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tpp carries on

When president Donald Trump withdrew the US from the Trans-Pacific Partnership, its future was shrouded in doubt. However, 11 countries signed up to the free-trade agreement in early March, and optimism is running high among the signatories, as Philippa Maister discovers.

In a month when the unpredictability of the Trump administration’s approach to trade and threats of tariff hikes sent stock markets into steep dives, the 11 Pacific Rim countries that signed a mutual free-trade agreement on March 8 had good reason to congratulate themselves, having committed to “an effective, rules-based and transparent trading system”.

Absent from the signing ceremony for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was the US, which had championed the original agreement until Donald Trump, in the first week of his presidency, announced its withdrawal (though, in early April 2018, he did signal that the US joining the agreement was still a possibility). The remaining countries, led by Japan, decided to proceed without the US, predicting that the agreement would “boost trade, investment and economic growth in the Asia-Pacific region”, including by promoting the development and strengthening of regional supply chains.

A new landscape

The signatories – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – left the door open for other countries to join. South Korea, which in March agreed to an amended free-trade agreement with the US under the threat of increased tariffs on its steel exports (which will instead face a quota), has said it will make a decision by June. Indonesia, the Philippines, Taiwan and Thailand have expressed interest – as has the UK. 

Businesses in member countries will – in some cases immediately – have tariff-free access to a population of 498 million, and with a combined 2017 GDP of $10,500bn. 

The US exit has rearranged the beneficiaries under CPTPP. Vietnam, Malaysia, and Japan, which were to be the big winners under the original TPP because of their increased access to the US market, now stand to gain much less. In general, countries that stand to gain the most are those with the fewest existing free-trade arrangements with other member states.

Still, each member country benefits, according to studies by the Peterson Institute for International Economics in Washington, DC, and Canadian economist Dan Ciuriak. The studies suggest Australia, Mexico, Canada, Chile and Peru will do better under CPTPP because they retain their US trade preferences under prior agreements and gain access to new markets. “No country stands to benefit more from the US withdrawal than Mexico,” says Mr Ciuriak.

Everyone a winner?

Both studies agree that the biggest loser from its withdrawal is the US itself – slipping from a $131bn net gain in the original TPP to a $2bn loss outside it, according to Peterson Institute figures. Such figures could have influenced Mr Trump's recent volte-face.

Matthew Circosta, an analyst with Moody’s sovereign risk group in Singapore, expects Canada and Mexico to attract more FDI from CPTPP members seeking greater access to the US market – provided negotiations on the North American Free Trade Agreement with the US are successful.

Mr Circosta also sees CPTPP as 'credit positive' for member countries, both because of economic growth and because the requirements for compliance with CPTPP standards are expected to improve governance. “We look at control of corruption, the rule of law, the effectiveness of policy in supporting growth, and we believe CPTPP will help support the economic reform momentum, and improve business innovation and competitiveness,” he says.

Blocks in the road

Nevertheless, there are still kinks to be worked out and hurdles to overcome for the agreement to reach its full potential.

Implementation will be a challenge, among both member nations and affected companies. For example, in Vietnam there is a big gap between its current rules and CPTPP rules on trade, according to Deborah Elms, executive director of the Asian Trade Centre in Singapore and an expert on the CPTPP. The absence of the US and of adequate capacity building programmes in place for officials in both national and provincial governments and for companies adds complications. 

“There is a mismatch between the speed at which the agreement will be coming into force and the slow speed of capacity building,” says Ms Elms. “It’s a challenge even for some of the largest companies, because many stopped paying attention when the US withdrew. Companies that are ready on day one will have a competitive advantage.”

Wolfgang Alschner, a law professor at the University of Ottawa in Canada, notes that some existing bilateral investment treaties with identical or lower investment standards remain in place between CPTPP members. “Investors can basically choose under which treaty they wish to bring a claim,” he says. And they may choose the weaker treaty if it serves their interests better, for example if CPTPP bars a claim that a parallel treaty allows. “There are arguments that a later treaty changes the interpretation of an earlier one, but it’s not settled,” says Mr Alschner.

Little change

The CPTPP, as signed, contains most of the original TPP text and 20 of its 30 chapters are unchanged. However, 22 provisions insisted on by the US were suspended.

A key element of the CPTPP is that it removes tariffs on an estimated 95% of goods traded between member countries, opening new markets for exporters and eliminating many non-tariff barriers. In some cases, duties will be removed on the day it goes into force; in others, over a period of time. 

Crucial to the agreement – and especially for attracting FDI – is the simplified rules of origin, which allow a product manufactured in any member state to qualify for entry into other member states without altering processes, parts, suppliers or components. “That is a huge benefit, especially for small companies, because it opens up all 11 markets,” says Ms Elms.

In addition, customs procedures and paperwork have been modernised and standardised to speed the movement of goods. 

The CPTPP significantly opens markets in member states for service industries. It also deals with investment, intellectual property, the digital economy, labour, the environment, good governance and improved methods for dispute settlement – an increasingly thorny subject. 

Meanwhile, some CPTPP members continue to explore joining the China-backed Regional Comprehensive Economic Partnership (RCEP) which would include 16 countries with ties to the Association of South-east Asian Nations, and are agitating for negotiators to move things along.

The Peterson Institute study estimates the global income gains of the RCEP to be $286bn – compared with $147bn for the CPTPP – partly because it includes heavyweights such as China and India. Ms Elms says both agreements are needed because not all countries are willing to sign up for CPTPP’s ambitious goals.

This article is sourced from fDi Magazine
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