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09 Oct 2013

Why the Pacific trade pact matters

Frederic Neumann

by Frederic Neumann

Co-Head of Asian Economic Research, HSBC

Why the Pacific trade pact matters (Getty Images/Echo)

World exports are no longer growing faster than GDP

Rhetoric rarely matches reality with grand policy announcements. But, with world trade slowing in recent years, the push to the Trans-Pacific Partnership given at the Asia-Pacific Economic Cooperation (APEC) Bali summit could not have been better timed. Talks on this ambitious free-trade agreement covering 12 Asian economies are progressing faster than sceptics expected, even if the end-2013 deadline for final agreement is missed.

Trade has been a major engine of global growth, helping spread prosperity. But world exports are no longer growing faster than GDP and, with no major agreements for further liberalisation in recent years, new and proliferating obstacles have again gummed up global trade.

Trade has been a major engine of global growth, helping spread prosperity

But a few ambitious agreements are now in the works, with the Trans-Pacific Partnership (TPP) offering the most exciting prospect for swift and far-reaching gains. The economies involved – the United States, Singapore, Japan, Australia, New Zealand, Peru, Brunei, Malaysia, Vietnam, Canada, Chile and Mexico – represent 40 per cent of global trade.

Much has been made of this supposedly being an exclusive arrangement designed to exclude other nations, notably China, but that may be the wrong way to look at it. First, implementing TPP could spur other arrangements, such as between China and ASEAN economies. Second, TPP is among the most comprehensive trade pacts being negotiated, tackling stubborn non-tariff barriers and controversial provisions for intellectual property and labour rights: it addresses the needs of modern economies, unlike old industrial tariff-busting agreements.

Third, its membership might be extended over time. TPP grew out of the P4 agreement between Brunei, Chile, Singapore and New Zealand; Japan joined only in 2013. And fourth, it would be critical in shaking Japan out of its decades-long slumber: helping sustain recovery in the world’s third-largest economy would benefit everyone.

The potential gains are impressive. If fully implemented, TPP could raise Japan's GDP by 2.2 per cent by 2025, Malaysia’s by 6.1 per cent and Vietnam’s by more than 13 per cent according to the Peterson Institute for International Economics. And that’s before the benefits from heightened efficiency through stiffer competition.

Ministers from TPP countries at October 2013’s Bali meeting agreed to stick to the principle of full tariff removal. Even Japan, a hardened advocate of protection for items such as rice and sugar, agreed. That means most of the substantive work of the TPP negotiations is now completed.

This research was first published on 7 October 2013.

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