Using e-Commerce to Help Smaller Companies

One of the fastest, easiest and lowest cost ways for smaller companies to join the global marketplace is to use e-Commerce.  By harnessing the power of the Internet to connect with suppliers, producers, lead firms, and consumers, firms can sell their goods and services to a much wider audience than would otherwise be possible.

As the clearest example of this phenomenon, check out the attached policy report.  This document, Challenges of e-Commerce for Small and Medium Sized Enterprises in Asia, benefitted from the skills of a graphic designer in Pakistan.  The staff of the Asian Trade Centre in Singapore never met the designer.  Instead, the entire process was handled via the web. 

This designer charged one-tenth the price of a locally engaged person.   In the end, the magic of e-Commerce allowed one small firm in Singapore to support an even smaller firm in Pakistan and create a win-win situation for both companies in delivering a high quality service to a wide range of readers and government officials in Asia.

The report examined many of the challenges and opportunities for small and medium enterprises (SMEs) in the region that are engaged in e-Commerce.  It was generously financed by the British Foreign and Commonwealth Office and is intended to provide a small sample of case studies to launch our larger project on the topic.

Despite the promise of greater economic growth available by using e-Commerce, the cases highlight a set of challenges that smaller firms often face. 

Small firms, by definition, have limited resources including, especially, fewer staff members.  This makes getting things done more challenging and increases the premium on hiring and retaining quality workers.  Manpower issues of all sorts are a challenge for many of the SMEs profiled in our study. 

The Singapore-based firms have particularly struggled with tight access to foreign talent at various levels. But most of the firms in the region have also faced escalating wage requests and difficulties keeping employees adequately trained for their tasks.

Rising costs elsewhere, including ever-increasing rental charges, have also proven difficult to manage.  Purchasing facilities like office, warehouse or factory space may not be possible, depending on the type of firm and ownership structure.  Land acquisition is often difficult or time consuming. 

These problems may plague all types of smaller firms, not just those trying to work in the e-Commerce space.  For companies that want to buy and sell online, they have additional issues to consider.  Creating and maintaining an excellent web presence is very difficult for smaller companies.  A lack of knowledge about existing online platforms has lead many companies to create their own customized solutions. 

However, creating a functioning website can be quite expensive and often requires hiring staff with specific skills.  Getting employees with website skills can be particularly problematic for smaller companies that may not need someone full time and have to pay a premium wage to get skilled workers to join smaller firms.

Companies do not have the time or resources to invest in expensive hardware and storage systems.  Hence, most smaller firms need to be able to find other vendors with dramatically better abilities to manage e-Commerce platforms at lower cost, greater reliability, and improved security. 

Finally, our firm-level interviews turned up many examples of companies struggling with payments issues.  These challenges ranged from getting online payment mechanisms set up on the websites in the first place to crazy high fees imposed on companies wanting to set up online shopping carts.  The charges for online card processing can be very steep for smaller firms with limited cash flow.

Government officials trying to address the specific challenges faced by such an assortment of companies struggle to respond appropriately.  Because SMEs are small and numerous, getting feedback from such firms is always harder than finding out about the concerns of larger companies with greater resources.

Most small companies do not recognize that many of their specific challenges could be addressed by government policies.  They often regard their situation as simply part of a background environment that is immutable.  For example, firms may have a hard time managing multiple bank terminal machines as required by different bank and financial institutions.  Government could fairly easily sort out this obstacle to firms by requiring that terminal machines function for multiple financial institutions. 

When asked by government, however, most companies might not complain about the banking terminal issues to agencies or ministries.  This is not because the issue is insignificant, but because firms think that a problem like this could only be addressed by banks.  Such a complaint is not seen as a policy or regulatory issue.  Hence, officials that ask for “policy feedback” may not receive as much useful input as they might have expected. 

Governments in the region, and particularly Singapore, offer many different types of support programs for small firms.  These range from seed capital to training courses to salary supplements for different types of staff.  However, for a small company, managing these programs may require significant investments from staff members. 

Such programs also frequently take time—up to six months—to completely process through complex bureaucracies.  For companies, speed to market can be critical and delays along the way can be disastrous.  Hence, many firms do not bother to take up government assistance at all because they would prefer to just self-finance or otherwise sort out their own issues than face time and paperwork delays and hassles. 

