INTERNATIONAL POLICY ANALYSIS

The Return of Geopolitics

Trade Policy in the Era of TTIP and TPP

HERIBERT DIETER
December 2014

„„ The future of the multilateral trading system looks bleak. The main reason for this
development is the return of geopolitics in a new multipolar world characterized by
a declining willingness to cooperate. The lack of progress in the WTO Doha round is
the main factor for the current mushrooming of preferential trade agreements. The
new and very large US-led trade projects TTIP and TPP exclude the main emerging
powers China, Russia, India and Brazil.

„„ For TTIP and TPP supporters these agreements are answers not only to the standstill
at the multilateral trade negotiations, but also to a declining competitiveness vis-à-
vis emerging nations and a declining ability of the transatlantic powers to shape the
rules of cross-border commerce. In short, if the United States and Europe do not
write the rules today, China will write them tomorrow. However, it appears unrealis-
tic to assume that China and the other BRICS will accept rules that were negotiated
without them. Instead, the creation of competing systems appears likely.

„„ Through TTIP, TPP and other preferential agreements, the United States and the EU
are not only fundamentally weakening the WTO, but they are also betraying their
own principles. Today, the choice is between open global regulation and an eco-
nomic order built around competing blocs. EU countries, Germany in particular, have
nothing of lasting value to gain from such a fragmentation of world trade. They
should, therefore, not seek to isolate China and any other BRICS country.
 Heribert Dieter | The Return of Geopolitics

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1. Regional Integration: the Key Elements of a Political and Economic Concept. . . . 4

2. The Politics of Regional Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. TTIP and the Mushrooming of Free Trade Agreements. . . . . . . . . . . . . . . . . . . . . . . 7

4. Questionable Justifications and S

­ erious Construction Flaws. . . . . . . . . . . . . . . . . . 8

5. Geopolitics and the Dangers of Fragmentation

of the International Trade Regime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

6. Potential Responses by the BRICS Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1
 Heribert Dieter | The Return of Geopolitics

Introduction joint crisis prevention (Dieter 2013). In 2014 the United

States was subject to an ultimatum of the other G-20
For decades, the multilateral trading system enjoyed countries demanding the implementation of the quota
political support while at the same time facilitating un- reform agreed upon in 2010. The reform would double
precedented economic growth. Member states of the the capital of the International Monetary Fund (IMF) to
Organisation for Economic Co-operation and Develop- $720 billion, shift 6 percentage points of the total quota
ment (OECD) as well as emerging economies success- to developing countries, and move two of the twenty-
fully pursued deeper economic integration and division four IMF directorships from European to developing
of labor. International trade lifted hundreds of millions of countries. The delay demonstrates quite clearly that the
people out of poverty. Needless to say, there were also United States is unable or unwilling to contribute to the
negative effects, but on balance the multilateral trading reform of the fund, and this has not slipped the attention
system seemed to work well. The establishment of the of policy makers in developing countries and emerging
World Trade Organization (WTO) in 1995 symbolized markets.1 Adding to the confusion, the United States had
the political will that characterized the 1990s. After the itself initiated the reform that it was now blocking. Of
end of the cold war, organizing co-operation without course, seasoned observers of US politics would argue
hegemony appeared possible. that although the administration of Barack Obama con-
tinues to be in favor of the reform, Congress is hostile
The post–cold war trading system was built on organi- to it. Since congressional approval is required, President
zational principles in place since the late 1940s. The Obama could try to persuade Congress on the matter,
General Agreement on Tariffs and Trade (GATT) had but the issue appears to be of secondary importance.
facilitated both economic integration and political co- Advancing multilateral institutions does not seem to be
operation. It is important to recall that GATT’s legend- a priority of the current US president.
ary Article 1, the most favored nation clause, was much
more than an instrument for trade liberalization. After Departure from the goal of global regulation of trade is
the disastrous experiences of the 1930s, characterized by resulting in the return of large preferential trade agree-
competitive devaluations and a dramatic rise in protec- ments.2 This is a parallel to the 1930s. Then as now, the
tionist policies, the architects of the postwar regulatory global economy was increasingly divided into blocs, and
architecture sought to develop instruments that would in trade, one observed a distinction between trade with
facilitate peaceful co-operation. The recipe worked well allies and trade with rivals. The new and very large trade
for GATT member countries or »contracting parties.« projects—namely, the two US-led transatlantic and trans-
After the disintegration of the Soviet Union, the former pacific schemes—underline this trend. Both the Transat-
Eastern bloc was integrated in the existing trading sys- lantic Trade and Investment Partnership (TTIP) and the
tem. Negotiations with the Russian Federation were most Trans-Pacific Partnership (TPP) exclude the main emerg-
difficult, but after almost twenty years of negotiating, the ing powers. China, Russia, India, and Brazil are excluded
country joined the WTO in 2012 as its 156th member. from participating in these endeavors. Put differently,
today, the world’s largest economies push processes of
Today, the future of the WTO looks bleak, and one of the regional integration and create projects with each other.
reasons for this development is the return of geopolitics. This constitutes a sea change.
Today’s multipolar world is characterized by a declining
willingness to co-operate. Of course, this sea change For decades, regional integration was a concept primarily
has not just hit the multilateral trading system. Whether discussed as an economic policy instrument for develop-
involving financial regulation or joint measures to fight ing countries. In the first wave of regional integration in
climate change, it appears difficult, if not impossible, the 1960s, there was great enthusiasm for the potential
to organize »co-operation beyond the nation-state,« as
Michael Zürn noted in the late 1990s. Even the G20—af- 1. Financial Times, 15 January 2014, 4.

ter its elevation to leader level, initially hailed as a new, 2. Throughout this paper, the term preferential trade agreement refers
to free trade agreements and customs unions. The terms free trade agree-
powerful institution of global economic governance— ment and free trade area are used synonymously. The term preferential
has been unable to produce tangible results. The G-20 trade agreement (as opposed to free trade agreement) reflects the fact
that the participating economies grant each other preferences, but may
has succeeded in crisis management, but it is failing in not implement a policy of free and unrestricted trade.

