A new comprehensive trade agreement could bring big economic benefits to member countries and impose uniform rules governing intellectual property, state protectionism, e-commerce and more.
After years of negotiations, the Trans-Pacific Partnership (TPP) was signed in February by 12 nations: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. If it is ratified, it will reduce tariffs and promote economic cooperation among member countries, and could result in a market similar to the European Union, but much larger. The 12 countries have a population of about 800 million, almost double that of the European Union, and currently represent 40% of global GDP and one-third of world trade.
Next Steps
Though signing was a big step forward, the pact still needs to be ratified to take effect. If all members ratify the treaty, it will go into effect two months later, but that’s unlikely to happen.
Otherwise, the agreement will become law if at least six countries representing at least 85 percent of the total member GDP ratify it within two years. Because of their size, both the United States and Japan would need to ratify the deal for it to become effective.
Provisions
The pact builds on rules already enshrined by the World Trade Organization, including limiting the role of governments in the marketplace and making a commitment to an open internet.
Notably absent from the agreement is China. The US has made no secret of its desire to make sure capitalist influences prevail in international trade.
“If we don’t write the rules, China will write the rules out in that region,” President Obama said in a Wall Street Journal interview.
In addition to reducing tariffs, the TPP creates an internal system for resolving disputes, which could pave the way for companies to sue governments that provide their countries with protectionist assistance such as low-cost loans, debt forgiveness or preferential access to goods and services.
The pact also addresses e-commerce, requiring member countries to protect consumers from fraud, ensure their privacy, and stop unsolicited messages. It prevents duties on e-commerce and stops member nations from favoring their own producers and suppliers or blocking other countries.
Benefits and Controversy
The deal, which comes at a time when global trade is slumping, could significantly increase world income. The Eurasia Group estimates that the deal could add $285 billion to the GDP of member countries by 2025 and increase exports by $440 billion.
China, on the other hand, stands to lose $35 billion a year.
In the US, domestic businesses will benefit by free trade with companies in the partnership. In particular, the agreement would help exporters in areas where barriers remain high, such as in agriculture, services and high-end manufacturing.
One of the biggest winners, the Eurasia Group says, will be Vietnam, which could gain 28% in exports and increase its GDP 11 percent by 2025.
Japanese auto makers also stand to make big gains, since they would receive cheaper access to the US, their biggest export market. Australia, Malaysia and New Zealand would also benefit from reduced tariffs.
Nevertheless, the agreement faces strong criticism in some quarters, including the US, where some believe it will foster job loss and unfair competition for American goods from low-income nations. Critics also question whether the pact’s labor provisions can be enforced. Some nations dislike the prospect of being sued over their own laws.
Many opponents have criticized the secrecy with which the pact was developed. Others have complained about reduced access to affordable medicines and other goods and services.
Other Trade Agreements
Though the TPP is considered the world's largest trade pact, other Asian and Pacific countries have signed deals among themselves in the past. One of the oldest is the Asia-Pacific Trade Agreement, which was signed in 1975. It includes China, India, Korea, Bangladesh, Laos, Sri Lanka and Mongolia, and has been modified several times over the years to keep up with changes and growth.
In 2014, Australia signed its own trade agreement with major trading partner China that will eventually eliminate 95% of tariffs on Australian exports there. So, while China is outside the TPP, US-based companies with a subsidiary in Australia should be well-positioned to benefit from the trade agreement between China and Australia. Australia also signed free-trade agreements with Korea and Japan in 2015, and is currently negotiating another one with India. Australian companies, including US-owned subsidiaries there, should also gain access to the trade benefits these treaties provide.
China is leading support for two initiatives even larger in scope than the TPP: the Free Trade Area of Asia Pacific (FTAAP), an agreement that could generate nearly $2 trillion by 2025; and the Regional Comprehensive Economic Partnership(RCEP), an inter-Asian contract that could result in trade volume of $10.6 billion. Since the TPP was signed first, it could influence the development of these other agreements.
By Dafydd Williams, Senior Director, Advisory Services