steel, and manufactured goods used . . . are produced or manufactured in the United States.” In general, goods from the EU are exempt from this provision because the union is a signatory to a reciprocal government procurement agreement. But several U.S. states have not ratified this agreement, and many others have done so subject to large exclusions and are therefore bound by it only partially or not at all. Since a very large part of government procurement occurs at the state and local levels, the issue requires negotiations that are far more specific and more diverse than is the norm.

In agriculture, sanitary concerns are paramount. The EU alleges that the United States is still applying import restrictions on various animals and animal products previously associated with mad cow disease. Similarly, in order for EU companies to export “grade A” milk products, they are expected to satisfy difficult benchmarks, including concluding contracts with U.S. states, adopting and applying U.S. rules, or harmonizing EU rules with those of the United States. The EU will also seek to establish clear rules for the use of geographical indications, such as Parma ham and parmesan cheese.

The TTIP negotiations are not all encompassing, however. They will not cover agricultural subsidies, for example. Likewise, the framework documents do not reference the dispute over subsidies to aircraft manufacturers Airbus and Boeing. Nor has there been mention—so far at least—of negotiations over the movement of temporary workers. These are important negotiating agendas, and their omission could result in lost opportunities. It could also cause problems if the parties most interested in these particular agenda points decide not to support a deal that excludes them.

Tariffs will be harder to reduce than imagined. The reason high tariffs in textiles and garments, steel, and trucks have existed for so long is that there are powerful interests that will not easily forgo their advantages. For example, French farmers and the U.S. sugar and cotton industries exhibit remarkable records of victory over the general interest.

And regulations are even more challenging than tariffs to negotiate. They are highly technical and exist to protect health, the environment, or safety. Tariffs are clearly protectionism, but regulations are more ambiguous. The merits of a particular regulation can be grounds for genuine differences of opinion among experts over what a change will do.

Moreover, modifications to regulations must be agreed upon by more than just trade negotiators. Other government agencies, such as the Food and Drug Administration or the Environmental Protection Agency in the United States and various country-specific agencies in the EU, usually have the final word on what is acceptable. Each of these agencies and national authorities will be relentlessly lobbied.

The fact that the Obama administration does not have the authority to fast track the agreement and has so far not asked Congress for authorization to do so (presumably because the White House fears Congress will refuse) could be fatal. The absence of a fast track means that the administration cannot present the deal to Congress for a vote without first allowing lawmakers the chance to change the legislation. It also means that the EU will face two stages of negotiations. Getting the Europeans to agree to offer a concession will only be the starting point, and then Congress will get involved. This is an enormous deterrent to agreement on anything.

Moreover, the absence of a fast track is a powerful signal that the political forces in support of such far-reaching negotiations as the TTIP and TPP are not aligned.

European negotiators will have to contend with their own internal divisions, which are aggravated by the ongoing euro crisis. Some countries, such as hypercompetitive Germany, enthusiastically support a deal, which would buttress business confidence in Europe by showing that new growth avenues are opening up. But other countries—such as Spain, with over a quarter of its population unemployed, or Italy, whose car market has collapsed—will be reluctant to make concessions if doing so would make things even worse on their national economies. And the euro crisis is likely to be with them for years to come.

If negotiations succeed, estimates suggest that the deal could lead to significant gains for both the U.S. and EU economies, although these gains would be small relative to the size of the economies and far in the future. For example, according to a report by the Centre for Economic Policy Research, added benefits could range from $88.7 to $155.1 billion for the EU and from $64.4 and $123.5 billion for the United States through 2027, depending on how ambitious the scenario is. Even these estimated gains must be taken with a grain of salt, however, because trade is already largely free and they merely indicate additional potential, which will be difficult to fulfill precisely where tariffs are highest and political interests are strongest.