3
 Heribert Dieter | The Return of Geopolitics

of regional integration. By enhancing the size of the inter- state, in stage 5, the political union. Balassa suggested
nal market, developing countries could reach economies that regional integration be organized in five steps:
of scale and improve their economic prospects. Today,
however, the picture has changed dramatically. Regional 1. Free trade area
integration is no longer a concept primarily applied by
small and medium-sized economies. For about ten years 2. Customs union
now, the United States and the European Union (EU)
have increasingly been placing their bets on preferential 3. Common market
trade agreements. The most obvious consequence is a
structural weakening of the WTO and the undermining 4. Economic and monetary union
of the existing multilateral order. This is a new challenge
for large emerging markets, or BRICS countries—Brazil, 5. Political union
Russia, India, China, and South Africa. What options do
these countries have to respond to the new policies of In today’s world of mushrooming free trade agreements,
the United States and the EU? Will they come to the one can distinguish between (regional) co-operation and
rescue of the multilateral system, or will they seek instead integration quite easily. If participating countries show no
to develop their own trade policy strategies outside the explicit interest in moving beyond a free trade area, this
WTO? constitutes co-operation. If a group of countries aims at
the creation of a customs union or higher forms of col-
This article is organized as follows. First, it analyzes the laboration, this constitutes regional integration.
economic logic of regional integration, followed by a dis-
cussion of the political reasons for the current popularity The distinction is useful because the level of harmoni-
of preferential agreements. The two main contributing zation of economic policies in a free trade agreement
factors for this—the lack of progress in the WTO and a is quite low. Tariffs are eliminated, but the participating
change in the global economic climate—are examined, economies retain their own, individual trade policy vis-à-
as are the justifications provided by advocates of the TTIP vis the rest of the world. Norms and standards are usually
and other large integration projects and the flaws in these not harmonized. The TTIP and TPP projects constitute
types of agreements. Subsequently, the geopolitics of the an exception in this regard, because the harmonization
new »mega-regionals,« the potential responses of the of norms and standards is considered to be an essen-
BRICS countries, and the dangers of an economic order tial component. A country can enter as many free trade
built around competing blocs are discussed, followed by agreements as it considers useful and appropriate, but it
conclusions and policy recommendations distilled from cannot harmonize norms with many different countries
the analysis. or groups of countries.

By contrast, once a country enters a customs union, it

1. Regional Integration: the Key Elements loses the ability to have an independent trade policy. The
of a Political and Economic Concept European experience demonstrates this. Since the crea-
tion of the European customs union among the original
Integration and co-operation are frequently used syn- six members of the European Economic Community in
onymously, but in fact there is a need to differentiate. 1968, trade policy has been formulated jointly in Brus-
Co-operation is aiming at limited goals, in trade or in- sels, not separately in Paris or The Hague. A customs
frastructure development for instance. By contrast, (re- union can mark the beginning of an integration process,
gional) integration aims at a higher level of collaboration rather than (limited) economic co-operation. There are,
and will eventually result in a new, unified political and of course, exceptions. The Southern African Customs Un-
economic entity. ion (SACU), founded in 1910, cannot be interpreted as
an integration project, but was instead a colonial scheme
The typology by the Hungarian economist Bela Balassa that has not lead to deeper integration of the participat-
(1961, 1987) illustrates the gradual deepening of col- ing countries.
laboration and the eventual creation of a new sovereign

4
 Heribert Dieter | The Return of Geopolitics

The first area that successfully implemented regional 2. The Politics of Regional Integration
integration was what in 1871 became the German Em-
pire. In 1834 the German Customs Union (Zollverein) The debate on Ukraine underlines that regional co-oper-
was established and gradually enlarged. Balassa’s typol- ation and integration can have a strong political dimen-
ogy was clearly inspired by the experience of Germany. sion. In Europe, this is of course not a new development.
Led by Prussia, the largest economy in the union, the The EU has been using accession as an instrument of
small and medium-sized economies began dismantling foreign policy for years. The enlargement of the EU has of
the economic boundaries between them, and within 40 course always had a political dimension, most obviously
years the regional integration process was successfully when the formerly socialist countries of Eastern Europe
concluded. The participating states ceased to exist. A joined in 2004. The EU has also, however, used trade
new state emerged as the successor of the previously policy vis-à-vis other countries as an instrument of for-
independent small German states. eign policy. In fact, since the EU still lacks a joint foreign
policy, trade policy can be seen as serving in lieu of a
The creation of the German Customs Union was the first European foreign policy.
example of a group of sovereign states agreeing to the
creation of supranational economic regulation without The political use of regional integration is of course not
(initially) political union. Countries participating in the a European dominion. In recent years, China has been
German Customs Union continued to be sovereign, until using trade policy to advance its political goals. This was
German unification. Even after 1871, Luxembourg con- most noticeable when China and the Association of
tinued to be a member of the customs union until 1919, Southeast Asian Nations (ASEAN) agreed on the crea-
but not part of the German Empire. In fact, the Zollverein tion of a free trade agreement in 2002. It is noteworthy
stands out not only as the first example of regional in- that ASEAN had been established as an anti-communist
tegration by economic rather than military means, but (i.e., anti-Chinese) bulwark in 1967. The ASEAN-China
also because of its early success in organizing economic Free Trade Area came into effect on 1 January 2010
relations with non-participating economies. In 1865, the and constitutes the world’s largest such agreement by
Zollverein created a free trade agreement with Sweden- population. In contrast to the 1960s and 1970s, when
Norway, linking the customs union with foreign markets. Southeast Asian countries were afraid of an increasing
economic and political Chinese influence, today these
It should be noted that in the current discussion about states have opened up for business with China. The fear
the external economic relations of Ukraine, a funda- of revolution and weapons has been replaced by a desire
mental misunderstanding has emerged. Policy makers in for trade with Beijing.
Brussels contend that the policies of the EU have been
neutral and have not been forcing Ukraine to choose In November 2014, China was urging an evaluation of
between the West and Russia. This, however, is mislead- the feasibility of a regionwide trade agreement, the Free
ing. Ukraine can either have a free trade agreement Trade Area of the Asia-Pacific (FTAAP). This was not a new
with the EU or join the customs union of Russia, Belarus, idea. In 1966 a Japanese economist had proposed such
and Kazakhstan. If Ukraine sought to join the customs a scheme. Twenty-five years ago, on the day the Berlin
union, that would prevent the establishment of a free Wall fell, Asia-Pacific Economic Cooperation (APEC) was
trade agreement between Ukraine and the EU because founded in Canberra, Australia. Since then, there have
of the joint external tariff that defines a customs un- been numerous debates about the format of trade fa-
ion. The only solution would be to create a free trade cilitation in the Asia Pacific. Initially, those advocating an
agreement between the EU and the customs union led open scheme, called open regionalism, prevailed, but in
by Russia. EU policies toward Ukraine were either some- recent years, a conventional free trade agreement exclud-
what naïve—assuming that eventual EU membership of ing non-participants has been discussed more intensively.
Ukraine would have been as technical as, say, Norwegian China does of course have a very clear interest in estab-
membership—or were deliberately meant to fuel conflict lishing FTAAP.
(Dieter 2014b).
Given that the United States is pushing the TPP, which
excludes China, Beijing wants to create a broader scheme

