TTIP, TTP – Image Courtesy: Simon Cunningham © flickr

The world of international trade is changing in a way, previously unseen on this scale and in this depth. With the appearance of more and more proposed regional and mega-regional free trade agreements, global markets are evolving into few large and mighty trading blocs.

Among those deals, the Transatlantic Trade and Investment Partnership (TTIP) represents the biggest and most ambitious project. When it passes TTIP will cover roughly 45% of global output. The sheer size of the agreement will thus dictate not only effects to TTIP member countries, but also to those other countries, not directly part of the deal. While TTIP insider countries expect large trade and income increases, the effect TTIP will have on 3rd party countries is less clear. Let’s take a look then at what kind of effects can be expected and how emerging markets will fit into this new world trade order being created.

The Negative Impact of TTIP on 3rd Party Countries

Economically, for 3rd party countries, there are two opposing forces at play, with a mega-regional free trade agreement like TTIP. On the one hand we have the negative effect of trade diversion. Once trade between the US and the EU becomes cheaper, TTIP countries will naturally tend to trade more with each other rather than with outsider countries. Looking at this map taken from a study by Prof. Gabriel Felbermayr, the Ifo Institute conducted recently for the German Ministry for Economic Cooperation and Development, we can clearly see how such trade diversion negatively affects countries especially around China and the Indo Asian region:

TTIP Chart illustrating the Global Capita Income Changes

Trade Costs Could Be Lowered Globally

On the other hand, opposing these negative effects, we have the positive spillover effects of TTIP. The key to unlocking these effects lies in the reduction of non-tariff barriers between TTIP partners and the level of inclusivity the transatlantic trade deal will finally present. If the EU and the US unify their trading standards this also means a reduction in trading costs for third party countries exporting to both these regions. Furthermore, an inclusive TTIP could also incentivise these 3rd party countries to adapt their own regulatory standards to the new example set by the EU and the US. As a result trade costs in both directions between TTIP insider and outsider countries would be lowered. This is called an indirect spillover effect. Looking at Felbermayr’s study again we can see how these indirect spillover effects in particular have the potential of shifting previously negative income effects for emerging market economies into positive ones:

Global Per Capita Income Effects GED Blog TTIP Emerging Markets 2

Could TTIP Liberalize Chinese Trade?

TTIP, and other mega-regional trade deals, will also impact emerging markets on a political level. To illustrate this best, we can look at the example of China. Among the emerging markets, China finds itself in an especially peculiar situation. It not only faces direct effects from TTIP, but also from the Trans-Pacific Partnership (TPP), which brings together the US and other American, pacific coast countries with many of East Asia’s economies, but notably excludes China. China, like many other emerging market economies, now has the choice of how it wants to face those agreements. Many people in China see in them, and especially in TPP, a direct move against the People’s Republic and a move to isolate China within the global trading community. The reaction in this case would be to counter western FTA’s with their own agreement versions, as could happen through the establishment of the Regional Comprehensive Economic Partnership (RCEP) or the even more ambitious Free Trade Area of the Asia-Pacific (FTAAP) currently discussed. Other voices see TTIP and TPP as a positive external push to further liberalise Chinese trade, much like the joining of the WTO has been in past decades and ultimately seek accession to these new western trade agreements.

The possible inclusivity of mega-regionals and the reaction to those deals by third party emerging markets like China, at this point, is hanging in the balance. What is clear though, is that whatever the results they will define global trade in the 21st century. We at the Global Economic Dynamics project are currently working on in-depth studies on all the effects described here and concrete recommendations and hope to be able to show you our findings on this soon. It will definitely be worth your wait, so don’t forget to keep checking our site for more on this interesting and important topic.