Megaregionalism 2.0

Trade and Innovation within Global Networks

Dieter Ernst, Michael G Plummer

• Publisher: WSPC
• Year: 2018
• eBook ISBN: 9789813229846
• Topic: Economics
• Subtopic: Business General
• Index: Economics

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This book provides new insights for policy debates on how to strengthen the gains from trade for innovation through an inclusive trading environment that facilitates access to knowledge for all. Rising economic nationalism, especially in the United States, creates new challenges to an enlightened globalization agenda.

The US government has withdrawn from the Transpacific Partnership agreement (TPP) that once was considered to be the gold standard of megaregionalism, suggesting the need to highlight once again the critical role that international trade and investment play in fostering sustainable growth and prosperity. Fostering innovation and facilitating the links between trade and innovation are becoming increasingly important for developed and developing economies alike. But equally important are economic policies to ensure that gains and losses from trade for innovation are shared by all.

This book is a must read for trade economists, innovation economists, trade negotiators, trade lawyers, and academicians interested in current transformations in the global economy and their impact on innovation and economic growth.

--> Contents:

• What We Know from Economic Analysis:
  • The Transpacific Partnership: Potential Gains and Impediments in a Global Context (Michael G Plummer)
  • The Trans-Pacific Partnership Agreement: Promoting Waves of Innovation (Douglas Lippoldt)
• Innovation and Trade within Global Networks:
  • Beyond Value Capture — Exploring Innovation Gains from Global Networks (Dieter Ernst)
• Supply Chain Positioning and Innovation: Taiwan's Challenge (Tain-Jy Chen)
• Trade and Investment Barriers in Solar and Wind Global Production Networks (Derek L Hill)

• Intellectual Property, Strategic Patenting, and Trade:

• Patents and Technology Transfer through Trade and the Role of Regional Trade Agreements (Keith Maskus)
• Learning from Past Mistakes — The US Patent System and International Trade Agreements (Robin Feldman)
• Harmony and Disharmony in International Intellectual Property Law (Colleen Chien)
• Shadow Patent Systems: Technology, Economics, and Geopolitics (Brian Kahin)

• The Critical Role of Technical Standards:

• The Impacts of Technical Standards on Global Trade and Economic Efficiency (Gregory Tassey)
• Standard-Essential Patents and the Distribution of Gains from Trade for Innovation (Florian Ramel, Maximilian von Laer and Knut Blind)
• Patents, Standards, and Borders: Addressing National Disparities Among Holders of Standard-Essential Patents (Jorge L Contreras)
• Dual Use of Standardization Strategies: Promoting Regional Integration and/or Global Markets (Konstantinos Karachalios and Karen McCabe)
• Beyond Government Control of China's Standardization System — History, Current Status, and Reform Suggestions (Ping Wang and Zheng Liang)

• Trade and Innovation Policy — New Perspectives:

• Innovation, Trade, and Intellectual Property Rights: Implications for Trade Negotiations (Carlos A Primo Braga)
• The Information Technology Agreement, Manufacturing, and Innovation — China's and India's Contrasting Experiences (Dieter Ernst)
• Promoting Win–Win Development of Global Value Chains (Susan Helper and Timothy Krueger)
• Labor Implications of TPP: A Game Changer? (Ronald C Brown)

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--> Readership: Graduate students, researchers, and policymakers in the fields of international economics, international trade law, patent law and the economics of standardisation. -->
Globalization;Megaregionalism;Trade;Innovation;Trade Gains;Negative Impacts;Trade Rules;Intellectual Property;Standards;Asia;China;TPP;RCEP0 Key Features:

• Includes chapters from top, policy-oriented trade economists who deal with various aspects of the mega-regionalism movement
• Studies how patents and standards affect innovation within mega-regional trade agreements
• Considers the trade-innovation link in the context of China and other Asian economies

Part 1

What We Know from Economic Analysis

Chapter 1

The Transpacific Partnership: Potential Gains and Impediments in a Global Context

Michael G. Plummer

The Johns Hopkins University
East-West Center
[email protected]

1.Introduction

Economic integration has served the world economy well over the past quarter century. The Asia-Pacific region in particular has benefited from the regional and international marketplace; at the same time that it has embraced an outward-oriented approach to economic development, the region has seen great improvements in virtually all economic indicators. For example, using $1.90 per day as a poverty threshold, the World Bank calculates that in the East Asia and Pacific region, the poverty headcount has fallen from 60.1% in 1990 to 7.2% in 2012, with absolute numbers of the poor falling from 1 billion to 147 million,¹ which is historically unprecedented. The Asian middle class has been rising rapidly; the Asian Development Bank (ADB) predicts that by 2030, about three-fourths of the residents in India, China, and ASEAN will be middle class, up from about one-fifth in 1990.² Many economies in Asia and the Pacific were able to make significant progress toward achieving the Millennium Development Goals via stable macroeconomic policies, effective public policy, and outward orientation. These factors will be no less important in meeting the ambitious Sustainable Development Goals (SDGs).