5
 Heribert Dieter | The Return of Geopolitics

in which it can participate. The logic of the Chinese push is the unresolved rivalry between Mercosur’s two largest
for FTAAP is clear: Should Washington prevents the es- members, Brazil and Argentina.
tablishment of a 21-member FTAAP, including Russia,
China can push for RCEP, the Regional Comprehensive From an economic perspective the current mushrooming
Partnership Agreement. RCEP includes Japan and all the of preferential trade agreements is puzzling. The disman-
ASEAN economies, plus Australia and New Zealand, but tling of obstacles to trade is, on balance, welfare enhanc-
excludes the United States and Russia. ing, although the political economy of trade liberalization
has to consider winners and losers of liberalization. To-
The BRICS countries—all of them influential powers in day, however, policy makers all over the world apparently
their region—are increasingly inclined to use regional prefer to implement preferential trade agreements rather
integration to promote political goals. South Africa has than advancing the multilateral system. What can explain
been ahead of its peers for more than a century in doing this seemingly irrational trade policy?
so. SACU is the oldest existing customs union of sover-
eign states. In existence since 1910, it comprises Bot- From a realist perspective, the main reason for the inabil-
swana, Lesotho, Namibia, South Africa, and Swaziland. ity to advance the multilateral system is the emergence of
Of course, SACU is currently not featuring prominently a multipolar world. In the bipolar world, between 1945
in South Africa’s regional policies, primarily because the and 1991, the two hegemonic powers established eco-
other member economies are so small. nomic regulation in their spheres of influence. The United
States established and backed GATT. The Soviet Union set
Neither China nor India is currently participating in a up the Council for Mutual Economic Assistance, COM-
customs union, choosing instead to pursue free trade ECON. After the short »unipolar moment« (to borrow
agreements. Russia established a customs union, as men- from Charles Krauthammer) ended and was replaced by
tioned above, with Kazakhstan and Belarus in 2010. The a multipolar world, there have been increasing difficulties
eventual goal of this project is the creation of a Eurasian in maintaining the multilateral trade regime. Geopolitics
Union, somewhat similar to the European Union. Many and the competition for power and influence have re-
successor states of the former Soviet republics have been turned. Consequently, organizing co-operation has be-
invited to join, and in 2013 Vietnam expressed interest come increasingly difficult. Today’s multipolarity appears
in creating a free trade agreement with the customs un- to weaken, rather than strengthen, the ability and inter-
ion.3 Western critics have argued that the Eurasian Un- est of sovereign countries to engage in the establishment
ion represents an attempt to re-create the Soviet Union. of sustainable international regulation.
Although it is evident that there is very limited interest
in re-establishing a communist bloc, a battle for influ- Optimists could argue that the WTO has returned to the
ence is clearly under way. Moscow is trying to expand its stage, after the successful conclusion of its December
influence, while the United States, with its two mega- 2013 conference in Bali. They suggest that the previous
projects, is attempting to create an even larger sphere unwillingness of member countries to advance the multi-
of influence. Regional co-operation and integration have lateral trading system may have ended with Bali, possibly
been re-politicized. allowing the WTO to regain the strength it had in the first
decade of its existence after its establishment in 1995.
Brazil and its neighbors Argentina, Paraguay, and Uru- However, only low-hanging fruit was harvested in Bali.
guay have been working on Mercosur since 1991, but None of the difficult issues were put on the table (Dieter
the results have been mixed.4 The Treaty of Asuncion, 2014a). Trade facilitation—the most important compo-
signed in March 1991, aimed at the creation of a customs nent of the Bali agreement—is useful, but on balance
union, but that goal has not yet been achieved. Merco- the Bali deal is probably not much more than »a tropical
sur does, however, have the potential to become a Latin fling,« as the Financial Times described it. The key rea-
American common market. The main political obstacle son for this skeptical view is that important countries, in
particular the United States, have ceased to push for an
3. Tran Thu, »Vietnam to start FTA talks with Customs Union in 2013,« advancement of the multilateral trading system. While
Saigon Times, 13 September 2013, [Link]
Home/business/vietnam-economy/25534/. the EU and the United States have been implementing
4. Venezuela joined in 2012. preferential trade agreements in the past (e.g., the North