These estimates include gains that would emerge from eliminating regulatory barriers, a step that is typically assumed to produce welfare gains four or five times larger than gains produced by eliminating tariff barriers. But it is easy to exaggerate these gains since, except in cases where they represent outright bans, the impact of regulations is very tricky to measure. And even if and when regulations are standardized, it will be difficult to evaluate their impact on trade after the fact, making it easy for negotiators to paper over differences.

Aside from increasing trade and investment between the United States and the European Union by reducing border barriers, both parties may gain from the establishment of a common U.S.-EU standard that can be adopted globally. Even if some in the developing world chose to resist, most countries will have no real choice but to accept such a standard—it would, after all, enable them to address over half the world market. And it would be even more likely to succeed if the United States managed to convince its Pacific trading partners to adopt standards similar to the American ones.

The TPP: The “Pivot” At Work

Given the number of partners involved, the TPP may be the most comprehensive and complex free trade agreement ever negotiated. With twelve countries already participating in the negotiations—including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam—and with Korea a possible addition, the TPP will cover about 40 percent of global gross domestic product (GDP).

Trade is already largely free in the TPP region, and the highest barriers to it are usually found in the group’s less developed countries, which are also small markets. The aim is a high-standard agreement that will go beyond borders to enhance trade and investment prospects across the board. The United States already has established free trade agreements with six of the negotiating countries, and the challenge will be to go even further.

Even more so than with the TTIP—where geopolitical considerations are no longer nearly as compelling as they might have been during the Cold War—the TTP is motivated by political and security concerns as well as by economics. It is an integral part of Washington’s much-heralded “pivot” to Asia and the perceived need to contain China’s growing influence in Asia and Latin America.

One attraction of the TPP is that, in contrast to the TTIP, the countries involved in the negotiations include several relatively fast-growing economies. Moreover, taken collectively, the TPP countries are the largest foreign market for U.S. producers, amounting to 46 percent of U.S. exports of goods and services.

Indeed, the TPP is defined by its comprehensive market access and broad regional dimension, and it includes a number of relatively new trade issues, such as Internet trade and the role of state-owned enterprises. It is intended to be a living agreement, capable of deepening and extending to new members, and to cover cross‐cutting issues that go beyond narrow trade concerns, such as enhancing competitiveness and facilitating business, supporting small- and medium-sized enterprises, and improving development policy and regulatory coherence.

But, much like the TTIP, establishing the TPP will be challenging. The complex and comprehensive nature of the agreement, as well as the diversity of interests among its disparate members, invites the possibility of lengthy delays and the risk that reaching an agreement could require diluting the deal or, worse, prove altogether impossible. Naturally, each country will stress different priorities. The United States, for example, will be defensive regarding textiles, apparel, and agriculture policies. It will be on the offensive regarding Japan’s agriculture, automobiles, and service policies and a host of issues elsewhere, such as the important role of state-owned enterprises in Vietnam.

In the United States, TPP negotiations have already drawn criticism from those who express concern that the interests of exporters and global firms will be placed ahead of health, labor, environmental standards, and the need to regulate financial flows. For example, these critics argue that allowing drug companies to extend their patents for several years may make the drugs they produce unaffordable to many in developing Asia. This sort of issue was a sore point in the unsuccessful Doha negotiations and may well prove problematic in TTP negotiations as well.

The desire of companies to include dispute-settlement provisions that enable them to sue states directly is also causing a stir among some civil society representatives. It raises the issue of whether, for example, oil companies would be able to sue governments over a fracking moratorium. Activists fear that health and environmental concerns could suffer as a result of such investor-state dispute-settlement provisions.

Since the project’s initiation in early 2010, TPP partner countries have concluded sixteen rounds of negotiations. At the close of the most recent round, which took place in Singapore in March 2013, chief negotiators optimistically reported that the main goals that had been set for the round were in sight even though many of the thorniest negotiating issues remain.

