Erry Prasetyo

Mega Traders, the 21st Century Trade, and Global Trade Governance

International trade has grown staggeringly in the last 30 years with the value of merchandise trade

increased by more than 7% and trade in commercial service by 8% per year between 1980 and 2011.

During the same period, world trade has grown twice as fast as world GDP, thanks to the reductions of

tariff and other barriers during this period of globalization since the 1980s (WTO, 2013). Along with

this, trade has also evolved to be more regionalized with higher interdependency among economies

resulting largely from international supply chains that highlights the importance of value-added

measurements and commercial services contribution to trade by each location in internationally

configured production processes. Today’s trade is radically more complex. The revolution in

information and communication technologies fostered an internationalization of supply chains, which

created complex links between trade, investment, and services.

Together with the evolution of international trade patterns, trading countries around the world are

also evolving. New players have also risen to the center stage. Developing economies share of world

trade has risen to 47% in 2011 with China at the front as the latest member of the world’s mega trader

(WTO, 2013). The four largest trading nations, in terms of both exports and imports in goods and

services, are the European Union, the United States, Japan, and China (WTO, 2012). When members of

the European Union are counted separately, China is the world’s largest trading nation in goods exports,

while the United States still holds the title of the world’s largest trading nation in terms of imports of

goods as well as exports and imports of commercial services (WTO, 2013).

Given this background, this paper aims to examine the likely evolution of these four large trading

nations and their interaction through international trade as well as the impact on global trade governance.

This paper will first discuss the evolution of international trade in brief as a background to determine the

fundamental forces shaping the future of international trade that will affect the likely evolution of the

United States, European Union, Japan, and China. Then this paper will discuss each of these four

economies separately followed by analysis on the their likely interaction and its policy implications for

the global governance through WTO.

The Evolution of International Trade: The Second Unbundling

International trade in today’s world has evolved into a multifaceted two-way flows of goods,

services, people, ideas, and investments in physical, human and knowledge capital, not only trade in raw

materials and final goods. This section examines the evolution of international trade brought about by

Erry Prasetyo globalization through the so-called ‘unbundling’ process of international trade and the relevance of the

international trade regime under the WTO. In World Trade Report 2013, the WTO list technological

progress and transportation cost among the fundamental forces driving the world trade evolution (WTO,

2013).

Indeed, astonishing progress in two very different connective technologies has driven

globalization: transportation and transmission. From the steam revolution up to late 1980s, globalization

was mostly about reducing trade costs by liberalizing trade at the borders focused on tariff reduction

(this was globalization’s 1st unbundle); since 1980, the information and communications technology

(ICT) revolution radically lowered transmission costs; this was globalization’s 2nd

unbundling (Baldwin,

2011: 2).

The first unbundling was the geographic separation of production and consumption: one country

produces goods and trade it for other goods produced by another country, with each country benefiting

by producing according to its comparative advantage. The second unbundling is the division of

production itself, so that each stage of the production process is done in the most efficient location. One

famous example of this concept is Apple’s products that always say: assembled in China, designed by

Apple in California; these products are recorded as part of China’s exports, but most of the value comes

from outside China.

In light of this evolution of international trade, of course trade rules and regime need to adapt to

be able to support international trade. Responding to the first unbundling of international trade, countries

negotiated the GATT, remained modest with limited agenda centered on liberalization of trade barriers

“at the border” and focused mostly on trade of goods and merchandise. Uruguay Round that

subsequently established the WTO in 1995, beginning to address the challenges of trade rules and

regime to keep up with second unbundling of international trade with a more complex agendas and more

players on the stage. Nevertheless, the WTO Agreement managed to extend the WTO rules into ‘behind-

the-border’ realms such as the GATS and TRIPS (Barton et al, 2006).

