Practical analysis for investment professionals
08 October 2015

Trans-Pacific Partnership: Brave New World or Geopolitical Maneuver?

After two decades of negotiations, 12 Pacific Rim countries finally reached agreement on the Trans-Pacific Partnership (TPP) in Atlanta this week. The 12 countries are Australia, Brunei, Canada, Chile, Japan, Mexico, Malaysia, New Zealand, Peru, Singapore, the United States, and Vietnam.

We asked readers of CFA Institute Financial NewsBrief if this is an important event in the context of the global economy. Here’s what the 513 respondents told us:

Will the Trans-Pacific Partnership (TPP) have a major effect on the global economy?
Will the Trans-Pacific Partnership TPP have a major effect on the global economy?

Yes, the reduction in trade barriers will stimulate growth in participating economies: 35%

Not surprisingly, a large percentage of our readers thought the reduction of trade barriers will have a major effect on the global economy. After all, most of our members (and other readers) are indoctrinated in the Ricardian philosophy that free trade is an ideal scheme where all participants benefit. The Post-World War II economic success stories of Japan, the four Asian tigers, and China all seem to bear that out as well.

The stated goal of the TPP is a 0% tariff and streamlined regulations regarding market-distorting trade barriers, such as government subsidies, currency manipulation, and property right protections. To many, this sounds like a brave new world of international trade and, more importantly, a way to set the world economy on the right track again.

Yes, the participating economies represent 40% of the world’s GDP, and any rules they set will have a global effect: 33 %

This is a less sanguine version of the first option, and about a third of the readers find this to be a more realistic view in terms of setting expectations. It clearly was an important moment in history when ministers from the 12 countries signed on the dotted line. The fact that the group includes the United States and Japan certainly has added significance.

What happened this week is at least as important symbolically as it is in reality. The significance of the participating nations agreeing on a set of revamped rules for international trade and finance is not to be underestimated. For some countries, the 161-member strong World Trade Organization (WTO) has probably become just a bit too unwieldy to push through any new rules. And the world we live in today is far different from that of the late 1970s and early 1980s when the majority of the current WTO rules were put in place. In some ways, the TPP has been portrayed at least as a set of ideals that the world has been longing for.

No, it is driven by geopolitical rather than economic considerations: 20%

Despite the potential TPP offers, many remain skeptical of the participating countries’ motives. As the rules are almost written in a way to keep China out of the agreement, most Chinese companies are treating this more as a political maneuver by the United States to contain China than simply a business agreement. President Obama certainly did not help ease those concerns when he said “When more than 95 percent of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy.” Harvard law professor Noah Feldman, among many political commentators, also held the view that “China’s the Reason US Needs Trade Pact.”

As a general background, China surpassed the United States as the largest trading nation in the world in recent years. The United States is understandably concerned that China will use its economic influence to achieve geopolitical ends. China has also been engaging in bilateral and multilateral trade negotiations, among them the Southeast Asia FTA, which does not include the United States.

No, it will never be approved: 7%

Some believe domestic politics really holds the key to TPP’s successful approval in the 12 member countries’ legislatures. Given the geopolitical motivations of the United States (and Japan, for that matter) in reaching an agreement, compromises that will anger various interest groups have undoubtedly been made.

That Hillary Clinton broke ranks this week with Obama on supporting the TPP is the latest indication that the domestic battles the 12 governments have now to fight are just as serious as those they just fought against each other. On that note, Donald Trump has not been shy about making his dissatisfaction with the TPP known either. Sometimes people are left wondering: Who really wanted this deal?

No idea/have never heard of it: 5%

No need to feel ashamed if you have not heard of the TPP and do not have an opinion. About 5% of readers were brave enough to admit that they are in the same league as you.

Although it may take years before the TPP becomes a reality, judgment day is approaching fast. Businesses and investors would be well advised to start assessing the potential implications now.

Tell us what you think in the comment section if you have not already voted. We’d love to hear from you.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, senior director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, Multi-Asset Strategies: The Future of Investment Management and AI Pioneers in Investment management. He is also a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

1 thought on “Trans-Pacific Partnership: Brave New World or Geopolitical Maneuver?”

  1. Levan Ochigava says:

    Obviously striking the TPP deal is a political process in itself. But politics and economics are dialectically interlinked domains/processes. Although TPP could be seen as a politically motivated project, it will also set an additional non-negligible conduit for economic considerations to be transpired into international as well as local politics. Thus, being a rule-based framework for cooperation among economically important players, TPP will most probably constitute a considerable impulse for the regional economies and, indirectly, to global economy.
    Of course the future success or failure of TPP, as well as the risks to potential losers from this deal, will depend again on future interplay between international politics and economics, but as an undertaking, I think, TPP deal is unequivocally positive news for the world economy.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.