Trade has been an essential component of the successful Asian economic development experience, and regional economic integration has grown rapidly over the past quarter century. There have been a number of drivers behind this trend. First, East Asian governments have recognized the importance of the international marketplace as an engine of growth and as a weapon against poverty. The chronology, extent, and speed with which regional economies have adopted outward-oriented reforms vary, but unilateral liberalization is now a key feature of virtually all economies in the region. Second, rapid improvements in transportation infrastructure have lowered the costs of integration, and the explosion of Information and Communication Technologies (ICT) has opened up new markets and reduced the importance of borders and costs associated with geography. Third, the liberalization of barriers to economic interaction via a half century of multilateral liberalization under the General Agreement on Tariffs and Trade (GATT) paved the way for unusually rapid growth in trade, especially in developing countries (Dollar, 1992; Winters, 2004).

The share of trade in GDP varies considerably across the region, but it is high and/or rising in essentially all countries and subregions; for example, over the past 20 years until 2014, trade as a percentage of GDP rose from 73% to 102% in ASEAN, making it the most open large region in the world (World Bank, 2016). Trade is connected to growth and poverty reduction through multiple channels (Winters et al., 2004). It acts as the vehicle through which countries exploit comparative advantage, improve the efficiency and productivity of domestic resources, and tap into international markets. It raises incomes, increases consumption and investment, and reduces risks associated with shocks to domestic production and markets. It enables access to greater varieties of goods, services, and intermediate inputs, and allows local firms to use or acquire improved technologies (Petri and Plummer, forthcoming). Trade creates better and higher-paying jobs, provides incentives for learning, and helps to attract Foreign Direct Investment (FDI).

More recently, a strategy of concerted liberalization via bilateral and subregional Free Trade Areas (FTAs) has been adopted by essentially all countries in the region, with most having many FTAs in place with regional and extra-regional partners. This trend has been especially important beginning at the turn of the 21^st century and is gaining momentum; for example, the ASEAN Economic Community (AEC) was put in place in December 2015 (though a good deal of the project remains to be completed) and is the most comprehensive and ambitious (“deep”) regional economic integration accord in the developing world. In 2000, there were 35 FTAs that were in effect in Asia; in 2016, the number rose to 140.³

However, a major concern regarding the FTA movement pertains to the fact that FTAs are mostly bilateral in nature, with different degrees of sectoral coverage, divergent rules and regulations, and inconsistent rules of origin associated with each arrangement. Such inefficiencies have been described as the Asian “noodle bowl” effect; while empirical work on these agreements suggests greater efficiency and welfare gains, the limited scope of bilateral arrangements constrains potential net benefits. In part in response to these shortcomings, over the past decade there has been a movement toward the consolidation of bilateral arrangements into large regional agreements, a trend that is known as “megaregionalism.”

The recently signed (but not yet ratified) Trans-Pacific Partnership (TPP) agreement, which includes 12 developing and developed economies in the Asia-Pacific,⁴ is the most ambitious of these megaregional arrangements, but it is not the only one: negotiations for the Regional Comprehensive Economic Partnership (RCEP), composed of 16 countries in East Asia and India,⁵ were launched in November 2012, and the Free Trade Area of the Asia-Pacific (FTAAP), which could include all APEC economies and possibly others, is slated to begin negotiations in 2020. The Transatlantic Trade and Investment Partnership (TTIP) between the 28 countries of the EU and the United States is also considered part of the megaregionalism movement — though obviously with only one Asia-Pacific economy — and began negotiations in 2013. If ratified, these arrangements would all have important effects on not only the regional economy but also the world.

The goal of this chapter is to consider the economics of megaregionalism in general and the TPP in particular to provide context to other trade-and-innovation-related chapters of this volume. As is clear from the chapters, lower international barriers to trade at borders and behind them, as well as such trade-related policies as common rules and regulations, standards, intellectual property protection, investment regulations, and so forth facilitate the creation of supply chains and global production networks and, as such, promote the dissemination of information and the flows and applications of technology. As noted in Chapter 3, global innovation networks will continue to rise in importance as contributors to economic integration and progress. Since these megaregionalism agreements are also slated to be advanced, deep, and comprehensive in scope and orientation, they will no doubt have an important bearing on global innovation networks as well as production networks. The TPP is likely to be the most advanced of these agreements — except possibly the TTIP, which still has a long way to go and negotiations have currently been shelved — and its ratification will pave the way for additional member-economy applications; Indonesia, the Philippines, Thailand, Chinese Taipei, and South Korea have all expressed interest in possibly applying for a membership. Moreover, a successful conclusion to the TPP could light a fire under the RCEP and TTIP negotiations and set the stage for the FTAAP. Hence, the TPP is key.

