My Say: Trans-Pacific Partnership: Good upside potential, but watch the politics

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This article first appeared in Forum, The Edge Malaysia Weekly, on October 19 - October 25, 2015.

 

Twelve countries straddling the Pacific Ocean have come together to conclude the Trans-Pacific Partnership agreement. TPP is the most far-reaching trade agreement that has been concluded since the Uruguay Round of the 1990s and has the potential to transform Asia-Pacific because it has unique features. 

First, unlike other trade accords, its geo-political implications are huge, underscoring the US rebalance to Asia. Second, TPP countries account for about US$30 trillion of economic output, or about 40% of the world economy. And, finally, TPP goes well beyond conventional trade deals to encompass agreements on the services trade, labour and environmental standards as well as non-tariff barriers. 

 

Why TPP is a big thing

The detailed text of TPP has not been released yet but the broad outlines are known: 

• The agreement involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam;

• It reduces tariffs on about 18,000 goods including sensitive areas such as agriculture, pharmaceuticals and autos. In some cases, such as dairy products, the cuts in tariffs will be phased in over a decade, so the impact will take a while to be felt. In other cases, the compromises needed to resolve bitter differences (for example, over pharmaceuticals) produced a convoluted text over which there are bound to be further disagreements in time;

• The agreement makes a studied attempt to knock down non-tariff barriers. For example, in autos, only 45% of the value-added content needs to come from within the TPP region, a relaxation compared with, say, the 62.5% requirement in the North American Free Trade Area. TPP improves a whole spectrum of regulations affecting trade. For example, it introduces more electronic submission of customs information and expands the recognition of equivalent health and safety requirements across the 12 countries. A whole chapter was given over to measures to ease market entry for small and medium-size businesses; and

• TPP goes beyond the usual trade issues. In fact, only five of the 29 chapters address conventional trade issues. Rules are also set on a range of other issues such as employment law and minimum wages, intellectual property protection, the environment, internet freedom, financial regulation and medical costs. In addition, TPP countries will also sign a side document in which they pledge not to pursue a cheap currency policy that would unfairly raise their export competitiveness. 

Critics of TPP express concern that the details may yet reveal serious downsides. Some of these worries are legitimate — such as concern that the US may have driven a hard bargain that provides unfair advantages to its pharmaceutical and high-technology companies and against the interests of the others. There are also fears that the inter-state dispute settlement mechanism could give US corporations a means of overturning national laws they do not like. Once the full text is available, we are confident that many of these fears will be assuaged. Most countries involved in the TPP negotiations have learnt over the years of these risks and the information we have received so far seems to suggest that the compromises agreed to in these controversial areas were on the whole fair and balanced. 

One should note, however, that TPP is not a done deal yet, as it has to be ratified by national parliaments, a straightforward process in most countries but potentially a problem in a few:

• There will be a huge battle in the US.  As with most other trade agreements,  TPP has aroused great hostility from President Barack Obama’s own Democratic Party.

The Democrats’ front runner for the presidential nomination, former Secretary of State Hillary Clinton, has already gone on record opposing the accord.  Unlike in the past, when the opposition Republicans generally favoured free trade, this time round the party’s

populist wing is much more influential and likely to oppose it. Thus, it will take a lot of effort and skill on the part of the Obama

Administration to get TPP ratified by Congress.It does not help that the US presidential election campaign would be heating up by the time the ratification process starts. Still, as the political class focuses on TPP, they will learn that the details of the accord are favourable to the US and that the geo-political gains are also sizeable. International businesses are likely to lobby hard for the deal to be passed in Congress. In the end, it will be a close call but TPP is likely to eventually pass; and

• There will also be resistance to the pact in the poorer developing economies. In Malaysia, for instance, Prime Minister Datuk Seri Najib Razak is under political attack from his opponents and he may calculate that trying to secure a consensus over the pact within his own ruling party might expose him to further attack. 

 

TPP is a geo-political game changer 

TPP is basically a political victory for the US and Japan. It is not a defeat for China as many had painted it, but it certainly makes it harder for China to displace the US as the pre-eminent power in Asia. 