The Obama administration aims to conclude the TPP deal by the end of 2013. This seems an extraordinarily ambitious objective, especially as the late inclusion of Japan is likely to greatly complicate the negotiations. As with the TTIP, obtaining fast-track authority may be essential to clinching a deal. Moreover, in deciding how much to concede to U.S. demands in areas ranging from labor and industrial standards to intellectual property rights to policies toward state-owned enterprises, Washington’s partners in the TPP will be forced to consider the effects of these concessions on their relations with China.

China: The Elephant in the Room

Viewed narrowly from an economic perspective, there is a counterhistorical feel to America’s new trade policy. Its two giant regional agreements exclude China, Washington’s largest Asian trading partner and the world’s fastest-growing large trading nation, which now accounts for close to 10 percent of global imports. China is also the largest trading partner of several TPP countries (see tables 1 and 2 below).

U.S. President Barack Obama and former secretary of state Hillary Clinton invited China to join the TPP, but they did so while sending a clear message that this could only happen on America’s terms. Within Chinese academic and policy circles, there is a heated debate about whether Washington’s true intention in supporting the TPP is to contain China’s rise or at least to dilute and delay its effect in reducing U.S. influence.

Excluding China carries both political and economic risks. Doing so may cause deterioration in relations and may also oblige some TPP countries to develop closer links with the United States than they would like. At the very least, excluding China would mean missing the opportunity to include the largest and fastest-growing market, one at the center of Asia’s increasingly intertwined global production chains. Although the TPP is intended to be a living, evolving agreement, it would be both problematic and unlikely for China to join after the United States led the establishment of rules in areas such as intellectual property rights, labor standards, and state-owned enterprises.

In pure economic terms, the effect of the TPP and the TTIP on China may be less detrimental than many believe. Some trade diversion may result from these agreements, especially given that the TPP is set to include countries whose exports often mirror those of China. However, bearing in mind that U.S. and Japanese tariffs as well as EU tariffs are already low, and in most regional trade agreements preference margins tend to be very low anyway, these effects are likely to be small.

Shifting global standards may also prove less problematic for China than some anticipate. While Beijing may find that U.S. or EU standards—or a combination of the two—predominate, it may simply opt to adopt them. China took this approach when it adopted WTO disciplines during its accession process, which helped it to become the world’s most competitive economy.

The easiest avenue for Beijing appears to be pragmatically adapting to the new realities. Such a strategy might include a waiting period to see whether the two sets of negotiations progress and succeed—and whether the shifts they are predicted to cause ever materialize.

If and when the agreements take shape, China could actually come out a winner. The establishment of common industrial standards, for example, could lower its own costs in serving a global market. And if a successful TTIP and TPP materialize, China could also step up its direct investment in the United States and the European Union.

Or, if it prefers, China is also big enough—and would find enough allies in the other BRICS, all of whom are missing from TPP and TTIP negotiations—to refute new rules regarding intellectual property or state-owned enterprises, for example.

As these agreements progress, China is likely to pursue its own free trade negotiations, marked by priorities set according to its own agenda, with increased determination. The announcement of the Regional Comprehensive Economic Partnership—a proposed intra-Asian megaregional agreement including the Association of Southeast Asian Nations as well as Australia, India, China, Japan, New Zealand, and South Korea—is a step in this direction.

The development of such competing megaregionals poses a clear risk of fragmentation and tension in Asia. But would China and the other BRICS also redirect their attention to multilateral negotiations as part of their response to America’s new trade policy?

The Orphaned WTO

The WTO, the core of the multilateral trade system, has not concluded a multilateral trade round since it was founded in 1995, succeeding the GATT arrangement. The prospects of it concluding one in the foreseeable future are dim. Before the launch of the ill-fated Doha Round in 2001, only about 50 bilateral free trade agreements had been concluded in the postwar period. With Doha stuttering, over 200 have been concluded since.

