The Beginning of the New Grand Game

Trade blocks naturally involve geopolitics and three presented examples will demonstrate this clearly. Emphasis in the article will be put on the USA-led projects of TTIP and TPP, the Eurasian union led by Russia and the revival of the Silk Road by China. Briefly mentioned will be also integration efforts in Latin America. In all three cases, the potential of the trade block, together with possible risks will be analyzed, focusing on geopolitical shifts on global level.

Introduction

The multilateral trade system is facing a long-term crisis. Since 2001 the Doha round with its ambitious program of development agenda has not been accomplished. With running time not only frustration grows, but also attempts to bypass the deadlocked negotiations and to develop some alternatives. It may sound true that in a globally connected world there may not be an alternative to multilateralism. On the other hand, there have been tensions among the trade centers that are reflected also in different position of the Doha round in such topics as agricultural subsidies, tariff escalation etc. Simplified view would suggest that Western (developed) countries have different priorities than emerging or developing countries. The emergence of the BRICS group, not only on paper, but as a real forum of heterogeneous countries, but sharing some similar interests, strengthens differing positions.
It would not be correct to underestimate the problems of the BRICS countries, some of which were summarized in the slogan of “fragile five” last year. However, it can be clearly seen that the developed countries are stuck in deep socio-economic problems and despite their loose monetary policy (including the quantitative easing), the economic situation remains fragile at best. Eurozone faces long-term stagnation accompanied by deflation which raises threats of the Japanese scenario at the beginning of 90´s that eventually led to two lost decades. The situation may seem better in the US, however the growth remains deeply below the trends in previous decades and the problem of inequality undermines not only future economic development but also political legitimacy. Japan is waiting for the first evaluation of Shinzo Abe policy, the so-called abenomics that may be inspiring for some members of the European Central Bank. However, all three developed centers are aware of the fact that their economic dominance is weakening and that their privileged positions, e.g. in the International monetary fund are being heavily criticized. There are two projects of “more than trade blocks” that involve all the three developed centers. Already in the introduction part, it shall be noted that the initiative for both TTIP and TPP comes from the U.S., respectively the TPP project was grabbed by the U.S. quite recently as one of its economic priorities in the Pacific region.
Before TTIP, Russia came with a project that would connect more closely the EU and Russia itself. This project has not been accepted by the EU, as we will see in the text, and as a substitute for that Russia started the Eurasian union that marks its orientation towards east. The latest reaction to both TPP and Eurasian union came from China that revived its traditional project of Silk Road, both on the land and on the sea.
Although all projects share focus on economic matters – free trade, partly common rules and investment promotion, they must be viewed in geopolitical context. Huge trade blocks are never only a matter of business.