However this effort of adapting trade rules and regime to be able to support the nature of

international trade after the second unbundling is not finish yet, but talks in multilateral level have been

stalled with the uncertain fate the WTO’s Doha Round even after more than 10 years of negotiation. For

the world to be able to realize full benefits of the second unbundling, the international trade regime

should be able to fully liberalize trade at the border and also be able to completely dismantle 'behind-

the-border' trade restrictions as well as establishing consistent rules, standards, methods of operation and

infrastructure to support the complexity of the 21st century trade.

Erry Prasetyo

It is not surprising that the negotiation of today’s international trade regime at the multilateral

level is relatively more difficult compared to the negotiation of the GATT and the Uruguay Round. The

two most pronounced explanation behind the slow progress of Doha Round negotiation to further

advance the multilateral trade regime are: diverse players and interests and overloaded agendas of

complex issues. Compared to the world when the GATT was being negotiated, we are now living in a

more complex world with more prominent trading nations, more nation grouping with differing

strategies reflecting diverging national interests at stake. In general, the complexity in current

multilateral trade negotiation could be described that industrialized countries such as the Unites States is

in need of an ambitious and commercially attractive outcome of multilateral agreement; while countries

like China, India, and Brazil as well as other developing countries and least developed countries (LDCs)

have their own domestic national interests and not in a position to take on such ambitious goal of

comprehensive rules and standards of international trade (Kleimann, 2011). Hence exist much

disagreement about rules, standards, methods of operation and infrastructure to support the complexity

of the 21st century trade.

Based on the analysis of this section regarding the evolution of international trade, the next

section of this paper will analyze the likely evolution of the four largest trading nations with the

background of the second global unbundling of trade that demands a more complex and sophisticated

trade regime combined with a stalled multilateral negotiation.

The Mega Traders of the 21st Century

Along with the evolution of the nature of international trade, the largest trading nations in the

world are also keep evolving. Up until 2014, the four largest traders in the world, with enough weight to

shape the future of global trade governance, are: the United States, the European Union, Japan, and

China (see graph 1). This section will analyze each country’s evolution on trade policy before

embarking to analysis on their interaction and implication of global trade governance in the following

section.

Graph 1. Share of World Trade (The United State, European, Japan, and China)

Erry Prasetyo

The United States

With the rise of the developing economies’ share of world trade, led by China in the last three

decades, the industrialized countries including the United States’ share of world trade has declined.

Along with that, the United States share of GDP has also declined to 29% in 2013. In relative terms, the

Unites States’ prominence in world trade has been declining. During the 2008 crisis, the United States

was experiencing the worst economic crisis in 80 years since the great depression, while global trade

was dropping at a fastest rate, causing the Unites States to lose nearly half a million jobs a month Trade

has been an important part of America’s economic recovery, but uneasiness around pursuing new trade

opportunities remains.

Hence in trade policy, the Obama Administration is committed to a trade policy that provides

new opportunities for workers and that supports economic growth by opening markets, enforcing

agreements, and leveling the playing field for America’s domestic labor and companies. To be able to

support high-paying jobs, the United States aim to increase market access through efforts of leveling the

playing field by raising labor and environmental standards, putting disciplines on state-owned

enterprises and integrating itself into global supply chains (USTR: The President’s Trade Policy Agenda

2014).

This leveling the playing field objective in order to support the United States economy and its

Erry Prasetyo recovery and creating more jobs through expanded export supported by value-driven trade policy is the

central tenet of current United States’ trade policy and will guide its likely evolution to future. In his

remarks at the Center for American Progress in February 2014, United States Trade Representative

Michael Froman mentioned that a United States’ value-driven trade policy would focus on issues

including but not limited to: enforceable labor standards, enforceable environmental protections, issues

related to innovation and digital freedom through promotion and protection of IPR, as well as trade rules

that address competition policy including State Owned Enterprises (Froman, 2014). American

companies and workers are among the most productive and innovative in the world with an estimated 19

million Americans employed in intellectual property-intensive industries that makes IPR protection and

enforcement vital to strengthen the U.S. economy through creation of economic opportunities and jobs

for Americans (Ahearn, 2012).