Another challenge many types of companies face in trying to manage e-Commerce operations is a lack of understanding by government officials of how e-Commerce can work.  Many officials have a very limited view of e-Commerce possibilities with a narrow focus on delivering goods to final customers.  Instead, e-Commerce programs ought to focus on a broader definition of possibilities, including delivery of both goods and services, as well as business-to-business (B2B) applications and final consumer demands. 

A broader perspective on e-Commerce possibilities and obstacles should help governments in Asia focus attention on a wider range of issues that must be considered and addressed in creating supportive policies.  For example, smaller firms that do export or import goods need a set of policies for smaller size or smaller value shipments.  Delays at the border of any kind can be catastrophic for firms since it ties up inventory and prevents payment.  A small firm can easily go out of business waiting 45 days or longer for money to reach their bank account.

Government needs to recognize the possibilities for small firms to provide a wide range of services.  For many developing countries, especially, firms can plug into wider regional or global value chains through the provision of services much more easily than they can engage in trade in goods.  Again, barriers to entry for services providers can be substantial, even if firms do not recognize that their own specific challenges in this regard are related to policy decisions by government to, for instance, limit foreign firm access to certain markets.

The Asian Trade Centre is using the information provided by this range of companies in different parts of the e-Commerce world to create a set of policy proposals for governments in the region.  We have already presented the proposal highlighted at the back of the report to the 16 party trade negotiators meeting as part of the e-Commerce deliberations in the Regional Comprehensive Economic Partnership (RCEP).  We are also working to put these ideas into practice as part of ASEAN’s Vision 2025. 

Finally, we are working within the APEC framework to encourage governments across the Asia-Pacific to consider e-Commerce in a broader, more holistic manner.  APEC has created an ad-hoc committee on the internet economy that should help guide policy across a wider range of issue areas than just a focus on telecommunications policy. 

Getting the right policies into place to unleash the creative and entrepreneurial spirits of smaller firms like those featured in our report should lead to greater opportunities for economic growth and development across the region.  Thinking carefully about e-Commerce provides an ideal space for government officials to consider and address next generation barriers to trade.   We are looking forward to hearing from more firms and governments trying to operate in this space.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Getting TPA for TPP

Note:  This Taking Trade post is a reprint of my article now appearing in a special issue on the Trans-Pacific Partnership, part of the Social Science Japan newsletter produced by the Institute of Social Science at the University of Tokyo.  

As the Trans-Pacific Partnership (TPP) negotiations with the 12 international trading partners nears conclusion after five long years of hard bargaining, the battle for the future of the agreement inside the United States is heating up.  There are two key elements of the fight: Congressional approval of Trade Promotion Authority (TPA) and passage of the implementing legislation necessary to bring it into force in the United States.  In both areas, interest group pressures are likely to be substantial, making ratification of the TPP uncertain.

In the U.S., Congress has the authority to regulate commerce, which includes setting tariffs.  But getting 535 members of Congress to negotiate trade agreements is not practical, so historically the executive branch has handled these tasks.  In the 1970s, this arrangement was formalized.  Congress explicitly gave the role of negotiating trade agreements to the White House subject to a number of specific provisions.

Under what used to be called “fast track” and is now labeled “Trade Promotion Authority” (TPA), Congress is to be notified of the intention to launch negotiations.[1]  Congress is given 90 days to respond.  The United States Trade Representative (USTR) office is also tasked with gathering information about the future direction and important elements for the talks during this time period from a range of key stakeholders including business groups.  After the initial comment period is concluded, USTR is required to keep Congress informed as negotiations continue.  Finally, Congress has promised to vote the entire trade agreement up or down without amendment at the end by a simple majority vote in both chambers.[2]  The timeline is shown in Table 1.

Ideally prior to the start of new negotiations, USTR would receive TPA from Congress, with the broad parameters and objectives set for any trade agreements to be negotiated during the time covered by the approval.  However, this was not done for the TPP as the latest version of TPA expired in 2007.

The outgoing George W. Bush administration announced its intention to join what became the TPP in September 2008.  The Obama White House decided not to press Congress for renewal of TPA in 2009, but rather started negotiations in March 2010 by following the provisions of TPA “as if” it were active. 

