CRS — Rising Economic Powers and U.S. Trade Policy

December 20, 2012

Rising Economic Powers and U.S. Trade Policy (PDF)

Source: Congressional Research Service (via Federation of American Scientists)

A handful of developing countries are becoming major players in the global economy due, in part, to their large populations, rising trade flows, and rapidly growing economies. These evolving economies are likely to be of increasing interest to the 113th Congress. Led by China, these rising economic powers (REPs) include Brazil, India, Indonesia, Mexico, Russia, and Turkey. Based on purchasing power parity estimates, China, India, Brazil, and Russia are now among the 10 largest economies in the world and Mexico (#11), Indonesia (#15) and Turkey (#16) are not far behind. With large economies and rising shares of world trade flows, the REPs have greater involvement in World Trade Organization (WTO) negotiations and dispute settlement cases, have protested with greater frequency U.S. economic and trade policies, and are more able and willing to deflect or reject U.S. trade and market access demands.

Although they have made great economic strides, any of these REPs could stumble if they do not take steps to improve their business climates by undertaking a range of trade, regulatory, and structural reforms. At the same time, other large developing countries that have enormous economic potential, such as Egypt, Iran, Nigeria, and Vietnam could rise if they successfully address underlying political and economic challenges.

U.S. exports to the REPs and other developing countries have become an increasingly important source of growth for the U.S. economy. If the United States is to maximize its export potential and boost its living standards, U.S. exporters and investors may need to have better access to the REP markets. Trade and investment barriers remain considerably higher in most of the REPs than in the United States and other advanced countries. Efforts have stalled in these countries to reduce their barriers further, and several REPs have reactivated industrial policies or found ways to take advantage of gaps in the world trade rules to promote home companies at the expense of foreign companies.

The United States’ ability to persuade these emerging economic powers to embrace the principles of free and fair trade is constrained by growing differences over the role of the state in economic activity. The more interventionist practices and philosophies of REP governments coincide with a desire to maintain “policy space” to promote development of their economies via policies that often appear to violate the letter or spirit of WTO rules and obligations. Persuading the REPs that a strengthened multilateral trading system is squarely in their national economic interests and a way to move their domestic economic reforms forward remains a challenge.

As global power and prosperity is reconfigured, U.S. trade policymakers face a number of overlapping and complex issues relating to the role of future trade liberalizing negotiations, U.S. leverage in influencing REP economic reforms, and the management of the global trading system. Given the checkered history of the Doha Round, future progress on trade liberalization within the WTO may require new approaches. Principles that have guided multilateral trade negotiations in the past, such as unconditional most-favored-nation (MFN) and special and differential treatment (S&D), may need to be reexamined. Similarly, if the United States wishes to negotiate free trade agreements (FTAs) with large and more significant trading partners, it may need to consider deviations from its standard FTA template. At the same time, ongoing Trans-Pacific Partnership (TPP) negotiations and a potential comprehensive U.S. FTA with the European Union (EU) could serve as incentives for the REPs to view multilateral or bilateral negotiations more favorably.

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