Along with the evolution of international trade and the reconfiguration of power and affluence

among major trading nations, the United States trade policy face a number of overlapping and complex

issues relating to the role of future trade liberalizing negotiations and the management of the multilateral

trading system. With Doha Round stalled and the United States has the pressure to advance the ‘21st

century’ trade issus, the Obama Administration has been actively negotiating what it promises will be

“a trade agreement for the twenty-first century” outside the WTO and focusing more on PTA

negotiations leading the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment

Partnership (T-TIP) negotiations that are supposedly will comprise more than half of the world’s trade

share.

The United States’ objectives in the proposed TPP agreement include but not limited to setting

up a comprehensive standard of PTA that eliminates trade barriers and increase trade and investment; as

well as providing the United States with an opportunity to establish new rules on emerging trade issues

such as regulatory coherence, supply chain management, and state-owned enterprises (Williams, 2013:

1). These objectives of a comprehensive higher standard on issues ranging beyond traditional trade

liberalization is quite spot on since the United States already has FTAs with Australia, Canada and

Mexico via NAFTA, Chile, Peru, and Singapore.

The European Union

Similar to the United States, the European Union also seen their share of world trade and GDP

declining with the rise of developing countries in the last three decades. The European Union has also

Erry Prasetyo been hit pretty badly during the 2008 financial crisis and they believe that recovering from the economic

crisis depends on strong manufacturing companies and in turn building strong manufacturing companies

depends on open international markets.

The European Trade Commission, on its presentation titled “The European Union Trade Policy

2014”, mentioned three driving forces in today’s context that would most likely guide the European

Union’s evolution in future trade policy are: fragmentation of value chain (the 2nd

unbundling),

emergence of new economic powerhouses (China, India, and Brazil), and economic downturn that needs

trade as part of solution (EU Trade Comission, 2014: 4). European trade policy aims to increase its

competitiveness to adapt to the new global challenges. Similar with the United States, the European

Union also uses the term “leveling the playing field” saying that trade policy must ensure that trade

takes place on a level playing field governed by fair rules; through access to new markets to maintain

and re-invent its role in global supply chains (De Gucht, 2012).

Similar to the United States, the European Union has interest in setting up a pioneering

mechanism for addressing the main issue in the 21st century international trade through regulatory

convergence of rules and standard. Furthermore, even though the Union still supports the Doha Round

and the multilateral trade regime under the WTO, the European Union also aware that the Round is

currently stuck. With these situations in the background, the Union press forward on its trade policy

agenda through bilateral and preferential trade arrangements with around sixty trading agreements either

signed or currently under negotiations (European Comission, 2014). The most recent and probably most

important trading agreements in terms of scope and issues (currently under negotiations with the United

States) is the Transatlantic Trade and Investment Partnership (T-TIP).

In addition, according to the European Commission, the European Union is also considering a

preferential negotiation with Japan that will have comprehensive rules on non-tariff barriers and public

procurement at its core. This intent has been more pronounced since Japan joined TPP negotiation in

July 2013. If the European Union set up a preferential agreement with Japan, then three out of four

largest trading nations will have their own preferential trading arrangement within each other.

Japan

While the Unites States and the European Union pursuing a more comprehensive “21st century”

trade rules and standards with or without the WTO, Japan has been less ambitious in both negotiating

Erry Prasetyo PTAs and tackling the WTO plus issues

1 (i.e. the 21

st century trade issues). Even in 2001, Japanese

Foreign Minister, Yohei Kono mentioned that PTAs posed a threat to the multilateral world trading

system, which has greatly benefited Japan (Kono, 2001).