Over all the years of TPP negotiations, the White House never seriously pursued the votes in Congress to support renewal of TPA.[3]  But now, as talks enter the closing phase, TPA is necessary to finish the agreement.  Without TPA, Congress can amend the agreement from the opening sentence to the closing word.  It could also allow the agreement to die in committee or tangle ratification in an endless filibuster.  In short, without the provisions of TPA in place prior to the closure of the agreement, the TPP will likely fail to be ratified by Congress.[4]

The first problem for 2015, then, is to secure passage of TPA.  The last time the bill was authorized, in 2002, the votes were very close: approval by 215 to 212 in the House of Representatives and by a margin of 64 to 34 in the Senate.[5]  All indications are that a TPA vote may be equally close this time.

Even the passage of TPA, however, does not mean smooth sailing for a TPP deal.  In authorizing TPA, many members of Congress want to place strict conditions on elements of a final deal that must be present before they will grant approval.  Most controversial is an ongoing discussion of including legally binding rules to prevent trade agreement members from manipulating their currencies.[6] 

Until now, currency issues like manipulation or currency controls have been kept out of the TPP.  There is no appetite within the other TPP member countries to include such rules and certainly there is no interest in adding in an extremely controversial set of provisions at this late date in negotiations.  Hence, a decision by Congress to insist on such currency rules in TPA approval in 2015 will be deeply problematic for the TPP.

Ideally, TPA will be granted—as it has always been—for a range of trade agreements and not simply given for the TPP.  The United States is simultaneously engaged in multiple negotiations over trade: with the European Union in the Trans-Atlantic Trade and Investment Partnership (TTIP); with nearly two dozen countries on the sidelines of the World Trade Organization (WTO) in the Trade in Services Agreement (TiSA); with 80 countries at the WTO in updating the Information Technology Agreement (ITA); and with more than 160 countries in the WTO in the Doha Development Agenda (DDA).   All will need a version of TPA, at least before any agreement can be implemented and enter into force for the United States.

Once TPA has been granted, the fight over trade inside the U.S. will not be over.  Instead, different groups are likely to engage in potentially bitter arguments over the provisions of the TPP as Congress grapples with whether or not to approve this specific trade deal. 

Even for less controversial agreements, passage of the final legislation for free trade agreements (FTAs) has been far from assured.  Congress approved the three most recent FTAs, with Colombia, Panama and South Korea, on October 12, 2011.[7]  The votes were largely along partisan lines with many Democrats in Congress voting against President Obama.[8] 

The TPP is a much more complicated and challenging agreement.  Many provisions will require changes in domestic rules and regulations.  Sectors that have not been affected by previous trade agreements may face new issues in the TPP.  For example, the agreement drops tariffs to 0 on 90% of goods trade on entry into force, which may impose new competitive challenges on some industries from the very beginning.

Sectors, firms and industries that believe they will be negatively affected, especially by the removal of previous protections of one sort or another, can be expected to lobby furiously to block the implementation of the TPP in the United States.  They will likely find a receptive audience, especially from some members of Congress.

Trade agreements have always been problematic for Democrats given their historical ties to the labor and union movements.  Additional challenges come from the environmental wing of the party, as opening trade is assumed to undermine environmental protections.  Although changing, the party has not been as closely tied to the business community. 

An additional complication in securing support from Democrats for the TPP will be the legacy of the North American Free Trade Agreement (NAFTA).  The battle over NAFTA was long and bitter.  In the end, President Bill Clinton defied his party to push for the conclusion of the deal to tie the United States more closely with Canada and Mexico.[9] 

The debate around NAFTA was highly charged with supporters overselling the benefits and opponents making wild claims (Ross Perot, a US Presidential candidate, famously called NAFTA a “giant sucking sound” of American jobs heading to Mexico in one of the debates.[10]) 

In the 20 years since NAFTA was approved, the evidence on the benefits to the American economy has been largely mixed.  In this relatively uncertain environment, opponents have been quick to seize on examples of companies that moved operations into Mexico.  Some will likely argue that a similar loss of jobs will take place under TPP.[11]

Against a backdrop of—at best—lukewarm Democratic support, the TPP will require Republicans to line up in support of the agreement.  In the past, Republicans largely voted in favor of trade agreements.  Now, however, the Republican party is also split.  Many members of the party are firmly opposed to any type of foreign entanglements, especially those in the Tea Party wing.  Others are simply loath to give President Obama a victory in anything at all.  Hence, unified support by Republicans for the TPP cannot be taken as a given. 