6
 Heribert Dieter | The Return of Geopolitics

American Free Trade Agreement, NAFTA), the number negotiations the »development round« was a mistake.
and scope of preferential trade agreements have risen As a consequence, traditional supporters of a multilateral
sharply in recent years. The United States and the EU are trade order—for example, industry associations like the
contributing to the creation of a post-WTO world. Federation of German Industry (BDI)—lost interest in the
further development of the WTO. Attaching the label
»development round« to the negotiations, although well
3. TTIP and the Mushrooming intended, has had disastrous consequences.
of Free  Trade Agreements
Much of the blame for the lack of progress in the Doha
Few trade projects have been welcomed more enthusi- round has been placed on India and other developing
astically by the business community and various policy countries. That might be a misreading. Joseph Stiglitz
makers than the Transatlantic Trade and Investment Part- has argued that the Doha round was torpedoed by the
nership between the EU and the United States. The initia- United States’ refusal to reduce agricultural subsidies
tive, however, will send both down the wrong track. For (Stiglitz 2013). In general, and although hardly discussed,
Europeans, the TTIP project does not make much sense, the negotiating strategy of the United States appears
economically or geopolitically. The economic gains would quite implausible. At the beginning of the Doha round,
be moderate, but the political damage enormous. in 2002, the United States suggested abolishing all tar-
iffs on industrial and consumer goods, indeed, a bold
It is not the first time that a transatlantic free trade area proposal, which was rejected by developing countries
has been discussed. The idea was debated intensively and emerging markets.6 Was that proposal, however,
during the 1990s, although no formal negotiations were borrowing from poker, a bluff? Without access to US
opened (Siebert et al. 1996). The two most important government archives, it is difficult to assess the sincerity
reasons for the skepticism at the time were the success- of the proposal by the George W. Bush administration. In
ful establishment of the WTO and the trust bestowed recent years, the Obama administration has emphasized
on concepts of global governance, which at the time the importance of »fair trade,« a synonym for moderate
seemed modern and promising. protection against perceived »unfair traders.«

Roughly 20 years later, the excitement over the WTO Moreover, the United States continues to apply tariff
has evaporated. As the negotiations of the Doha round peaks in important sectors. Surprisingly, half of the US
trudge along, governments around the world are pursu- vehicle market continues to be protected by a 25 percent
ing the new approach of creating free trade areas, which tariff. About 8 million so-called light trucks are sold in
is labeled trade pragmatism, rather than aiming for mul- the country each year, and due to the high tariff, there is
tilateral regulations. The EU and the United States, and virtually no foreign-made light truck on American roads.7
also China and many smaller economies, have altered Turnover in the segment is an estimated $200 billion, so it
their trade policies over the last few years. Globally, pref- seems fair to assume that the US auto industry very much
erential discriminating trade areas are on the rise. Every enjoys the protection afforded its light trucks (Dieter
WTO member, Mongolia excluded, is party to at least 2014c). The United States has not even been debating
one free trade area or customs union. According to WTO a reduction of that tariff, which is noteworthy because
data, in January 2014 there were 377 preferential treaties a 25 percent tariff for a mature industry represents a
in force and about 200 more were being negotiated.5 remarkable level of protection

There are numerous reasons for this expansion, but two The changed global economic climate since the begin-
factors stand out. The first and most important factor is ning of the Doha negotiations is the second major factor
probably the lack of progress of the Doha round; few ob-
servers believe that the negotiations can still be brought to
6. »Can America Kickstart the Doha Round?,« Economist, 29 November
a successful conclusion. In retrospect, labeling the Doha 2002, [Link]
7. Many studies on transatlantic trade overlook the importance of tariff
peaks. For instance, Beck and Ohr (2014: 346) suggest that the trade-
5. See the WTO database, [Link] weighted average tariff is below 3 percent, but their assessment ignores
region_e/region_e.htm. tariff peaks that are so high that no measureable trade exists.

7
 Heribert Dieter | The Return of Geopolitics

that has greatly contributed to reduced interest in the agreement seems to be broken, but the other arguments
WTO. The year 2001 not only marked the start of the do not hold water. Even if one accepts the dwindling
Doha round, but also the accession of China to the WTO. competitiveness of the EU and the United States vis-à-vis
The rocket-like takeoff of the Chinese economy has since the emerging countries, which is highly debatable look-
continued and is now met with growing concern in the ing at a number of European companies, a discriminatory
established industrialized countries. OECD countries trade agreement would be the wrong answer. Rather,
are asking whether they can still compete globally with wide-ranging structural reforms would be the remedy
China and other emerging countries. For the moment, for lost competitiveness. A treaty that disadvantages
this does not apply to Germany, but certainly to a number third parties does not strengthen the competitiveness of
of EU member states and definitely to the United States. companies. Of course, the danger is that reforms will
be delayed because a single transatlantic market would
This points to a central problem of preferential trade trea- convey a deceptive sense of security. The exclusion of
ties: Many do not contribute to a further liberalization of strong competition has rarely led to strong economies.
trade, but are meant instead to function as protection
from all-too-powerful competition. That thinking plays a The assumption that the transatlantic powers could es-
central role in the approach taken by the Obama admin- tablish the rules for the future regulation of cross-border
istration; the focus is not so much on free trade, but on commerce is of course dependent on the perception
fair trade.8 In other words, the aim is to exclude allegedly of other countries. Will China and the other BRICS and
unfair competitors, and from an American perspective, other OECD countries accept rules that were negotiated
that is mainly China. Therefore, the TTIP and TPP projects without them? Considering the increasing self-confi-
at one level are defensive in nature—attempts to create dence of policy makers in the BRICS countries, it appears
a trade regime without China. That said, what sort of unrealistic to assume that they will accept a done deal.
arrangement is really about to be negotiated between Instead, the creation of competing systems appears likely.
the EU and the United States? What are the advantages The policies of China (RCEP) and Russia (Eurasian Union)
and disadvantages of the TTIP? provide a hint of potential developments.