However, in recent year, Japan seems to rethink its view of PTAs and further liberalization

tackling the 21st Century trade issues. The reasons behind this shift include but not limited to: the

realization of deep interdependence of the Japanese economy and the region, the lack of progress in

Doha Round, anxiety on being left out by other countries that are conducting PTAs. After the late 1990s

Asian financial crisis, Japan realized that its economy are intertwined and to some degree depends on

the well being of its neighbors in Asia.

Along the same line with the United States and European Union, Japan begins to realize that

Doha Round might not be able to achieve the goals of most interest to Japan in a timely manner, or

worse, it might not be concluded at all. Therefore Japan has been increasingly nervous about being left

out by other PTAs involving its trading partners. Up until 2001, Japan and Korea were the only OECD

countries that had not entered into any PTA. Currently Korea already concluded an FTA with the United

States. Japan itself has concluded some twelve PTAs including with ASEAN as a region, seven ASEAN

countries, GCC countries, Mexico, India, Switzerland, Australia, Chile and Peru. Japan’s intention to not

being left out of PTAs could be seen through FTA with Mexico (NAFTA) and Chile (Central American

and Pacific).

Japan has shifted its conventional wisdom that PTAs were incompatible with the WTO regime,

and this shift gave Japan greater policy flexibility even to start negotiating trade issues that it used to be

avoiding. On November 7, 2011, Japanese Prime Minister Yoshihiko Noda announced that Japan would

explore participation in the TPP and subsequently joined the negotiation in July 2013. Japanese

participation is important to the United States because Japan is its fourth largest trading partner and a

key player in the Asia-Pacific regional economy. On the other hand, Japanese participation may make

negotiation in TPP more complex given the Japanese sensitive issues (e.g. automotive and agriculture

among many). However, with the addition of Japan in TPP negotiation, we can infer that three out of

four largest trading nations have been embarking on moving forward discussing deeper liberalization

tackling the more complex, broader and sensitive trade issues (21st century trade issues) through PTAs.

China

1 With the exception of investment, Japan has generally open only selected sectors with no additional

environmental safeguards or labor standards protections included.

Erry Prasetyo In 2014, China is one of the four largest trading nations, surpassing Japan in 2003 and equaling

the United States since 2011 (see graph 1). In terms of merchandise export, China has surpassed the

United States in 2011. However, China is the new kid on the block of mega traders of the world. In

1980, China’s share of world’s export was only 1% making it the 10th largest exporter among

developing country, but in 2011 its share had increased to 11% making it the largest exporter among

developing countries and the second largest exporter in the world only after the European Union (WTO,

2013). It is also worth noting, that China is the only one among the four mega trading nations with a

developing country status.

The accession of China to the WTO in 2001 gave a huge boost to China’s integration into the

international trading system and serve as a landmark where China’s trade policy and interest could be

observed. The following decade after its accession to the WTO, China has been embarking on deep

market opening and liberalization unilaterally but its WTO accession obligations remains incomplete

especially in observance of non-discrimination, transparency, and rule of law (Hilpert, 2014). Based on

its status as a developing country, China focuses the domestic development of income level and

employment with priorities in protecting its large SOEs and establishing competitive industries with

government supports (Hilpert, 2014).

Hence in general, China plays an ambivalent stance on the multilateral trade platform. It remains

reserved and passive. This is probably due to China’s unique position regarding the Doha Round’s

agendas. Chinese officials made it clear that after deep and broad liberalization concessions made during

the WTO accession process, China is not ready to take on major new obligations and more complex

issues as part of the Doha Round negotiations. (Barfield, 2007).

However, compared to its position at the multilateral level, China plays a relatively more active

role at the PTA level. To date China has signed thirteen PTAs. Since 2001, when it became a Member of

the WTO, China has moved with stunning speed to craft a widening network of bilateral and regional

trading arrangements with PTA templates that stand in great contrast to PTAs under the United States

and European Union. China tends to prefer a more pragmatic approach with individually tailored PTAs

to the needs and priorities of individual countries, while meeting the imperatives of Chinese political and

foreign policy goals. In general, Chinese PTAs focus on liberalizing trade in traditional goods and

services without extensive agenda on the 21st century trade issues such as environmental and labor rules

and WTO-plus intellectual property provisions (Hufbauer and Wong, 2005).

