By Charlie Carre at Coface, the international credit insurer
The US, Japan and 10 other Pacific Rim economies (Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) reached an agreement on the 5th of October in Atlanta on a long-waited trade agreement.
Covering 40% of the global economy, the Trans-Pacific Partnership (TPP) is the largest trade pact in two decades. After five years of negotiations, the deal is a huge political victory for Japanese PM Shinzo Abe and US President Barack Obama with their respectively “third arrow” and “pivot to Asia” strategies. The deal has now to be formally signed and ratified by the members’ Parliaments.
Known to be designed to counter the rise of China, the TPP should primarily boost trade between the 12 countries involved by eliminating or reducing 18 000 custom duties. But it also raises political issues.
The main purpose of the partnership is to promote trade between the 12 countries. The TPP establishes the biggest free-trade zone. Trade between member countries already represents about two-fifth of global trade. Today, most advanced countries have few tariffs but some remain, notably in the agricultural sector. For example, the US protects its domestic sugar market and Japan has imposed tariff duties on rice, beef and dairy products.
The agreement includes enforceable labour, intellectual property and environment standards. For instance, Vietnam will have to allow the creation of independent unions.
The TPP is also here to address issues that have arisen since previous agreements were negotiated, notably issues linked to internet and data flow. TPP will ban data localisation laws. The agreement aims to develop opportunities for service industries. Services are not subject to tariffs but some emerging countries impose nationality requirements or restrictions on FDI.
The TPP includes terms to create a more competitive environment for state-operated businesses but these provisions remains limited.
One of the most contentious elements on the TPP is an Investor-State dispute settlement mechanism that will allow investors to bring members governments to arbitration. As a result of the negotiations, the tobacco industry has been excluded from this provision.
Although the agreement represents progress, its positive effects on trade may be limited at first. The TPP aims to eliminate 18 000 custom duties but some of those changes are likely to take decades to flow though. For instance, the US has negotiated a 30-year transition period for its own tariffs on car imports.
The TPP also needs to be ratified by members’ legislature including the US Congress. It is also controversial because of the provision related to the Investor-State dispute settlement mechanism.
China is not in the deal although it is the US largest trade partner. The TPP has been discussed in the first place to counter China but it may become a member one day.
Some opponents of the partnership see the deal as encouraging further delocalisation of manufacturing – oriented jobs to low-wage nations. In addition, the European Union is now under pressure to conclude its own negotiations for the Transatlantic Trade and Investment Partnership with the US. Other countries could join such as South Korea, which is part of many bilateral agreements, or Colombia.
A research paper by Petri, Plummer and Zhai (The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment, 2012) concluded that world income would rise by $295 billion per year (+0.4% of global GDP) if the TPP is fully implemented.