In this environment, the votes needed to bring the TPP into force in the United States may very well be closer than ever.  The President and his team will need to mount an aggressive campaign to ensure that the 12 nation deal does not collapse at the finish line in Washington DC. 

[1] For the best review of the history and evolution of fast track, see I.M. Destler, 2005, American Trade Politics, 4th edition, (Washington DC:  International Institute for Economics).  For a recent discussion of issues, see William Cooper, January 13, 2014, “Trade Promotion Authority and the Role of Congress in Trade Policy,” Congressional Research Service 7-5700.  Access at: http://fas.org/sgp/crs/misc/RL33743.pdf.

[2] Technically, TPA is a Congressional-Executive Agreement, which is why it needs approval of both houses of Congress (unlike Executive Actions, which do not need Congressional approval at all or treaties that require 2/3 of the Senate). 

[3] President Obama did ask for TPA on January 30, 2013, but did not push very hard to receive it. 

[4] Technically, Congress does not ratify trade agreements.  But to bring them into force, Congress must pass implementing legislation to bring existing laws into compliance with the newly negotiated international obligations.  TPA provisions also streamline the procedures for doing so and prevent the deal from getting stuck while under review.

[5] A 1998 vote went down to failure with a vote of 180-243 in the House.

[6] For example, see “Brown, Levin Working on Currency Legislation Reminiscent of Earlier Bills,” Inside US Trade, January 16, 2015, Vol. 33 No. 2. 

[7] House votes for the three were: 262 to 167 for Colombia; 300 to 129; and 278 to 151 respectively while the Senate voted 66 to 33; 77 to 22; and 83 to 15 for the Korean agreement.

[8] For a nice interactive summary of the votes, see Binyamin Applebaum and Jennifer Steinhauer, “Congress Ends a 5 Year Standoff on Trade Deals in Rare Accord,” New York Times, October 12, 2011, accessed at: http://www.nytimes.com/2011/10/13/business/trade-bills-near-final-chapter.html?pagewanted=all. 

[9] In the final vote, Democrats split.  The House voted 234 to 200 and the Senate was 61 to 38.  The Democrats were almost evenly divided in both chambers.  (The vote over the next deal, the Central American Free Trade Agreement or CAFTA, was even closer.  If even one House member had changed a “yes” vote to “no,” the agreement would have failed in 2005 by 216-216.)

[10] See his remarks in the 1992 Debate at: https://www.youtube.com/watch?v=Rkgx1C_S6ls

[11] See, for example, remarks by Democrat Congresswoman DeLauro, “DeLauro Breaks with Obama, Big CT Firms on Pacific Trade Deal,” Hartford Courant, January 12, 2015; comments by Elizabeth Warren, “Senator Warren’s Remarks at  AFL-CIO National Summit on Raising Wages,” January 7, 2015 (accessed at: http://www.warren.senate.gov/?p=press_release&id=696); or Julie Hirschfeld Davis, “Democrats Step Up Efforts to Block Obama’s Trade Agenda,” New York Times, January 8, 2015. 

The Costs of Inefficient Road Transport

JAKARTA--This blog post almost didn’t get written.  I was stuck in a taxi for three hours trying to get back from an interview at a factory just outside the city.  The total distance was 39 kilometers and there was absolutely no reason for such a relatively short journey to take so long.  Google maps suggested that the route we travelled should take 45 minutes without traffic. 

Anyone who has ever visited Jakarta (or Manila or Bangkok) will smile knowingly at this story.  They may feel the urge to swap their own personal horror moment about sitting for long stretches without going anywhere.  Such anecdotes can be told without references to terrible traffic accidents or road construction.  These are just examples of the normal, daily operation of the roads.

Clearly, a big part of the problem is simply too many vehicles and not enough capacity.  Poor mass transit systems do not help the situation.  Both of these challenges are difficult and expensive to sort out and address properly.

However, poor road design also contributes to traffic woes.  For example, in Jakarta, it is often impossible to turn onto a road at an intersection in the direction you actually want to travel.  This means that you are forced to drive for potentially long distances in the exact opposite direction.  (Or, even more frustratingly, to sit for long stretches of time--not moving--while pointed in the wrong direction.)

The only way to get going in the right direction is to do a U-turn at the next available opportunity. 