In addition, free trade areas have a serious construction

4. Questionable Justifications and flaw that even the most capable negotiators cannot re-
­Serious Construction Flaws solve—the origins of duty-free traded products need to
be documented. Free trade areas do not function without
TTIP and TPP supporters usually advance three reasons so-called rules of origin. What does this mean exactly?
why these agreements are desirable: first, because the Within free trade areas, products from participating
competitive advantage of industrialized nations is being countries can be traded duty free, but not those from
eroded by emerging nations such as China and India; sec- third countries. Therefore, the origin of a given product
ond, because multilateral trade negotiations have come needs to be documented carefully (which means higher
to a standstill; and third, because the rise of the BRICS, costs) with certificates of origin. The more complex a
China in particular, will result in a declining ability of the product is, the more expensive the drafting of its certifi-
transatlantic powers to shape the rules of cross-border cate is. It really gets complicated when inputs from third
commerce. In short, if the United States and Europe do countries must be accounted for. Furthermore, within the
not write the rules today, China will write them tomor- almost 400 free trade areas in existence today, the pro-
row. cedures to determine the origin of a product vary widely.
The most complex is the most common one—measuring
These claims, made by advocates of TTIP and other large the percentages of value added.
integration projects, are quite astounding. Undeniably,
the WTO Doha round advances only at a snail’s pace The result is that for small and medium-sized companies,
if at all, even after the temporary deadlock on the Bali preferential agreements are of limited benefit. For devel-
oping countries, such complex rules are high hurdles as
well. The abolition of tariffs is bought with the obligation
8. State of the Union address, 12 February 2012, in which Obama
speaks of »free and fair trade.« to document the origins of products. This considerably

8
 Heribert Dieter | The Return of Geopolitics

reduces the value of the envisaged mega-regionals for riod, which greatly contributed to the rise in tensions
many players. With tariffs in the lower one-digit region, during the 1930s.
companies are right to question whether it would be
easier and cheaper for them to waive the preferential With this historical lesson in mind, there is no convincing
treatment and pay the tariff. This has the additional ad- reason to jettison the multilateral trade order. Emerging
vantage of greater clarity. After paying an import fee, economies still conduct the bulk of their trade with the EU
no further costs are to be reckoned with. As tariffs are and the United States and prefer to use the mechanisms
negligible in transatlantic trade these days (apart from of the WTO. A coordinated counterproposal on their part
a number of tariff peaks in a few tariff lines), it is highly for an alternative to the existing trade regime is currently
likely that many companies will opt for paying tariffs and not discernable. The EU and the United States cannot in-
against drawing up certificates of origin. Estimates sug- fluence the further rise of China and other countries, but
gest that the provision of a certificate of origin costs com- they can make sure that international trade relations will
panies about 5 percent of the value of the product (Dieter continue to be shaped by the order established by the
2004). On average, current tariffs are at 3.5 percent for United States and its allies in the 1940s (Ikenberry 2008).
the EU and 2.5 percent for the United States.
The current multilateral trade order is deemed to protect
The United States has carefully acted to safeguard Ameri- the interests of all states—including those less power-
can interests within every free trade area it is party to. The ful—in the complexity of the twenty-first century. How-
rules of origin have contributed to this; the regulations ever, the EU in particular, which has repeatedly stressed
cover 200 pages in the NAFTA document. The origins of the importance of multilateral rules for emerging coun-
raw materials allowed or prohibited are listed in great tries, has weakened the trade order with its foreign trade
detail. The so-called fiber-forward rule states that cotton policy.
needs to have been produced in the NAFTA area to be
traded without tariffs. This rule was pushed through by The EU would, by agreeing to a preferential treaty with
Washington to protect US cotton producers. It is likely the United States, end up being used by Washington for
that similar rules would be incorporated in the TTIP. The US geopolitical goals. As mentioned, the United States
victims would be African cotton producers, who would is not only pursuing a transatlantic, but also a trans-
no longer be allowed to supply cotton for Spanish or Pacific project, the Trans-Pacific Partnership agreement,
Italian fashion products for export to the United States. to which twelve countries are currently party, including
Although it is difficult to forecast the impact of TTIP on the economic heavyweight Japan. With the exception
all developing countries, the effects will probably be of South Korea and China, the largest economies of
negative. Sourcing inputs from non-TTIP-countries will the Pacific are participating. South Korea already has a
result in the risk of non-qualification for TTIP origin, and free trade agreement with the United States and thus
companies will not want to face that. Rather than buying can be considered a special case. Significantly, China is
from the cheapest source, they will buy from the cheap- not invited to join. Should the United States succeed in
est TTIP companies, thus diverting trade from developing both concluding a transatlantic and a trans-Pacific agree-
countries. ment, the result would be a new bipolar world order. The
United States would then no longer be dependent on the
WTO and could push ahead in its trade confrontation
5. Geopolitics and the Dangers of Fragmen- with China, as has been demanded by various American
tation of the International Trade Regime politicians over the last few years.

Through TTIP, TPP, and other preferential agreements, Washington’s European accomplices, first and foremost
the United States and the EU are not only fundamentally Germany, have nothing of lasting value to gain from such
weakening the WTO, but they are also betraying their a fragmentation of world trade. German and other Eu-
own principles. The multilateral trade regime established ropean companies prove their competitiveness on world
after World War II was specifically designed to overcome markets every single day. Europe in particular should
the discriminatory trade agreements of the interwar pe- support a multilateral order not only rhetorically, but also

9
 Heribert Dieter | The Return of Geopolitics

strengthen it actively. In other words, Europe, especially, Implementing two mega-regional projects with the EU
should not erect parallel structures that weaken the WTO. and important economies in the Asia Pacific enables
Washington to isolate China and seek confrontation with
Such insights, however, are rare in Brussels these days. America’s only rival. Rather than negotiating with China,
The last EU trade commissioner who understood the fra- the United States is actively promoting the return to a
gility of the multilateral order, and imposed a moratorium bipolar world. Of course, supporters of both TTIP and TPP
on EU preferential trade agreements in 1999, was Pas- will argue that the motivations are primarily economic.
cal Lamy, the former WTO chief. After the Briton Peter Given the rhetoric and statements of the Obama admin-
Mandelson took over as EU trade commissioner in 2004, istration, however, the geostrategic motives appear to
the EU set out on the wrong track, concluding more and be quite important, and that has not gone unnoticed in
more preferential treaties. China.