It is worth noting here that China is not a negotiating country in the TPP that is designed to go

beyond simple tariff preferences and rules of origin, to bindingly regulate the spheres of services,

Erry Prasetyo investment protection, right of establishment, competition, intellectual property rights, and

environmental and labor protection standards (i.e. the 21st century trade issues). Recently, China has

been seen bidding to join the Trade in Services Agreement (TISA), which could be a signal that China is

ready to move to the direction of tackling the WTO plus issues. However, TISA would not be as far and

deep reaching as TPP, if China were to seek to later join the TPP, it would have to observe the complex,

newly-drafted trade rules and accept stricter standards in the fields of social affairs, environmental

standards, and intellectual property. The question is when will China be ready? How soon?

China is currently negotiating the Regional Comprehensive Economic Partnership (RCEP) with

the 10 ASEAN countries, Australia, India, Japan, South Korea, and New Zealand. It is natural for China

to support RCEP since China is still anxious toward TPP (both because it is still not clear whether TPP

is a United States’ strategy to contain China and also because China is still not clear about its own

readiness to tackle the agendas in TPP negotiations). The advantage of RCEP for China is obviously

reflected in the flexibility in negotiations that allows for decisions to be made through any agreed

modality and enabling special and differential treatment of members, which enables a more generous

consideration of each nation’s interests and needs that is in contrast with the high threshold of the TPP

and more in line with China’s PTA characteristics (Xiaohui, 2012).

The Interaction of Giants: Mega PTAs and Global Trade Governance in the 21st Century

With the Doha Round under WTO stuck, the four largest trading nations have to find a way to

keep on moving forward to make sure that trade rules and regime is up to the challenges of the nature of

international trade in the 21st century. From the previous section we can see that although the United

States, the European Union, Japan, and China do not abandon multilateral negotiation completely, these

four large nations have also been putting their attention and effort in forming PTAs with different focus

and interests in the background.

The United States and the European Union put their reputation at stake in negotiating the

ambitious transatlantic agreements (T-TIP) with long list of WTO-plus agendas. Japan also shifted its

uneasiness towards PTA and recently joins the Unites States, trying to lead the rulemaking of the 21st

century trade regime through TPP. While China seems to be ambivalent about taking on the 21st century

trade issues, chose to stay in the sideline from United States’ led PTA negotiations while embarking on

an equally large PTA negotiation albeit with less strict agendas (RCEP) together with ASEAN+6

nations. The direction charted by four of the world’s largest trading nations will have a profound impact

Erry Prasetyo on the fate of the free trade regime. Given the analysis in previous sections, we can see that there are

contrasting strategies adopted by the United States, Europe, Japan and China when negotiating PTAs.

The United States seems to be only interested in PTA negotiations only if the result would be

comprehensive and would be WTO-plus focusing in furthering reductions in industrial tariffs with

substantial additional liberalization service sectors, intellectual property protection beyond TRIPS and

other 21st century issues. The European Union has also adopted a similar approach with the Unites

Statets, particularly with regard to labor and environmental standards, tariff reduction, and services

liberalization as well as greater focus on competition rules and on stricter protection in international

investment (Barfield, 2007).

Japan that has been relatively less ambitious in negotiating PTA might move toward the United

States’ way since joining the TPP negotiations. Before TPP, Japanese PTAs are usually focused on

economic partnership, tackling the traditional trade liberalization agendas with addition of economic

cooperation such as technical cooperation and aid/development assistance; hence Japan PTAs are

usually called Economic Partnership Agreement (EPA). The only WTO-plus issue that the Japanese

seems to push through on its EPAs is investment, but nothing further. Japan’s decision to join in TPP

negotiation actually triggers some tectonic shifts in the region, triggering the proposed China-Japan-

South Korea PTA and the Chinese supported RCEP driven by ASEAN countries, as well as a more

serious talk on Japan-European Union FTA (Mulgan, 2013).