TTIP and TPP – a way to maintain U.S. hegemony

Transatlantic trade and investment partnership (TTIP) and Transpacific partnership (TPP) are the two projects dominated by the U.S. They coincide (if it can be called a coincidence) not only in the current time of negotiations but as can be derived only from their names they cover both sides of the U.S. marine borders, they stretch to both sides. Whereas the TTIP involves negotiations with the EU as the only partner, the TPP has more sides. However the crucial axis is built by Japan and U.S. As in all alliances it is crucial to mention those, who are left behind, as that will tell us more about the projects than the members included. We will see that the projects exclude two big U.S. rivals (in geopolitical and economic terms): Russia in the case of TTIP and China in the case of TPP.
There are many controversies around TTIP, which is also the reason why the civic resistance towards this agreement grows and why there are coalitions of European activists, NGO ´s and others built. The first controversy is connected with the way the negotiations are, or rather were led. Until recently, the negotiations results had restricted access, but thanks to Wikileaks we know that the number of meetings with the industrial lobby strongly exceeds those with the representatives of the civic society. The pressure from citizens is growing, however, and the European Commission was forced to publish more openly some controversial issues. The secrecy and lack of information as well as sporadic and limited media coverage is the more provoking when we consider that the TTIP would represent, if accomplished, the biggest trade block of the world with more than 800 million citizens.
On economic level (1), critics of the TTIP emphasize that as both the U.S. and the EU are members of WTO, their tariff incidence is already very low and abolishing it would have a limited impact. Therefore, more attention is paid to non-tariff obstacles. However, these non-tariff obstacles include also differing standards as for environment or labor. In both cases, the European level is higher than in the U.S. As the U.S. is the initiator of the negotiations it seems reasonable to ask if the motivation is to increase social and environmental standards in the U.S., which probably would not be the case. Worries of genetically modified products spreading do European markets, permission of shale fracking, decreasing the level of social security etc. are in the center of worries of many activists and movements.
There have been various analyses claiming that TTIP would help boost economic growth and create new jobs. This is very difficult to confirm as free trade per se is not a tool to promote social stability and create jobs. Free trade is primarily a tool of efficiency and specialization. (2) As such it may have different impacts, depending on the obstacles being abolished, the initial state and structure of the economies in question, time framework etc. We may learn from similar agreements that have been made recently (e.g. U.S. – South Korea) and at best we will see very controversial results that lay far behind the expectations (3). A special case is of course NAFTA, the results of which as disappointing and under criticism of all three countries involved.
However, probably the issue that causes the biggest upheaval is the ISDS clause – e.g. Investor State Dispute Settlement. There are numerous cases of these disputes where an effort of state towards higher social or environmental standards led to legal action against the state, which the state at the end lost and was forced to pay huge amounts of “compensation.”
The ISDS clause has been reviewed thoroughly by UNCTAD (4). UNCTAD states that the number of arbitrages rises steeply, the whole number of cases reached 514 till 2012. About a third of them were won by the investor, while the amounts of lost money for the state increase sharply. On the data collected, UNCTAD comes to the conclusion that the current provisions of ISDS show serious flaws. To name a few of them: legitimacy. How can three individuals be able to evaluate the acts of state legislation? How does such proceeding take into account public interest? The next serious flaw is lack of transparency. Arbitrage can be hidden from public eye even if it included public interest. Further flaws are decision inconsistency (there are various ruling in same cases), mistakes cannot be overruled; the issue of independence and impartiality… for all these reasons, UNCTAD offers alternatives to the current ISDS system. One of them would be international investment court.
The TTIP is not finished yet and the civic resistance is growing. Therefore it may come to substantial changes in the agreement or the agreement may not be finished at all. TTIP offers for the U.S. strengthening of the position of its corporations and controlling the EU via common standards and regulation. The connection of trade, investment, regulations, law would be so intense it would “cut” EU from other partners, mainly from Russia.
Transpacific partnership witnessed a major change, when in 2011 the U.S. entered into the negotiations. TPP shows similar characteristics as TTIP (1), including lack of transparency and information for civic society.
So far these are the countries negotiating: Australia, Brunei, Chile, Canada, Japan (joined in 2013), Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the U.S. China showed repeated interest in the project, however it was not included. When we examine the countries more closely, we can see that they make a kind of belt around China, which may indicate the effort to encircle China in the policy of containment. Also, we must take into account that Australia and Japan that represent major economies among the negotiators have switched their trade and investment flows more intensively to China, on the other hand the influence of U.S. sank dramatically in both these countries. The TPP may be so presented as a part of American policy that should regain place for American goods and investment.
It shall be noted it is not the first time, when the U.S. tried to establish a large area under the influence of its rules, or rather rules advantageous for U.S. NAFTA (North American Free Trade Agreement)  is a primary example that comprises many issues discussed also in TTIP and TPP negotiations. ISDS clause in NAFTA agreement is hidden as “clause 11”and belongs to, not surprisingly, to the most criticized issued in NAFTA. Furthermore, it shall be mentioned that NAFTA was the first agreement made by countries on very different socio-economic level (U.S., Canada X Mexico), but this asymmetry was not reflected in the agreement.
After NAFTA the American representatives planned to spread the neoliberal concept to the whole of Americas connected into one free trade zone under the primacy of the U.S. However, due to resistance led by Hugo Chávez, and later also Lula da Silva, the concept of FTAA did not succeed. Instead of that Latin America started creating its own integration formations built on solidarity, fair trade and the heritage of Simon Bolívar.