This chapter begins with a brief review of the economics of regionalism in Section II, followed by a review of the TPP agreement itself in Section III. Next, the chapter summarizes the net aggregate economic effects of the TPP, based on Petri and Plummer (2016). Section IV endeavors to explain controversies surrounding these megaregional accords. Section V concludes.

2.Economics of FTAs: A primer

The economics of FTAs are complicated. While they remove discrimination between partner-country and domestic firms and therefore form a more efficient regional division of labor (“trade creation”), the discrimination introduces a distortion between the partner and non-partner countries, and countries within the FTA may end up purchasing imports from less efficient partner countries, which not only hurts non-partner exports but raises the price of imports (“trade diversion”). Hence, trade diversion results in a negative terms-of-trade effect, as a country potentially purchases imports from higher-cost sources. Moreover, trade diversion associated with an FTA increases the potential scope for “investment diversion,” in which FDI flows to a country merely to take advantage of protected regional access or rules of origin. Investment could then flow to inefficient sectors that could dampen employment generation (e.g., if in capital-intensive sectors) and productivity growth.

Trade and investment diversion underscores why FTAs are referred to as “second best,” as opposed to “first best” unilateral or multilateral liberalization, which do not introduce any discrimination across trading partners. Still, FTAs tend to be more comprehensive in terms of the coverage of goods and services, comprehensive removal of tariffs and non-tariff barriers, investment, and other aspects of economic integration (from rules governing economic interchange to competitive neutrality disciplines on state-owned enterprises) than is the case of multilateral liberalization because it is easier to negotiate complicated and politically sensitive measures among a smaller group of like-minded countries than in the context of the diverse 164-economy membership of the WTO. Hence, FTAs discriminate across countries, but less across products and services and trade-related behind-the-border barriers, implying less potential negative effects in terms of actual protection accorded to national value-added (i.e., “effective rates” of protection). The rules, regulations, and measures necessary to meet the needs of the private sector require comprehensive, deep integration, and this has hampered progress at the Doha Development Agenda negotiations of the WTO, which have been at an impasse for the past four years. In an outward-oriented, dynamic region like the Asia-Pacific, much more is possible.

An important drawback of FTAs regards restrictive rules of origin. While rules of origin in any FTA are necessary to prevent trade deflection — whereby exporters take advantage of the FTA to export through the market with the lowest external tariff — they can be inefficient in that they: (1) complicate an FTA with product-based rules of origin that can differ across FTAs, an increasing problem in the context of the proliferation of bilateral FTAs; (2) they can often require excessive documentation and can be costly, particularly for Small- and Medium-sized Enterprises (SMEs), one reason why SMEs often do not take advantage of FTAs; and (3) excessive rules of origin can lead to another form of investment diversion in order to take advantage of FTA value-added-content requirements (World Bank, 2016).

Addressing the problems associated with overlapping and complicated rules of origin is an important goal of “megaregional” FTA arrangements like the TPP and RCEP. These agreements will allow for “cumulation” of rules of origin, that is, value-added in any TPP country counts toward meeting minimum rules of origin thresholds in intraregional trade. Cumulation is particularly important for regional production networks; the “Asian Noodle Bowl” of overlapping bilateral FTAs limits the benefits of economic cooperation to multinationals seeking to develop these networks. An example might illustrate the point. Suppose that there is a 10% tariff on thermionic tubes in all TPP markets and there is a rules of origin requirement of 40% in all US bilateral FTAs. A US multinational produces 25% of the value of a thermionic tube at home, while 55% is produced in China, 10% in Peru, and 10% in Australia, from which it is re-exported back to the US. The US has a bilateral FTA in place with both Peru and Australia, but the company will not be able to benefit from any preferential tariffs associated with either agreement because the value-added would be only 35%. To avoid the 10% tariff, the company would then face difficult decisions regarding its optimal distribution of production; for example, it may be less efficient to raise value-added in Australia, but there would be an incentive to do so (either by reducing production in China or in Peru such that it meets the 40% threshold) in order that the company could at least profit from preferences associated with the US–Australia agreement. The higher the rules of origin and existing Most Favored Nation (MFN) tariffs, the greater the incentive for value-added in a bilateral FTA partner, and the more a regional division of labor will be distorted. Cumulation can solve this problem. In the above example, the US multinational company would benefit from the TPP without changing any production.

Regionalism has other “dynamic” effects that tend to grow in importance over time. These would include, inter alia, economies of scale via greater market access, technology transfer, and improved management tech...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Acknowledgements
• Preface
• About the Contributors
• Introduction
• Part 1 What We Know from Economic Analysis
• Part 2 Innovation and Trade within Global Networks
• Part 3 Intellectual Property, Strategic Patenting, and Trade
• Part 4 The Critical Role of Technical Standards
• Part 5 Trade and Innovation Policy — New Perspectives
• Index