The remaining question is China. China is the one among the four mega trading nations that is

currently not in intense negotiation with the other three. After Japan join TPP, China has been indicating

a possibility to jump in too, however it would have to observe the complex, newly drafted trade rules

and accept stricter standards. But without China it would be hard for the United States, the European

Union, and Japan to establish and enforce the 21st century trade’s set of rules to foster the ‘second

unbundling'. The concern for China is not simply the politics of regional leadership but that the trade

negotiation will move outside its control, with the WTO framework less central, standard-setting

dominated by the other major economic powers through TPP and T-TIP. Currently, in mega PTA

negotiation, China only involved in RCEP negotiation. The TPP and T-TIP pursues a high-standard

agreement, while the negotiating objective of the RCEP is modest, focusing on tariff cuts with

flexibility.

This situation, with China outside of TPP and T-TIP and active in RCEP, presents two

competing templates in the pursuance of the future of global trade governance. It remains to be seen

whether the two competing trade blocs will converge, simplifying the spaghetti bowl effects of PTAs

Erry Prasetyo and subsequently unlocking the deadlock in multilateral negotiation or will become mutually exclusive.

This will determine the future of the international trading system. With the current impasse at Doha

Round, at least these mega PTAs (RCEP, TPP, T-TIP) are potentially valuable as the framework for

negotiating 'second unbundling' issues; mega FTAs will no doubt serve as the basis for the formation of

a new international trade regime in the years to come.

These four mega trading nations should be cautious in completing their mega PTAs projects. The

most likely scenario for the future of world trade is that there will be two track of negotiation template

running parallel. With TPP and T-TIP embarking on ambitious rule and standard making to address the

21st trade issue. Should the United States, the European Union, and Japan could prove to be successful in

setting up the future trading rules and regime through TPP and T-TIP, it could provide motivation for

China and other countries to rebalance domestically and tackle their own supply chain problems to be

able to join in the new regime of world trade and not left behind. The RCEP on the other hand, could

help China and large developing countries to better prepare for multilateral reforms through incremental

liberalization until they are ready to take on the TPP template of higher and more ambitious agendas.

This would hopefully allow the TPP template and the RCEP template to converge. However, the

risk of deeper fragmentation of world trade would be realized should the TPP template and the RCEP

template could never converge. Possible solution for all would be to make sure that the TPP and the

RCEP will co-exist and multilateralize under the WTO. With appropriate communication and

cooperation, these mechanisms will be able to avoid vicious competition.

Concluding Remarks

Along with the evolution of trade and globalization, that brought about the second unbundling of

international trade, international trade regime also need to keep evolving. Countries feel the need to have

an established trade rules that address the new challenges brought about by the evolution of international

trade. However, with rising number of players and diverging interests in the multilateral platform, the

multilateral negotiation have been stuck and only minimally address the 21st century trade issues.

The four largest trading nations interact through mega PTAs in which they advance the

international trade agenda aiming for an enhanced and more established rules and regime for the 21st

century trade. The United States and the European Union led the journey to the uncharted territory of

establishing new regime through TPP and T-TIP with Japan playing the middle man through TPP,

tripartite Japan-China-Korea FTA, and RCEP would help China and other developing countries to get

Erry Prasetyo ready to jump in and converge the two templates of mega PTAs negotiation that currently are under

negotiations.

Convergence of mega PTAs into a more harmonious trade rules and standard would simplify the

spaghetti bowl of PTAs and bring greater benefit for every trading nations as well as unlocking the

deadlock of multilateral negotiation. Thinking ahead, however, it is clear that global trade governance

faces a historical turning point. The current trajectory seems certain to undermine the WTO’s centrality;

with mega PTAs taking over the global trade governance.

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