Russia’s searching for an advantageous vector

Eurasian union is often viewed as a rather small step of Russia’s regaining world power status. However, too often it is forgotten that Russia, precisely at that time the prime minister, Vladimir Putin, made an unusual offer to the EU.
In 2010 Vladimir Putin visited Germany and at this occasion presented a sophisticated view of cooperation between the Russian Federation and the EU (5). The year 2010 is important in this context. Two years after the crisis in the U.S. broke out, year after the first meeting of the BRIC group. Crisis is here especially important, as it served as a catalyst for searching for new ways and forms of cooperation. In this cooperation a way for economic recovery for both the EU and Russia could have been found. However, the EU found itself in a very difficult position, struck by the debt crisis and found out it did not dispose of mechanisms that would stabilize the imperfect economic and monetary union. The EU was therefore more concentrated on solving its own, serious internal problems. The Putin´s idea of a harmonic economic community stretching from Lisbon to Vladivostok did not find much resonance. The comprehensive ideas of cooperation even led Chancellor Merkel to a statement of “pouring cold water on the suggestions.” As we know today, the idea of EU-Russia cooperation did not materialize and only after that Russia intensified its implementation of Eurasian union. Vladimir Putin´s reasoning is very important also in the geopolitical context. He mentioned that all countries are searching for post-crisis strategies and that Russia could offer its vision of partnership to the EU. Putin also mentioned that the level of cooperation between EU and Russia had not been used sufficiently and – what is even more important – that the economies of EU and the Russian Federation are complementary to each other. The view is not exclusive (e.g. it would not force EU to “take sides”, which is a typical American policy) and focuses on long-term. Putin talked precisely of strategic thinking (!), in the term of next 20, 30 maybe even 50 years.
Year after the non-acceptance of Putin´s proposals to the EU, the project of Eurasian union gains dominance. The agreement to create Eurasian union was signed by Russia, Kazakhstan and Belarus in 2011. Officially the Eurasian union is not concentrated only on trade and investment flows, but also on cooperation in legal sphere and military. It could be understood as a bridge between Europe and China and a way to stabilize central Asia. However, from Russian point of view, the project is not by far as advantageous as the partnership with EU would have been. First, in this integration form, Russia is definitely the strongest country and therefore the expected engine of the process. This is always not as favorable as may seem. Secondly, countries involved already or countries that might enter, are either much weaker than Russia (Tajikistan, e.g.) and there is not much they can offer for Russia’s modernization efforts. On the other hand, there are countries like Kazakhstan that are clear rivals to Russia – here in case of natural sources richness.
Whereas the partnership between Russia and EU would have had a global impact, Eurasian union is a regional project centered on Russia (6). The economic power, vis-à-vis GDP is quite small, even if we sum up all current members and add potential members (including Ukraine), we would not get to the economic level of Germany. Countries like Tajikistan or Kyrgyzstan belong in terms of GDP per capita to the poorest in the world. The economic reasoning behind the Eurasian union is therefore far less significant than geopolitical and cultural explanations. In this context Eurasian union could be viewed not only as an stabilizing factor of central Asia and diminishing of American influence in the region, but also a cultural project of countries sharing similar values, that are not Western-liberal (7). In this view, Eurasian project may at least partly reflect the Russian search for identity, when denied by the West, but not as “Asian” as e.g. China. Therefore, the Eurasian union could actually have more profound effects for Russian domestic policy than global influence.

China – Reviving the Silk Road

China was the last of the three stated countries to present its project. The term “Silk Road” is inevitably connected to a famous part of Chinese history. However, China was recently not the first country to use this term in economic and geopolitical context. In 2011 the U.S. started using the term New Silk Road Strategy that was supposed to concentrate on Afghanistan and its linkages with other countries. However, these American ideas were not sufficiently financially supported and China with its revival of Silk Road gained prevalence. The land Silk Road concept was presented by the Chinese president himself at a meeting in Kazakhstan last year (8). The maritime route was, quite logically, mentioned at ASEAN meeting. The projects is being specified step by step, however much information remains unknown or not clear enough. Worth mentioning are the principles that Chinese representatives indicated and that are in contrast especially to American approach. The Chinese foreign policy is known for its “low profile”. Therefore, it has been stressed many times that the project would fully respect domestic policy, will not intrude into domestic issues, will not try to seek for dominance of China neither for creating of spheres of influence. It shall not be a new organization, nor a new entity. In this point we see a difference in comparison to Eurasian union. Later, more principles were added: openness, innovative approach, reforms. If we look at these principles, we will see the core of Chinese approach in last three decades. China would not force the participants of the project to “take sides” (which was clearly directed towards Kazakhstan, as to say that being a member of the Eurasian union is not against participating on the Silk Road). China also stresses inclusiveness of the project (clearly learning from its own experience with TPP) and win-win situation. From various speeches of Chinese representatives we could gain an idea what the Silk Road won’t be. The Silk Road should not enhance any ideological scheme, which again is quite in accordance with Chinese development since 1979, but also in contradiction with Eurasian union that is of conservative nature and with TTIP that is clearly neoliberal (9).
The Silk Road project, if realized would include up to 3 billion people and thus would dwarf even the TTIP. It aims at regional cooperation, infrastructure development, promotion of development strategies, knowledge and sharing of information, but also mentioned was the idea of local currencies payments, which could lead to U.S. dollar weakening (10). Gradually, we learn that the New Silk Road would consist of an “economic belt” that would not comprise only infrastructure (including energetic), but also free trade areas along the road, together with cooperation in sphere of tourism, agriculture, culture etc.
There are many internal reasons for this project, e.g. it would be wrong to view it “only” as a belated Chinese reaction to American and Russian plans in regions of (also) Chinese interest. It is no coincidence that the plan of New Silk Road was presented in accordance with the results of the Third Plenum that introduced some wide-ranging reforms. To enhance trade China needs to preserve stable environment and good relations with its neighbors, both on the land and on the sea. The Silk Road should start in western parts of China that have not been as economically successful as the eastern coastal regions. By New Silk Road China also tries to secure markets for its goods and its vast energetic needs. The New Silk Road on land is also a reaction to a worsening sea conditions, including the increase in piracy on important routes, like the Strait of Malacca that is used for 85% of Chinese imports.
Due to high interest on the matter, maps have been published (11), however the land New Silk Road differs in various versions (in one case a branch leading to Moscow, in one case crossing the Czech Republic, in one version avoiding it).