A 2006 World Bank analysis concluded that from 1983 to 2003, multilateral liberalization accounted for 25 percent of tariff reductions in developing countries, while regional agreements and autonomous liberalization accounted for 10 percent and 65 percent, respectively. If one were to repeat the exercise today, it would undoubtedly show that over the last decade, liberalization due to multilateral deals (including the residual effects of the Uruguay Round and subsequent agreements envisaged by it) would be minuscule, and regional deals and autonomous processes would dominate. The accession to the WTO of giant countries, including China and Russia, has also contributed very significantly to the openness and predictability of world trade, but the organization’s membership is now close to universal, and the additional gains to be had from accession are minuscule. The pursuit of the two megaregional agreements by the United States, Japan, the twenty-seven countries of the EU, and eleven other countries in North America, Latin America, and the Pacific, which together account for the lion’s share of world GDP, is likely to overshadow any liberalization initiatives in Geneva. It will also eliminate any residual pretense that the WTO, a famously member-driven organization, can develop more effective rules to guide the design of regional agreements among an overwhelmingly powerful group of its members.

Moreover, the investor‐state dispute-settlement mechanisms being advocated as part of the TPP, which may find their parallel in the TTIP, could replace the WTO’s system of state-state dispute settlement in a large and growing number of cases.

But how much does the WTO’s waning role in liberalization really matter? After all, though the financial crisis has crippled the European economies and severely slowed growth in the United States, there is little indication of widespread protectionism or of world trade slowing beyond what would be expected given the sharp recession in the advanced countries. Indeed, over the last twenty years, world trade and foreign investment have grown much more rapidly than world GDP despite the faltering of multilateral trade liberalization. Expressed in current U.S. dollars, world GDP grew at an annual rate of roughly 6 percent between 1990 and 2011. World trade flows and foreign investment, however, grew by 9 and 14 percent, respectively. And developing countries—where WTO disciplines bite least—have continued to globalize at a very rapid rate in spite of the crisis through trade, finance, foreign direct investment, international communications, travel, and so on.

Moreover, nearly all the available evidence suggests that the trade-distorting effect of regional agreements is tiny in the vast majority of cases (preference margins favoring members of these agreements are typically less than 1 percent). These agreements are also contributing in a significant way to the greater goal of trade liberalization and helping to secure the liberalization that has already occurred.

To be sure, the United States continues to say that the multilateral process remains essential. According to the president’s 2013 Trade Policy Agenda, in the run-up to the Bali Ministerial Conference at the end of the year, the United States “will continue to advance promising pathways for 21st century trade liberalization and to seek to revitalize Members’ work in Geneva, including on trade facilitation.”

The same report refers to the ongoing talks to expand the WTO’s Information Technology Agreement, the plurilateral—meaning it is among a subset of WTO members—deal regarding trade in information- and communication-technology products. The United States is also pursuing, together with a subset of 21 of the WTO’s like-minded members, another plurilateral deal. This so‐called International Services Agreement would remove trade and investment barriers to services. Formal negotiations on an initial legal text are expected to start soon.

However, the widely held view is that, although the United States continues to rely on the WTO’s dispute-settlement system, it lost interest in Doha long ago. Justified or not, this impression is bolstered by the fact that Washington has been notably noncommittal during the selection process of the next director general of the WTO.

And the plurilateral avenues for negotiation advocated by the United States and many observers as ways to revitalize the organization remain largely unproven. Combined, and if successful, the TPP and TTIP will account for a very large share of world trade in the sectors of greatest interest to their members, reducing the attraction of negotiating plurilateral deals under the aegis of the WTO. WTO members that are not interested in or hostile to a given plurilateral agreement can deny its inclusion in the WTO unless it is conducted on a most-favored-nation basis, meaning that its liberalizing benefits would accrue automatically to all parties, even those that are not obligated by the agreement. This free riding reduces the value of the agreement in the eyes of prospective participants, especially if the countries that exclude themselves from the deal represent a large part of world trade in the sector in question.