Here is where a bad design situation gets much worse.  With heavy traffic, safely executing a U-turn takes time.  There are generally no traffic lights at these road breaks.  In Jakarta, at least for now, there may be some enterprising young man who acts as an informal traffic policeman to stop traffic long enough to get a few cars turned around (for which he accepts a small payment from grateful drivers). 

Given the length of time needed to turn, the traffic quickly backs up even worse as impatient drivers line up to wait until they can head back in the correct direction. 

It really ought to be possible to fix some of these problems by using roundabouts, more U-turn breaks, more traffic lights, or some combination of all three.  The economic incentives alone ought to be driving governments to sort out any potential barriers to the smooth movement of vehicles as quickly as possible. 

Another significant cause of delay is the time needed to pay the road tolls.  The backup for the toll roads can stretch for kilometers.  The toll payment may be as little as 50 cents.  But the economic costs associated with having traffic not move for 15 minutes or more must surely outweigh whatever toll amount is collected. 

At a minimum, more toll booths could be automated or converted to system where drivers do not have to stop completely and hand over a few notes.  If the problem is getting drivers to start using such a system and stop paying cash, perhaps cashless cards could be given a discount or some other incentive to induce drivers to make the switch.  At least all taxis and commercial vehicles should be required to use the automated system.

The situation here is not just frustrating for drivers and passengers.  It imposes huge economic costs on the country, including acting as an informal tax on business operations for every firm trying to operate in the city.  (Being stuck in traffic also increases pollution and contributes to environmental damage.)

What I found very striking in today’s case study interview was a comment that the firm spends 20 hours shipping products between their factories in Jakarta and Central Java.  No one seemed at all surprised by this schedule either. 

For the firm, the costs of such delays can undermine their competitiveness on international markets.  Their margins are quite thin, so they do not have a lot of room for additional costs.

Yet just getting from their factory back to the first intersection of any kind took nearly 15 minutes.  I would guess that the distance traveled was less than a kilometer?  To reach the main road, which was about 2 kilometers from the factory gate, took a total of almost 25 minutes.

What was really astonishing about this timeline is that the factory is located in a bonded zone, specifically designed for export firms.  So, in this specially created district full of factories of all sorts, it still took 25 minutes to get to the main road on an apparently ordinary day—no rain, no car accidents, no construction. 

This road is the main means for the factory to get supplies in and final products out.  The firm, like most in Indonesia, does not have the option of using rail transport.  The trains do not, apparently, go where the firm needs them to travel. 

Very bizarrely for a country of 16,000 islands, cargo is not moved much by sea between domestic ports.

Air transport for cargo is expensive.

This leaves road transport as the primary means of moving goods around Java.  But given the state of the roads, firms cannot use large trucks either.  Hence, the company ships goods between its factory facilities in relatively small trucks over small roads since the highway system does not connect together well. 

Without traffic, the company estimates the drive could be done in 13 hours.  But for planning purposes, the firm usually assumes a trek of 20 hours.

This kind of inefficiency adds up.  To get anywhere remotely on time, everyone has to budget in all kinds of extra traffic delays into their schedules.  This results in additional wasted time if the traffic does not, for some reason, materialize as expected. 

Traffic delays are not just irritating.  They are costly and can seriously undermine economic competitiveness.  Firms will think twice about locating facilities in places that suffer from regular gridlock.  

Fixing transportation problems can be extremely expensive.  Not every remedy, however, requires substantial investments of resources.  Wherever possible, officials should move correcting inefficient transport higher up their priority lists. 

In a world increasingly operating along just-in-time systems, it will not do to miss your shipping deadline because you are stuck in a massive jam behind a toll booth collecting 50 cents.

***Talking Trade is a blog by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Restoring the Multilateral Trading System?

BEIJING—I have not participated in a workshop on the multilateral trading system in a while.  But this week, I was invited to Beijing by UIBE, the South African Institute of International Affairs, and the Cordell Hull Institute to discuss the restoration of a multilateral trade cooperation dialogue. 

The discussion this morning has focused on particularly on how to conclude the Doha Development Agenda (DDA) at the World Trade Organization (WTO).  While I knew there was a large gap between the multilateral system and what I would call  “the real world,” I was struck all over again by how wide it appears to have grown.

The workshop opened with some remarks by one of the best WTO trade ambassadors I have ever met—savvy, knowledgeable, and experienced.  He discussed what was on the table for discussions in Geneva and urged WTO members to work together to be as cooperative and accommodating as possible to get the round done. 