Conclusion

The deadlock of the multilateral system, the Doha round, has in first instance led to an explosion of free trade agreements. This situation changed after the crisis of 2008, when it became clear that the crisis is of serious nature and appropriate reactions had to be made. One of the fastest reactions was the materialization of the BRIC(S) group that first met in Russia in 2009. Russia was also the first to present a common vision of partnership with the EU, however due to many factors this offer was not accepted. Russia turned its attention eastwards and promoted the Eurasian union that however is small on the global level. U.S. entered the negotiations of Transpacific partnership and started negotiations of TTIP. Both of these projects have neoliberal nature and are aimed at creating large areas of common rules and regulations, where American companies would, in most cases, dominate. Both TTIP and TPP bound Russia and China and exclude these two geopolitical and economic rivals.  In the case of TTIP, the reason is to cut EU from Russia and to make it more tied to the U.S. This can be shown also by the current development in Ukraine and the scheme of sanctions against Russia that are no way in EU interest. China came last with its project of Silk Road – both on the land and on the sea in 2013. The Silk Road evolved into Economic Belt, whose specifications are still coming. If realized it would be a very specific form – not an integration formation, but still cooperation on many levels that could include up to 3 billion people.
From economic point of view, we can see that all projects, either proposed or in realization phase concentrate on cooperation in economic sphere, mostly trade and investment, however sometimes include values (Eurasian union) of cultural closeness, or a yet not specified list of topics (Silk Road) together with infrastructure projects. However, economic cooperation serves as a pretext for more intensive ties in the given region.
Geopolitically seen (12), three projects are touching EU, one of which was not accepted (TTIP directly, Russia-EU partnership refused, Silk Road reaching into Europe). EU is in all of these cases only“loot”, waiting who will get hold of it. EU itself did not come with a project as it has to devote all its efforts to hold together. In this context it behaves as a passive actor that gave preference to American side and is continuously refusing Russia, although for many reasons (energetic, geographical, cultural…) this makes little sense. As the details of Silk Road are not official yet, it is difficult to make a final statement, however e.g. the railway connection between Germany (Duisburg) and China makes an immediate denial of Chinese project improbable. The more, as the Chinese plans of Silk Road revival are not built on an integration formation, but more probably on a set of treaties in specified, mutually advantageous, areas.
The Silk Road and Eurasian union inevitably meet in central Asia, Kazakhstan is a prominent example. The Chinese position of inclusion of different formations, e.g. the possibility of being at the same time a member of Eurasian union and participating on the Silk Road projects offers unique opportunities both from economic and geopolitical view. It would not be either in Russia’s or in Chinese interest to fight over central Asia, as that would only benefit other powers that have been seeking to dominate “heartland” and at the moment are trying to make “belts” around Russia and China in order to slow down their development.
The era of multilateralism may well be over, as the crisis returns the Western world back to block building. However trade is not and has never been only a matter of business. Trade wars too often were the initial step to a full conflict. The new grand game of powers has just begun.

Literature:
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