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24 Dec 2013

Trade: a big deal

Izumi Devalier

by Izumi Devalier

Economist, HSBC

Trade: a big deal

The pact would boost trade and incomes for those involved

The Trans-Pacific Partnership (TPP) would create a trading bloc spanning 12 Pacific-Rim countries including the US, Japan, Canada and Australia. It would establish an economic zone bigger than the North American Free Trade Agreement and connect 12 economies responsible for 40 per cent of world GDP.

But agreeing on the proposed pact is taking time. Negotiators had hoped to conclude the TPP deal by the end of 2013. A deadlock at December’s ministerial meeting in Singapore meant that talks will continue into 2014.

The TPP is designed to be a 'living' agreement with rules and membership both open to expansion

The US had hoped for a full liberalisation of trade but most countries have settled on a tariff-free ratio of about 95 per cent. Japan wants to maintain tariffs on rice, barley, beef, dairy and sugar cane – effectively drawing a line at a tariff-free ratio of 93.5 per cent.

Another issue has been intellectual property rights protection. The US originally wanted to include provisions that would make it easier for pharmaceutical companies to obtain and extend patents. Developing countries objected, fearing that it would impede the development of low-cost generic medicines.

The US also wants the pact to include a provision that would allow foreign companies the right to sue the host government under international law. Australia has already said it would ask to be excluded from such a provision, reflecting the challenges of securing agreements across such a large and diverse group of countries.

The TPP competition chapter will include rules to level the playing field between state-owned enterprises and private firms. Perhaps the hardest part of crafting these rules is that they have to be created with a view to China’s future membership. If the rules are too tough it could discourage the potential membership of Asia’s biggest trading nation.

  • Countries: 12
  • Percentage of world GDP: 40
  • Percentage of global trade: 30
  • Global income boost: USD223.4 billion per year*
  • Next talks: January 2014
  • Biggest winners:
    Vietnam: textiles, apparel and footwear
    Malaysia: electronics and machinery
    Japan: auto, machinery and chemicals

*Estimate by Peterson Institute for International Economics

The TPP is designed to be a “living” agreement with rules and membership both open to expansion. In March 2013, Japan became the latest country to join – Korea and Taiwan could be next. It seems unlikely that China will join the negotiations before the current deal is sealed, but it may become involved in the medium term.

President Obama wants to sign the TPP in advance of the November congressional elections. One stumbling block is the fact he lacks the authority for “fast-track” trade promotion, which expired in 2007. That would have given him the ability to negotiate trade agreements without fear of an eventual Congress amendment or filibuster. US lawmakers are reportedly close to a vote that would return this power. This would make it easier to reach an agreement because it would reassure potential trade partners that the deal won’t be altered.

The TPP is not without flaws but all-told we believe it is good for Asia. For the countries involved improved access to international markets would boost trade and incomes. Vietnam, Malaysia and Japan are expected to be the biggest winners in the region largely because of the fact that they have yet to sign a free-trade agreement with the US. But the real value of the agreement could be its potential to spur badly needed domestic reforms and raise productivity. We think a deal could be signed within months. At a time when exports as a share of GDP have fallen sharply, growth in Asia needs boosting. The pact could help revive global trade and catalyse reforms.

This research was first published on 18 December 2013.

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