We’ve been meeting with 4-10 companies a week since we set up the Asian Trade Centre last August.  In all those meetings, I could not recall a single company mentioning the WTO.  Not once.  These are meetings with some of the biggest companies in the world as well as some of the smallest.  All are active in Asia, but are otherwise engaged in a wide range of economic sectors from manufacturing to services to investment and finance.  They are nearly all oriented outward, in that they either already trade across borders or would like to do so.

No one has raised the WTO. 

But it actually gets even worse.  I am similarly struggling to think about any of the companies mentioning any of the issues under discussion or negotiation in Geneva.  Of course, companies that face tariff barriers, for example, will perhaps discuss the lowering of these obstacles.  But they do not look to Geneva to solve these problems.  Partly this is because they have given up after waiting so long for an outcome from talks that started in earnest in 2001 building on an agenda started even longer ago.  This problem has been compounded by the fact that many companies think that the tariff cuts they might want are unlikely to come from the resolution of the DDA. 

Many of the issues that companies raise repeatedly as major challenges, like incompatible standards, labeling barriers, complex domestic rulings at borders, opening of services markets, inadequate protections of investments, and repeated backsliding from existing commitments in some markets, are not on the table at all.  They were either not on the agenda in the DDA or, in some cases like competition policy, were tossed off the list early on.

Again, I would argue that the situation gets worse.  It is not just that these issues are not on the agenda, but there seems to be no desire to put most of these items on a future agenda either.  For example, many of the least developed countries (LDC) often argue that the WTO agenda has to include provisions to help the poorest members of the system compete.  Most of the issues mentioned in my company discussions are likely to be viewed as “too hard” or “too complex” or “too biased in favor of developed economies” and would not be helpful to LDC members.  Thus the very issues that may be necessary to get companies reengaged are likely to be kept off the agenda in the future. 

It’s also not only the least developed members that may make these sorts of arguments.  There are all sorts of members in the “developing” country basket who would and will make similar complaints.  Recall that, unlike the LDC classifications that are set by the United Nations, WTO members are allowed to self-certify as developed.  This means that countries like Singapore and South Korea remain, officially, developing country members in Geneva. 

Of the 161 members of the WTO, the vast majority are now classified as developing.  Nearly a quarter of the membership are LDCs.  Clearly, their needs and interests are important and need to be considered in setting the rules and outcomes of the WTO.

My own bias (or at least one of them) is that the global trading system ought to be beneficial for trade.  This means that it is critical that company interests be placed front and center in creating a trade agenda.  Other issues certainly matter and do play a role, but ignoring the needs of business in this century is not a recipe for multilateral success either.  How can multilateral trade agreements better provide the platform for businesses of all sizes in all members to engage in global trade arrangements?

Over the years, lots of very smart and clever people have suggested methods to bridge gaps in the system.  These range from restarting dialogue in Geneva in a non-negotiating setting to tweaking the rules for decisionmaking to adjusting the agenda by grouping issue areas differently in the hopes of overcoming entrenched divisions between members.

Yet, listening to the range of interests just around this table in Beijing presented by some of the best global trade policy experts, I can clearly see why governments that have options are increasingly just leaving the multilateral system behind.  It does not appear to be possible to move on and address the issues that matter in the real world until the past agenda is completed.  But this past agenda is largely irrelevant to many key potential stakeholders.  Thus, if I were a government official, I am not sure why I would invest important political capital in pushing through a potential deal in Geneva that my own stakeholders are largely not interested in supporting.

This has been, frankly, a very depressing morning.  I think I can make a powerful argument for why trade cooperation at the multilateral level is best.  The WTO rules serve as the foundation for every bilateral and regional trade deal.  Transparency and non-discrimination remain key fundamental principles.  Global trade rules benefit the largest number of people in the greatest set of members.  It helps companies—especially the smaller firms that struggle to make sense of a complex, overlapping world of smaller bilateral and regional deals.  Global trade can serve as a driver for economic growth. 

The race to regional agreements will leave many potential participants on the sidelines.  As I frequently say, not every country is an attractive dance partner when searching for new agreement partners.  Thus, the stampede to smaller deals will leave some countries completely outside the dance hall. 