• TPP was the only real mechanism that the US had to entrench itself in Asia-Pacific in the face of a rising and more assertive China. With some of the countries that are not in TPP such as South Korea and Taiwan keen to join, the US will be able to count on at least maintaining a sphere of influence in the region;

• Japan, too, gains politically from TPP. With its ally and protector, the US, now more entrenched in Asia-Pacific as a result of TPP, Japan will feel more secure in facing China.  The accord will also promote greater integration of other Asian countries with Japan, giving it more influence as a result. For Prime Minister Shinzo Abe, TPP will be a useful level to promote supply side reforms;

• This agreement gives those Asia-Pacific countries uncomfortably confronting an assertive China more leeway in dealing with China on the back of a more robust US presence. US allies in the region are also reassured of continued American commitment to the region; and

• It puts China, at least temporarily, on the back foot after a year of moving forward on its major initiatives such as the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road initiative. However, we expect China

to find ways to adapt itself to TPP.

 

Economic upside to member countries is potentially huge

The crux of the matter is that member countries will have virtually free access to a combined market that comprises 40% of world GDP, giving them a decided edge over their competitors who are not party to TPP. If the provisions on reducing non-tariff barriers are as effective as claimed and the moves to ease trade in services and flows of investment as great, then the impact is likely to be substantially positive for TPP members. The winners and losers are likely to be as follows:

Countries that currently have few free trade agreements and hence face high trade barriers will stand to benefit greatly: 

• Vietnam will be a big winner from the greater access to Pacific markets, given its heavy reliance on export-driven growth and the substantial trade barriers it currently faces.

Japan will also benefit — this accord is the first-ever free trade agreement in any form between the US and Japan.  Japanese automakers will stand to gain from the increased access to US consumers. However, Japan’s agriculture sector will have its work cut out to remain competitive as domestic protections are gradually lifted; and

• The ending of tariffs for Vietnam-made products is also likely to herald more foreign direct investment. Cambodian leaders are criticising TPP because foreign investment has already switched from Cambodia (which is not in TPP) to Vietnam. Malaysia is also reported to have seen additional FDI. 

 

Countries that are forced to reform their supply side will also gain, though there might be some near-term losses in some sectors

With the high standards demanded of countries party to TPP, there will be a ramping-up of reforms, spurring economies to attaining efficiency gains. Japan, Vietnam and Malaysia could see more supply side improvements as a result. Some companies in these countries which have benefited from their government’s protection in the past may worry about the implications — but our suspicion is that they will adjust and adapt and in the end do reasonably well out of it. 

 

Regional hubs will benefit from the expansion of trade and other flows

TPP is expected to facilitate greater flows of goods, services, capital, skilled labour and ideas that will benefit regional hubs:

• Singapore is set to be a huge winner in facilitating and intermediating these flows, leveraging  its world-class infrastructure and institutions, strong rule of law and stability to reap the economic gains from increased trade and investment links around the region;

• Kuala Lumpur is also poised to benefit from these expanded flows, given its excellent infrastructure and existing base of regional headquarters; and

• Within Asean, the potential loser will be Bangkok, as economic flows are diverted to regional hubs in TPP countries.

 

Who are the potential losers?

Countries that are not part of the TPP agreement will stand to lose out from trade and investment diversions, even as their neighbours and trade competitors benefit from the reduced tariffs and increased market access. Already, South Korea and Taiwan have indicated their interest in joining TPP — this would strengthen the economic architecture. Within Asean, Thailand could well be the biggest loser if it remains outside TPP. With its Asean neighbours joining TPP, trade could be diverted away from Thailand as other countries become more competitive because of lowered trade barriers. Furthermore, should the rules of origin agreed upon by TPP members strictly confine the majority of manufacturing activity within member states, Thailand could see some degree of relocation of production facilities.

 

Bottom line: TPP will boost regional growth 

All multilateral economic agreements are messy, involving compromises and trade-offs — and TPP is no exception. However, the key is that member countries will have reasonably good access to a market that is 40% of the world economy. The opportunities to expand sales, gain scale efficiencies and attract new investment are simply mind-boggling. And nothing so shows the net positives of TPP as the keenness of countries such as South Korea and Taiwan to now join TPP. 


Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy