The Trans-Pacific Partnership (TPP) is an agreement between 12 countries bordering the Pacific Ocean. The TPP reached a deal this October in Atlanta, Georgia.
Ministers from the 12 participating countries announced the biggest regional trade and investment agreement in history making several sweeping changes to international trade in a positive way. Specifically, TPP is the first entry in a new world that marries the economic and geopolitical aspects for all these countries that share the Pacific Ocean as border.
That is why the name Trans Pacific Partnership – TPP that gathers besides the United States, 11 other countries: Canada, Mexico, Japan, Vietnam, Singapore, Brunei, Malaysia, Australia, New Zealand, Peru and Chile.
Negotiations began a decade ago where the main goal was to eliminate tariffs between these countries for the trade of goods and services. The main intent of TPP is to reduce trade barriers between these countries, lowering tariffs on goods such as trucks, rice, and textiles, to name just a few.
According to a recent Fact Sheet from US Government, TPP is very large in scale with the partner countries accounting for 24 percent of global exports and 40 percent of global GDP (Gross Domestic Product) of $88 trillion, with a market size of 793 million consumers.
Current trade between those countries is $1.5 trillion in goods (2012) and $242 billion in services (2011). If it is ratified by Congress, it will be bigger than the North American Free Trade Agreement (NAFTA), currently the world’s largest free trade area.
The following map from the Congressional Research Service shows the countries that joined the TPP and the volume of US trade with each of them in 2014 (Imports plus exports, not including services, in billions of dollars).
According to the U.S. Trade Representative, based on an analysis supported by the Peterson Institute, the TPP agreement provides global income benefits of an estimated $223 billion per year, by 2025. Real income benefits projected to the United States are an estimated $77 billion per year. The TPP could generate an estimated $305 billion in additional world exports per year, by 2025, including an additional $123.5 billion in U.S. exports.
Another visible benefit is that the new agreement will support jobs, drive sustainable growth, foster inclusive development and promote innovation across the 12-country trading block.
A big plus of TPP for qualifying under the agreement is that TPP supports harmonizing a single rule of origin and accumulation rule which reduces the complexity of existing bilateral agreements among 12 countries. Therefore, the utilization of TPP is expected to be increased, which results in more broad trade linearization in the region.
Manufacturers in the region with regional sourcing will provide a competitive edge against manufacturers in non-TPP countries exporting to TPP countries.
To increase the eligibility of the product(s), trade volume among TPP countries will be increased – changing the global value chain in the region. This may have a negative impact on the non-member countries as a source of raw materials will be changed from non-member to member countries.
“Most of the gains in income would go to workers making more than $88,000 a year. Free trade agreements contribute to income inequality in high-wage countries by promoting cheaper goods from low-wage countries”.
That would hold especially true of TPP because it protects patents and copyrights. Therefore, the higher-paid owners of the intellectual property would receive more of the income gains.
The agreement regarding patents will reduce the availability of cheap generics, making many drugs more expensive. Competitive business pressures will reduce the incentives in Asia to protect the environment. Though this is a statement charged by anti-free trade groups, there’s no evidence that it’s true. Last but not least, the trade agreement could supersede financial regulations. Though this is a statement charged by anti-free trade groups, there’s no evidence that it’s true.
Economic Impact to the non-member countries
According to specialists, TPP impact must come from the adoption of common rules on production between countries. As a result, its influence on the business goes beyond the simple reduction of fees.
By setting common legal rules between countries, businesses are provided with predictability for long-term business decisions, therefore facilitating investments. For example, a company may choose as a strategy procuring from partner country regional chains, exporting parts from one of the participating countries and final assembly being in one of the partner countries. The initial investment in this flow of goods should pay off in the long term as real savings.
In contrast, the non-participating countries like Brazil can lose ground on exports of its products. Brazil has been making a great effort recently to serve the Asian market with chicken meat, which with TPP; now these countries will focus on trade among themselves.
Another example, Australia may receive an additional quota of 65 thousand tons per year to export sugar to the United States. Under TPP, Brazilian sugar is likely to find it more difficult to secure a spot in the U.S. market.
Tariff impact in member countries
A significant example for treatment of participating countries is Canadian beef. Currently when it exports to Japan — the world’s third largest economy — it is subject to tariffs of over 38 per cent. Under TPP tariffs will be lowered to 9 per cent over the next 15 years.
Other tariffs affected range on commodities like canola, fish and seafood, forestry products and industrial goods proposed to be eliminated or lowered across the TPP region, either immediately or over a phased-in period ranging from five to 15 years.
Ministers in Peru project that this “historic agreement” serves to promote economic growth; support for better paying jobs, and innovation improvements, productivity and competitiveness.
Independently, the United States, Mexico, Canada and Japan agreed on the rules governing the auto trade that dictate how much of a vehicle must be made within the TPP region in order to qualify for duty-free status; though this has been a very vocal and contentious discussion on the agreement.
The North American Free Trade Agreement between Canada, the United States and Mexico mandates that vehicles have a local content of 62.5 percent. Under TPP, the rule states that just over half of a vehicle needs to be manufactured locally. TPP has been credited with driving a boom in auto-related investment in Mexico.
TPP would give Japan’s automakers, led by Toyota Motor Corp, a freer hand to buy parts from Asia for vehicles sold in the United States and sets long phase-out periods for U.S. tariffs on Japanese cars and light trucks.
To qualify as a tariff-free vehicle under TPP, 45 per cent of the net cost of the vehicle will need to originate in TPP countries — not just North America. For auto parts, 45 per cent of core parts and priority parts identified by the Canadian industry, and 40 per cent of the net cost of other parts, will need to originate in TPP countries.
What to prepare
Companies will need to rearrange the product flow, considering accumulation and rules of origin to increase the chance of qualifying the product for TPP.
Companies will also need a systematic approach for checking rules of origin, incorporating accumulation for sourcing strategy, but mainly to be objective, transparent and predictable in its operations.
To learn more about TPP, visit our Trans-Pacific Partnership Agreement page.