One participant just mentioned the worries of his country for trade and investment diversion as a result of regional and bilateral trade agreements.  I think this is a likely outcome, particularly from some of the deeper, more meaningful megaregional agreements.  To cite just one example, the creation of the Trans-Pacific Partnership (TPP) in textiles is likely to change trade patterns around textiles and apparel into the future.  Countries that are not members of the TPP will struggle to keep market share in major economies like the United States because their exports will not get the same benefits (reduced tariffs and other issues) as competitor, TPP-enhanced firms will receive.

So where do we go from here?  It is not clear at all, other than being depressing.  The situation is currently impossible—many members are refusing to budge on anything until the old agenda is addressed while other members have zero interest in the old agenda.  There is no way to satisfy these two positions.  As a negotiator, I can only reach agreement when there are some (even if quite small) overlapping interests.  I don’t see these overlapping interests taking place at the moment.

Perhaps, if I might make my own contributions to a growing set of reform proposals, it is that the business community must reengage with the multilateral system.  In this case, it is necessary to explain to officials in Geneva what are the issues that matter to large and small firms and why these concerns must be discussed in the WTO as the most suitable venue.  Companies have increasingly just left the building and it appears to me that their absence alone is not making the point.  No government officials are going to be ambitious if they do not think they have sufficient input and endorsement from businesses.  To get a trade agenda underway that matters to companies operating globally now, firms need to clearly and regularly articulate what ought to be on this agenda.

If this group of experts meeting in Beijing comes up with some outstanding, creative ideas of what else ought to be tried, I’ll write another post about it next week. 

***Talking Trade is a blog post by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Living with the Trans-Pacific Partnership (TPP)

The standard response to many questions about possible shortcomings in the Trans-Pacific Partnership (TPP) negotiations is likely to be some variation of the following, “Don’t worry—your concerns will be addressed later, because the TPP is a living agreement.” 

This sounds great.  Who doesn’t want an agreement to remain living?  But, in practice, the idea is going to be very difficult to implement, particularly if it is not tied to a Secretariat to carefully monitor the agreement.  Several key issues need to be considered as well, particularly the extent to which change will be allowed in the future.

The TPP, a 12 party trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, has been under negotiation for more than 5 years.  As deep and broad as the coverage will be in this deal, officials have not been able to resolve every possible issue satisfactorily for every member. 

Even if officials were amazingly capable of nailing down every possible point of concern, trade agreements can still become out of date relatively quickly as technology changes and markets shift.  New issues are constantly being added to the agenda of each ambitious deal.

Existing trade agreements, however, are relatively hard to amend.  Most require a “protocol of amendment” to be negotiated with the parties for each requested change.  Even if the parties agree to let the deal be amended, it does not guarantee that all sides will agree to incorporate specific changes. 

The mechanism for considering amendments in most standard trade agreements is also challenging to use.  Most preferential trade agreements (PTAs) are structured with a set of committees that are meant to meet from time to time to discuss the deal.  For example, a PTA may specify that the trade in goods committee will meet every year while a committee on services may be scheduled every two years. 

We can’t be sure yet, as the explosion in PTA numbers is a relatively recent phenomenon.  But for many agreements, it is highly likely that the required committees will not meet or will meet only intermittently.  Even if they do meet, officials are not likely to put their best efforts into the review meetings.  For a government like Singapore, with more than 20 active preferential trade agreements with bilateral and regional partners, just scheduling times for officials to meet during each review is likely to be a challenge. 

Thus, counting on the standing committees to resolve issues may provide false comfort.  Other than serious or significant obstacles and major or minor disasters, very few changes are likely to result from the standard operating procedures in trade agreements.     

We do have experience with the downsides to having agreements that cannot be easily amended.  The most obvious example comes from the World Trade Organization (WTO) where officials have been wrestling for years with how to alter an existing agreement for electronic goods. 

The Information Technology Agreement (ITA) at the WTO is an agreement that lowered tariffs to zero on a wide range of IT products.  The reduction in tariffs for electronic goods helped stimulate the growth of “factory Asia,” in particular, as companies found it easier to break apart supply chains for these types of products and to disperse production of different elements of complex products into different WTO member states.

The problem is that the agreement was negotiated on the basis of a “positive list.”  Under this method of liberalization, any product that appeared on the list was covered, with tariffs scheduled to drop.  But any product that did not appear on the list was not covered—tariffs would remain unchanged.  The idea was most definitely to amend the list as required over the years to reflect changing technology.  After all, IT cycles quite rapidly. 

