Understanding the TPP: Recommended Reading

Understanding the TPP: Recommended Reading

ByLarry Cao, CFA

Categories:Economics,History & Geopolitics

Following the signing of the Trans-Pacific Partnership (TPP) in early October, the full text of the trade agreement was released last week.The 30-chapter and 6,000-page documentresulting from more than five years of negotiations amonga dozen countries is hard to digest, so we have put together this primer to help you zoom in on some of the key issues.

First, the highlights:

• Overview: The TPP is a trade agreement among 12 Pacific Rim countries that aims to significantly reduce their existing trade barriers. The 12 countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. These nations jointly produce 40% of global GDP and represent about 800 million consumers. An article in theEconomisthighlightedmany of the key issues at stake in the TPP negotiations.
• History: Originally the TPP was envisioned by a handful of small countries 13 years ago. The initial concept was quite different from what we see today.If you are interested in the TPP’s history and evolution, read this short and sweet summaryon the New Zealand government website.
• Benefits: The TPP objectives of lowering tariffs to zero and significantly removing other trade barriers is meant to boost the participating economies. When we asked readers of theCFA Institute Financial NewsBrieffor their views,the majority agreed that the TPP would be a net positive. A week later, Edelman publishedsimilar results. Another benefit, although more controversial, is that the TPP incorporated some of the more idealistic (US) standards for international trade that are not includedin World Trade Organization (WTO) agreements, such as stricter rules regarding intellectual property, government subsidies, and labor rights.
• Geopolitics: Critics have argued thatthe TPP is more driven by global political considerations than its purported economic benefits. President Obama lent such views credence by makinga statementto that effect.
• Winners and Losers: Commentators tend to discuss which countries are winnersand losers in the TPP deal. Although the negotiations were conducted amongcountries, there is more here than meets the eye. The BBC looked at the situation froman industry and interest group perspective.The results were a bit more revealing. In short, the winners are groups with “comparative advantages” in the traditional Ricardian sense, i.e., skilled but lower-salaried workers in Vietnam and Malaysia, and the top dogs in each industry globally, such as US farmers and Silicon Valley.

Now let’s review some of the issues at stake in more depth.

The US Domestic Debates

Although the United States has been the driving force behind the TPP in recent years, the fierce debates among different USinterest groups demonstrate the complexity of the deal and the high stakes of the game.

A look at themembers’ roster for the US Coalition for TPPgives a good sense of which companies stand to gain from the agreement. Not surprisingly, such firms as Apple, Goldman Sachs, Pfizer, and the Walt Disney Company are among the ranks of those likely to benefit.ThisVoxarticleprovides a skeptical view of the reasons why.

Opponents of the trade deal come from more diverse backgrounds and seem less organized.The labor unions are not convincedthat the TPP will create jobs in the United States, and they have been going all out against it. Interestingly enough,Hillary Clinton publicly broke ranks with Obamaon the TPP recently.Donald Trump, a leading Republican presidential candidate, is not happy about it either.

So why did Obama want it? In addition to broadening the market for USindustries that have strong competitive positions, the United States wants to set the rules for international trade, and this agreement may do just that for many years to come, asthis article from theNew Republicexplained. Both objectives obviously have strong geopolitical implications as well.

The Debates among Developed Countries

Obama’s objectives are exactly what make other developed countries somewhat uncomfortable, to say the least. They fear that this deal will give the United States too much power.

Clearly the removal of trade barriers may hurt the local agricultural, pharmaceutical, and high-tech industries, among others, in such countries asAustralia,Canada, and New Zealand.Canadian farmers, for example,could take a big hit. Some Australians are also concerned thatthe strong intellectual property protection rules embedded in the accord could cost the country billions.

It is a somewhat awkward situation for Japan. Many Japanese industries are in a strong competitive position butnot the agricultural sector.Prime Minister Shinzo Abe needs this deal, though, both to help solve Japan’s economic conundrum and to ensure that the country has a say in setting the rules for international trade. Overall, Japan probably has the most to gain from the agreement after the United States, and it has been the second most active member in trying to reach a deal. Ironically, Japan and New Zealand were also said to be among the countries that witnessedthe most “vibrant” protests against it.

The Happy Campers vs. the Rest of the Emerging Markets in Asia

Vietnamand Malaysia are generally considered to be among the happy campers, for a good reason. They both could potentially get an edge oversuch exporters as China and India, which are not in on the deal.

It’s hard to argue that those left out will have anything to gain from it. ThisSouth China Morning Postarticlemakes an interesting point though, claiming that the TPP’s principles and the reforms that China needs to implement are well aligned.

What’s Next?

It is expected to take two years for the agreement to be ratified by all 12 member countries. Nowall eyes are on the US Congress, which has 90 days from the original signing to put the agreement to an up or down vote. We will update this post from time to time to bring you the latest developments.