With the creation of a transatlantic free trade agree- Today, the choice is between open global regulation and
ment, the historic success of multilateral trade would be an economic order built around competing blocs (Ste-
carelessly abandoned. In bilateral or other preferential vens 2013). In essence, as Philip Stevens has suggested,
trade agreements, neither the inclusion of developing »[T]he west has given up on the grand multilateralism
countries nor the very successful WTO dispute settlement that defined the postwar era. … The exclusion of the
mechanism, stemming from a transparent and coherent world’s second biggest economy is more than a coinci-
rulebook, could be preserved. TTIP and TPP will degrade dence« (ibid.).
the WTO to irrelevance, and neither would enhance the
competitiveness of participating economies. Of course, For Europe, being the United States’ junior partner is not
the WTO will continue to exist, but it will not be the a sustainable strategy. Of course, the EU should not seek
venue for further advancement of the trading system. to isolate China or any other BRICS country. A return to
a cold war, whether with Russia or China or both, does
If the above outlined analysis is correct, and the advan- not serve the interests of the Europeans, who have much
tages of TTIP and TPP are limited, what are the motiva- more to lose in a lasting conflict than the United States.
tions of the United States in particular for pushing these Regrettably, the long-term effects of TTIP for Europe’s
mega-regional agreements? Since the United States is the position in international relations are hardly debated.
only player participating in both projects, US policy mat- Instead, discussions on poultry and its sanitization domi-
ters more than any other. Political considerations must nate the debates.
play an important role, since many of the economic gains
could either be achieved by unilateral liberalization or by Seasoned observers of trade negotiations have been
regulatory harmonization without a discriminating pref- skeptical about the prospects for a rapid conclusion of
erential trade agreement. Stiglitz (2013) has suggested the TTIP negotiations. Lamy, the former EU trade com-
that the United States aims to create a managed trade missioner and WTO head, expects the talks to drag on for
regime, i.e., to serve special interests in the US economy. many years.10 He argues that the envisaged harmoniza-
tion of norms and standards requires complex changes
International relations, however, also play a role. In a July to regulation both in the United States and the EU, and
2014 interview, Anthony L. Gardner, the new US ambas- those changes will not be agreed upon quickly. Either
sador to the European Union, underlined the political norms could be harmonized on the lower level, resulting
importance of TTIP. Perhaps unintentionally, Gardner as- in political opposition by consumer associations, or the
serted, »[T]here are critical geostrategic reasons to get EU and the United States could agree on higher levels
this deal done.«9 What are the geostrategic aims of the of consumer protection, raising costs in the territory
United States? previously having laxer standards.11 Either way, a rapid
conclusion should not be expected. Should negotiations

10. Frankfurter Allgemeine, 15 July 2014, 24.

9. »US Ambassador: Beyond Growth, TTIP Must Happen for Geostra-
tegic Reasons,« EurActiv, 16 July 2014, available at [Link] 11. A third alternative would be the mutual recognition of standards,
[Link]/sections/trade-industry/us-ambassador-eu-anthony-l-gardner-be- which would be simple but would also require political will. European
yond-growth-ttip-must-happen. cheese could be sold in the United States, US beef in the EU. Given the

10
 Heribert Dieter | The Return of Geopolitics

drag on for years, cynics could argue that the WTO might order and Russia, albeit with missteps, would see its
once again become more popular among its traditional future in integration with Europe. Mr Xi and Mr Putin
supporters, e.g., industry associations. have decided otherwise. The world is waking up from
postmodern dreams of global governance to another
era of great power competition. (Stevens 2014)
6. Potential Responses„
by the BRICS Countries The inability of Western policy makers to consider eco-
nomic and political models beyond capitalism and de-
Of course, conflict between the transatlantic powers and mocracy—not for the West, but for other countries—has
the BRICS countries is not limited to trade issues. Russia’s backfired. Henry Kissinger has suggested that the de-
annexation of Crimea has deepened the rift between monization of Putin is an alibi for the absence of a policy.
Moscow and the West. At the same time, however, Moreover, »treating Russia as an aberrant to be patiently
ties between China and Russia have been strengthened taught rules of conduct established by Washington«
(Singh 2014). Beijing has effectively endorsed the an- ought to be avoided (Kissinger 2014).
nexation as well as the continuing intervention of Russia
in eastern Ukraine. Whether the policies implemented by the West are a
matter of inability or the result of a strategy is difficult
The conflict is much deeper than many observers in the to assess. Some observers have suggested that the
West are willing to acknowledge. For decades, policy West, not Putin, is responsible for the current crisis. John
makers in the West assumed that the rest of the world, Mearsheimer has argued, »[T]he United States and its
including China and Russia, would over time converge European allies share most of the responsibility for the
politically with the transatlantic powers, but China, Rus- crisis« (Mearsheimer 2014: 77). The EU’s expansionary
sia, and other emerging economies are increasingly frus- strategy is part of what Mearsheimer calls the West’s tri-
trated by the double standards of the West and their ex- ple package of policies—NATO enlargement, EU expan-
clusion. Of course, in 2014 policy makers in Washington sion, and democracy promotion (ibid.: 80).
and Brussels do not want to be reminded of the brutal
violations of international law of George W. Bush’s ad- The effects, however, are clear. The world is drifting apart
ministration. In the past, Moscow warned several times instead of growing together. The result is new rivalry, as
that the West’s repeated military interventions in Kosovo, suggested by Jaswant Singh, who has served as India’s
Serbia, Iraq, and Libya would undermine international minister of defense, finance, and foreign affairs. Accord-
law, but to no avail (Lukin 2014). Condemning Russia ing to Singh (2014), »In Putin’s authoritarian capital-
while tolerating violations of international law in one’s ism—similar to that of China—the Western-style liberal
own political camp is hypocritical and does not result in democracy, which was supposed to reign triumphant,
holding a credible position in international relations. has a new rival.«

Stevens (2014) has put forward a gloomy analysis of The question of course is how the BRICS countries are
the current situation: Two key players in BRICS coun- likely to respond to the processes outlined above. There
tries, Chinese president Xi Jinping and Russian president are two potential avenues. The first option is to form an
Vladimir Putin, do not foresee a joint future with the alliance against the destruction of the multilateral trad-
West. Instead, they have opted for competing with the ing system. The BRICS countries, together with African,
old powers: Asian, and Latin American developing economies, could
form a group that aims at revitalizing the WTO. Global
Not so long ago policy makers in the west assumed economic governance, in particular the multilateral regu-
that China and Russia would eventually decide they lation of trade, would be the platform for that group.
wanted to be like »us.« China would develop as a However, the likeliness of such a concerted action is lim-
responsible stakeholder in the existing international ited indeed. The BRICS countries are most probably not
sufficiently unified in their foreign (economic) policy to
push such a campaign. Even if they were, their ability to
debate over TTIP so far, it appears unlikely that this alternative will be
chosen.