But the list proved impossible to revise.  Hence the ITA might lower tariffs to zero on record players but still does not cover smart phones or tablets at all.  Members of the ITA agreement at the WTO continue to labor over creating new lists of items eligible for tariff cuts in an “ITA2.”

By contrast, the TPP would not face similar issues.  In addition to using a different method of market opening for services and investment (the so-called “negative list” where everything not listed is automatically opened for competition including new sectors), the TPP would become a “living agreement” that would never go out of date.  It could be simply and easily altered in the future.  Finally, any incomplete or insufficiently developed ideas, rules or coverage could be addressed without the major hassle of convening new negotiations or complicated committee meetings.

This sounds great.  Surely a living agreement beats a dead one?  But the devil, as happens so often, lies in the details.  How, precisely, can an agreement be brought to life?

Remember that the TPP has the same committee structure (at the moment, at least) as every other PTA.  Why would any committee member suggest an amendment in its area of purview?  (At least for items that do not rise quite to the level of catastrophe.)  The negotiating teams will have been disbanded and the institutional memories of the agreement are likely to vanish with retirements and promotions.

Sensitive issues will likely need political engagement to adjust or negotiate.  If it turns out to be difficult to amend the TPP, then this automatically negates the idea of a “living agreement” which was intended to be continuously revised and updated as events on the ground change.

Essentially, the TPP will face the same challenges as the WTO members in amending the ITA—the practical consequence will be to force a renegotiation of the agreement or of a portion of the deal. 

My solution, as regular readers may recall, is to create a TPP Secretariat.  This would not entirely fix the problem, but would at least keep changes out of the hands of indifferent trade officials racing from PTA review to PTA review.  It would put someone in charge of getting people together to consider possible amendments.  It would, most likely, have a built-in mechanism for engaging political leaders to sort out sensitive issues. 

The Secretariat staff would be most familiar with the agreement and the obligations of members.  They could serve as neutral brokers and help members manage necessary changes to the texts and commitments. 

A Secretariat does not solve all the problems associated with a living agreement, of course.  But the right institutional structure is needed in general and certainly represents a huge improvement over the traditional committee mechanisms.  Such a complicated trade deal requires the best possible institutional structure to run effectively.

One issue that will have to be considered by members directly in a living agreement is the extent of renegotiation that is allowed as part of the living deal before it triggers some sort of re-ratification or new approval process by members.  There must be, surely, some baseline level of change that is acceptable as part of the continual upgrading needed in a rapidly changing economic environment. 

But at a certain point, member governments will surely argue that they should be consulted again or give direct approval for changes.  What is the appropriate trigger point?  Is it the percentage of the text that is altered?  Officials on the ground can change one percent of the texts without a problem, but when they reach, say, 10 percent, this is the trip wire? 

Is the trigger the economic impact of changes?  In this scenario, officials can make minor adjustments to the texts, but if the result is more than $50 million, this is a problem?

For some TPP members (now and into the future), it is possible to imagine that no changes at all will be allowed without re-ratification of the deal. 

What if a member wanted to scale back commitments?  In a “21st century, high quality” deal, such a thing will likely not be countenanced.  But the idea of a living agreement, at least, suggests that alterations should be allowed both forward and backwards.  All adjustments, of course, would be subject to negotiation and not simply allowed to take place unilaterally.

It is possible to imagine a scenario under which a member might want to retreat from some element of the deal in the future.  Many people will strongly disagree here, but recall that one of the selling points for a living agreement is the ability of the agreement to handle a range of concerns after the TPP comes into force.  If a living agreement only allows upward ratchets on the level of commitment in the deal, it will not really allow for continual adjustment to meet the needs of members.

An additional benefit of an effective living agreement is that it could also create a mechanism for new members to adjust the text of the agreement.  Given that new entrants into the TPP are likely to be allowed limited (or even no) room for altering texts, a living agreement provision could provide a “back door” mechanism for alterations.  Such flexibility may be critical in getting new entrants to join.

Finally, if the living agreement idea is not made a reality, it is likely that the TPP will become just as difficult to amend as existing trade deals.  It may get out of date and become less and less relevant.   Getting the structure right for “living” is a necessary element of making sure that the final agreement does not rapidly become dead.

***Talking Trade is a blog post by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***