The TPP Inches Closer to the Finish Line

It took nearly eight years, but a dozen countries on both sides of the Pacific Rim, which account for 40% of the world’s GDP reached a trade agreement.  Attention will now shift to the ratification process. 

It took nearly eight years, but a dozen countries on both sides of the Pacific Rim, which account for 40% of the world’s GDP reached a trade agreement.  Attention will now shift to the ratification process. 

Canada may offer the first challenge.  National elections are October 19.  The Conservative Prime Minister Harper has supported the efforts, but his two main rivals are either openly critical (New Democratic Party) or lukewarm (Liberals).  The latest polls put the Liberals slightly ahead.  Geographically, there appears to be an East-West split, as one might imagine.

The US and Japan probably have the most at stake.  For the US, the Trans-Pacific Partnership is an essential component of the so-called Asian Pivot.  It excludes China (at least initially), and is seen to raise the bar to future trade agreements.  It addresses some non-tariff barriers to trade, regulation, government procurement, and state-owned enterprises.  Japan’s Prime Minister Abe was slow to embrace TPP efforts, but his advisers, especially in METI, see it as a powerful weapon to weaken the domestic obstacles to reform, like the agriculture cooperatives. 

Reports indicate that Japan has agreed to reduce tariffs on a wide range of agricultural goods, including what, pork, beef and poultry.  Ultimately, this will likely have an almost imperceptible impact on measured inflation.  The quotas for raw milk and rice imported duty-free account for about 1% of domestic production.

The US imposes a 2.5% tariff on Japanese auto imports.  This will go away over more than a decade.  Japanese producers service the US market primarily by building locally and selling locally.  This is to say Japanese carmakers have pursued a direct investment strategy to penetrate the US market rather export orientation.  The sales by local affiliates outstrip exports by a factor of four.

Typically, the advocates of free-trade agreements oversell the direct economic benefits, in terms of job creation and growth generation.  After all, many factors influence job creation and growth outside of trade.  The importance of this trade agreement may lie with taking the agreement further than other trade agreements.  There will be a wider number of goods traded duty-free, and tariff barrier reduction on other goods.  More importantly, there is a mutual recognition of many regulations.  This includes an exclusivity period of drugs derived from living organisms (biologics) and patent protection for pharmaceuticals. 

State-owned businesses, such as in Vietnam and Malaysia, must also adhere to commercial, labor and environment rules.  The International Labor Organizations codified guidelines for collective bargaining, minimum wage, safety, hours, and child labor.  For the first in a trade agreement, small business will get special help.  

There is an unprecedented degree of protection for the environment. There are provisions against wildlife trafficking and unsustainable logging and fishing.  There is protection for a wide range of marine and land animals, including elephants and rhinoceroses.

There are an estimated 30 chapters in the agreement, and it expects to take several weeks before they are all in the public domain.  The lack of details has not prevented candidates for US President to be critical of the agreement.  Trump on the Republican side has been a vocal critic, striking an apparently responsive chord among representatives from agriculture districts, especially sugar and rice.  

Support among Democrats is considerably weaker, and Obama depended heavily on the Republican Party to secure Trade Promotion Authority.   Sanders, closing the gap with Clinton in terms of fund raising and in the swing states, condemned the agreement even before it was reached.  Clinton’s position seems more nuanced.  As Secretary of State, she seemed supportive, but as a candidate, some of her important constituents oppose.

In some ways, the regional agreements are a result of the inability reach a global agreement under the auspices of the World Trade Organization.  Trade and capital flows have not returned to pre-crisis levels.  There are several reasons why this is the case.  The stronger dollar and weaker commodity prices play a role.  Slower world growth, the reduction of the US and China trade imbalances, and changing supply chains need to be taken into account.

The public debate and the ratification process will likely take several months to complete.  Today’s agreement, like Obama securing Trade Promotion Authority, is another important step toward a final agreement.  Although the odds have improved, it is not a done deal. 

TPP Deal Struck, Next Hurdle Ratification is republished with permission from Marc to Market