11
 Heribert Dieter | The Return of Geopolitics

force the United States (and the EU) to return to Geneva 7. Conclusion
might not be sufficient.
Trade policy has been massively re-politicized in recent
The second option is certainly less optimistic, but prob- years. For trade economists, this is a regrettable develop-
ably more realistic. In a multipolar world characterized ment. The first-best solution—the multilateral regulation
by the limited willingness for co-operation, the BRICS of trade—has been replaced by second-best approaches.
countries perhaps have no other option but to push their In part, the unwillingness of OECD countries to continue
own political projects. A race for alliances is the inevitable with trade liberalization can be explained by the harden-
result. Of course, some of this is already happening. Rus- ing of popular sentiment against free trade.12 Put differ-
sia does not want Ukraine to become associated with ently, the political costs of further liberalization simply
the European Union. China is ensnaring its neighbors are too high, so policy makers have refrained from con-
and is eager to form a Chinese-led Asian bloc. Brazil and fronting an increasingly skeptical domestic audience over
South Africa both see themselves as legitimate, leading issues that warrant only limited political returns.
regional powers. Only India, lacking neighbors willing to
co-operate, is an exception in this game. For political scientists, the main concern is that the politi-
cal lessons of the 1930s have been forgotten. Discrimina-
The increasing division between the United States and tion in trade is back, and this may result in greater conflict
the BRICS countries is not limited to trade-related issues. and less co-operation in international relations. None of
In 2014 the BRICS countries started creating their own the great powers has an explicit interest in advancing the
facilities in finance, announcing the creation of the New multilateral trading system. Geopolitics has replaced the
Development Bank (NDB) as well as the Contingent post-1945 liberal consensus in trade policy.
Reserve Arrangement (CRA). The former is competing
with the World Bank, financing development projects; This is both a dangerous and a regrettable develop-
the latter is a facility to provide liquidity in the event of a ment, but considering the domestic debates in the major
financial crisis and thus is a direct competitor to the IMF economies, there is little hope for a revision of policies.
(Eichengreen 2014). The world economy is sliding toward a situation char-
acterized by hostile economic blocs. The United States
Of course, it is impossible to evaluate the effects of these is more comfortable with its coalitions of like-minded
two institutions a few weeks after their establishment. countries than with multilateralism (Stevens 2013). Time
Barry Eichengreen (2014) has been suggesting that the and again, the Washington has shown that its cascading
effects of the New Development Bank will be moderately preferences—unilateral approaches first, coalitions sec-
positive, but he believes the CRA will not have a big ef- ond, and multilateralism as a last resort—do not facilitate
fect, calling it »empty symbolism.« The facility might be notions of »collective leadership« or other postmodern
too small for the BRICS countries, in particular China, concepts of shared responsibility for global regimes.
but over time, the BRICS countries might contemplate
using their own monetary fund to provide liquidity to The United States and its allies forget that their inward
third countries should they face trouble. In a few years, looking, self-interested policies will create backlashes.
developing countries could have the choice between The BRICS countries in particular will create their own
borrowing from the IMF or from the CRA. The trans- regimes in trade and finance. Of course, it is inappro-
atlantic dominance of the IMF would not be broken, priate to blame the BRICS countries for a game whose
but there would be systemic competition between the rules they cannot determine. They as well as the other
funds. Of course, today it is impossible to forecast the developing countries and emerging markets have no
evolution of the NDB or the CRA, but the foundation of alternative but to prepare themselves for an uncertain
both institutions reflects a persistent uneasiness of policy future in trade and financial regulation.
makers in the BRICS countries with the existing institu-
tions of global governance and the unwillingness of the
established powers to implement meaningful structural
changes.
12. Financial Times, 1–2 March 2014, 9.

12
 Heribert Dieter | The Return of Geopolitics

Policy Recommendations „„ Over time, the BRICS countries will aim at consolidat-
ing their influence on their neighboring countries. The
„„ The multilateral trading system is confronted with sys- current conflict in Ukraine may thus mark the beginning
temic competition by preferential trade agreements. Pol- of a new phase of regional power play. As the United
icy makers should refrain from creating closed economic States and the EU try to enlarge their spheres of influ-
blocs and should conclude the Doha round. While this ence, the BRICS countries will most probably not stay
recommendation may currently sound like naïve wish- behind and watch in awe.
ful thinking, the seemingly convincing alternative to the
WTO—preferential trade agreements—has considerable „„ In both trade and finance, it is highly implausible to
costs. Over time, this will lead to a balkanization of trade expect significant progress in multilateral regulation in
regulation. the short and medium term. Neither the G20 nor any of
the established institutions of global governance, such
„„ The mega-regional projects pose a particular risk to as the International Monetary Fund or the World Trade
developing countries. Since these projects by definition Organization, currently enjoy a high level of political sup-
require the documentation of the origin of products and port in their member countries. Since neither the IMF nor
inputs, developing countries will probably be excluded the WTO has the power to move ahead without politi-
from cross-border production networks, even if they are cal support, from the point of view of BRICS, alternatives
competitive. Restrictive rules of origin in mega-region- have to be developed, even if they are suboptimal.
als could severely damage the prospects for participation
by companies from developing countries in international „„ If developing countries and emerging markets de-
trade. Projects involving the United States, i.e., the Trans- velop their own co-operation schemes, learning from
atlantic Trade and Investment Partnership (TTIP) and the nineteenth-century Germany and the postwar European
Trans-Pacific Partnership (TPP) should refrain from using experience is recommended. Deep regional integration
the tight rules of origin of previous US-led projects, e.g., requires the establishment of at least a customs union.
NAFTA. Shallower forms of co-operation, such as a free trade
agreements, rarely lead to the creation of deep integra-
„„ Conventionally, the debate on preferential trade tion. Any sovereign country can join numerous preferen-
agreements emphasizes the economic dimension of tial trade agreements, but it can only join one customs
discrimination in trade. However, policy makers in Eu- union.
rope ought to consider the political cost of excluding the
BRICS countries as well as other emerging and develop-
ing countries from new forms of regulation.