Yet, the megaregionals would leave some of the biggest remaining impediments to world trade unaddressed. The TPP and TTIP participants do not have the highest tariffs or the most freedom to raise them under WTO rules. These distinctions belong to the developing economies, including India, Brazil, and South Africa, which are excluded from the megaregional agreements. Moreover, crucial issues such as agricultural subsidies—whose reduction has a most-favored-nation effect by definition—have been pretty much explicitly excluded from the regional deals.

Despite these concerns, the implications of the TTP and the TTIP on the WTO could in theory be positive. The United States and European Union—the largest players in these two potential agreements—may be able to forge a new set of rules and standards that, if broadly adopted, could fortify the multilateral trading system.

But that will depend on both how the advanced countries manage their megaregional negotiations and the attitude that China and other large developing countries take. Their exclusion from the megaregional agreements could motivate these countries, which constitute a substantial group of WTO members and which may account for the largest share of world trade in the not-too-distant future, to block any measure that they—or even a small subset of their group—find objectionable. This would fit a broader pattern of developing countries creating alternative arrangements, such as a BRIC bank or currency swaps designed to bypass use of the U.S. dollar. Thus, unless carefully handled, the megaregional approach is likely to undermine multilateralism by sidestepping the inherent role and function of the WTO.

Fulfilling the Accidental Trade Policy’s Promise

The American trade strategy is formulated from within the National Security Council, which advises the president. While the Office of the U.S. Trade Representative carries out negotiations, decisions on what to negotiate and with whom are made at the highest level and in consultation with a large interagency group. This is potentially a good thing, since it means that big trade policy decisions are more likely to marshal the needed support from various parts of the administration. But it is also potentially a problem because security and geopolitical considerations can outweigh or run ahead of economic realities.

Overall, the new American trade policy may turn out to be a big step forward in the quest for a more open and predictable global trading system. But it carries significant risks. There is a significant chance, for example, that the gains from the TTIP will not be nearly as large as the rhetoric suggests or that they cannot be achieved in a reasonable time frame. The TPP could be missing a large opportunity by excluding China and risking a rift with the United States’ most important future trading partner. The new trade policy will also risk effectively undermining the WTO and the multilateral process. The large number of developing countries excluded from the proposed megaregional agreements will look for their own deals and alternative approaches. This could render the WTO even less relevant.

Only time will tell whether these scenarios will come to pass. But there are ways to increase the likelihood of success and mitigate the risks associated with Washington’s new strategy.

A healthy dose of realism about what can be achieved and by when will help manage expectations and retain the credibility of the process. Obtaining fast-track authority will likely be essential to making progress early on and to closing deals.

In addition, China should be encouraged to join TPP negotiations—the sooner the better. As Henry Kissinger put it recently, “the key decision facing both Beijing and Washington is whether to move toward a genuine effort at cooperation or fall into a new version of historic patterns of international rivalry. . . . And if a global order does not emerge in the economic field, barriers to progress on . . . territory and security . . . may grow insurmountable.” Any effort to include China in the TPP will involve not a series of small commercial concessions but rather the projection of a shared long-term vision of how the United States and China will both compete and collaborate in the Pacific arena.

The United States also needs to simultaneously work with the EU and China and make a concerted effort to push for a revitalized multilateral process. China should take on the sort of greater leadership role in the WTO that it has so far carefully eschewed. This could involve attempts to harvest what is possible from Doha at the coming Bali meeting, even if that means sacrificing some of the negotiating objectives in favor of the broader group of developing countries. In the same spirit, plurilateral agreements in selected areas of interest to the developing countries should also be considered in tandem with initiatives in services and information technology.

The new American trade policy holds promise, but only if it does not unnecessarily provoke and alienate China and other developing economies and marginalize the WTO. And as the world’s largest exporter, China has a big stake in ensuring that multilateral collaboration retains its relevance in the presence of the new megaregionals. The time is long past when either the United States or China could afford to rely on a GATT-like trading system in which the advanced countries call the shots while developing countries watch from the sidelines.

Conversations with Susan Schwab, former U.S. trade representative, are gratefully acknowledged. Nevena Bosnic provided excellent research assistance.