„„ Potentially, the mega-regionals could be opened up to

all member countries of the WTO, but even that option
is not plausible. It is hard, for example, to envisage China
joining an agreement that does not permit input by Bei-
jing. Joining a »done deal« is politically unacceptable to
most policy makers from developing countries.

„„ Developing countries and emerging markets, includ-

ing the BRICS countries, are already preparing themselves
for a new phase of confrontation in international eco-
nomic relations. It is an illusion to expect these econo-
mies to remain loyal to the WTO when both the EU and
the United States are defecting from multilateral solu-
tions.

13
 Heribert Dieter | The Return of Geopolitics

References

Balassa, Bela. 1961.The Theory of Economic Integration. Homewood, Ill.: Richard Irwin.
 1987. »Economic Integration.« In The New Palgrave: A Dictionary of Economics. Vol. 2, E to J, edited by John Eatwell,
—
Murray Milgate, and Peter Newman, 43–47. London/Basingstoke: Macmillan.
Beck, Nils, and Renate Ohr. 2014. »Das transatlantische Freihandelsabkommen: Relativierung von Chancen
und Risiken.« Wirtschaftsdienst 5: 344–51.
Dieter, Heribert. 2004. »Ursprungsregeln in Freihandelszonen: Protektionismus durch die Hintertür.« SWP
Study 9, Stiftung Wissenschaft und Politik. March.
— 2013. »Die G-20 und der Schiffbruch multilateraler Kooperation.« Neue Zürcher Zeitung, 18 September.
— 2014a. »Das Bali-Abkommen: Ein positiver, aber zu kleiner Schritt.« ifo Schnelldienst 67(3): 16–18.
— 2014b. »Die scheinheilige EU.« Neue Zürcher Zeitung, 11 March.
 2014c. »The Virtue of Free-Trade Unilateralism.« Wall Street Journal, 10 September. [Link]
—
the-virtue-of-free-trade-unilateralism-1410287668.
Eichengreen, Barry. 2014. »Banking on the BRICS.« Project Syndicate, 13 August. [Link]
commentary/barry-eichengreen-is-bullish-on-the-group-s-new-development-bank--but-not-on-its-contingent-reserve-
arrangement.
Ikenberry, John. 2008.»The Rise of China and the Future of the West: Can the Liberal System Survive?« Foreign Affairs
(January/February). [Link]
the-west
Kissinger, Henry.2014. »The Right Outcome for Ukraine.« Washington Post, 6 March.
Lukin, Alexander.2014. »What the Kremlin Is Thinking.« Foreign Affairs 93(4): 85–93.
Mearsheimer, John J. 2014.»Why the Ukraine Crisis Is the West’s Fault: The Liberal Delusions That Provoked Putin.«
Foreign Affairs 93(5): 77–89.
Siebert, Horst, Rolf Langhammer, and Daniel Piazzolo. 1996. »TAFTA: Fuelling Trade Discrimination or Global
Liberalisation?« Kiel Working Paper no. 720. January.
Singh, Jaswant. 2014. »The Silence of the BRICS.« Project Syndicate, 27 August. [Link]
commentary/jaswant-singh-criticizes-global-powers--weak-response-to-russia-s-actions-in-ukraine.
Stevens, Philip. 2013. »Trade Trumps Missiles in Today’s Global Power Plays: China Is Waking Up to the Fact It Is Left
Behind as the West Clings to Economic Power.« Financial Times, 21 November. [Link]
[Link]#axzz3DTKnfOBR.
— 2014. »What Xi and Putin Really Think about the West.« Financial Times, 6 June.
Stiglitz, Joseph. 2013. »The Free-Trade Charade.« Project Syndicate, 4 July. [Link]
commentary/transatlantic-and-transpacific-free-trade-trouble-by-joseph-e--stiglitz.

14
About the Author: Imprint

Prof. Dr. Heribert Dieter is a Senior Fellow at German Institute Friedrich-Ebert-Stiftung | Global Policy and Development„
for International and Security Affairs, and a Visiting Professor for Hiroshimastr. 28 | 10785 Berlin | Germany
International Political Economy, at the Zeppelin University, Lake
Constance ([Link]@[Link]). Responsible:„
Hubert René Schillinger | Director, FES Geneva „
Stefan Pantekoek | Dialogue on Globalization

Phone +49-30-269-35-7462 | Fax: +49-30-269-35-9246„

[Link]

To order publications:„
[Link]@[Link]

Commercial use of all media published by the Friedrich-Ebert-

Stiftung (FES) is not permitted without the written consent of
the FES.

Global Policy and Development

The department Global Policy and Development of the Friedrich-Ebert-Stiftung fosters dialogue between North and South and promotes
public and political debate on international issues in Germany and Europe. In providing a platform for discussion and consultation we
aim at raising awareness of global interdependencies, developing scenarios for future trends and formulating policy recommendations.
This publication is part of the project »Construction sites of the Global Economy« a working line of the Working Group on Global Issues
(AGGF) of the Friedrich-Ebert-Stiftung, in charge: Stefan Pantekoek, [Link]@[Link].

Dialogue on Globalization

As part of the international work of the Friedrich-Ebert-Stiftung, Dialogue on Globalization contributes worldwide to the debate on
globalization and global governance. It is based on the premise that – through an inclusive and responsive global policy approach – glo-
balization can be shaped into a direction that promotes peace, democracy and social justice. The program draws intensely on the inter-
national network of the Friedrich-Ebert-Stiftung – a German non-profit institution committed to the principles of social democracy with
offices, programs and partners in more than 100 countries. Dialogue on Globalization addresses »movers and sha­kers« both in develop-
ing countries and in the industrialized parts of the world. The program is coordinated by the head office of the Friedrich-Ebert-Stiftung in
Berlin and by the FES offices in New York and Geneva.

The views expressed in this publication are not necessarily those ISBN
of the Friedrich-Ebert-Stiftung. 978-3-95861-059-0

This publication is printed on paper from sustainable forestry.