Understanding the TPP: Recommended Reading

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 document resulting from more than five years of negotiations among a 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 the Economist highlighted many 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 summary on 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 the CFA Institute Financial NewsBrief for their views, the majority agreed that the TPP would be a net positive. A week later, Edelman published similar results. Another benefit, although more controversial, is that the TPP incorporated some of the more idealistic (US) standards for international trade that are not included in World Trade Organization (WTO) agreements, such as stricter rules regarding intellectual property, government subsidies, and labor rights.
• Geopolitics: Critics have argued that the TPP is more driven by global political considerations than its purported economic benefits. President Obama lent such views credence by making a statement to that effect.
• Winners and Losers: Commentators tend to discuss which countries are winners and losers in the TPP deal. Although the negotiations were conducted among countries, there is more here than meets the eye. The BBC looked at the situation from an 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 US interest groups demonstrate the complexity of the deal and the high stakes of the game.

A look at the members’ roster for the US Coalition for TPP gives 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. This Vox article provides 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 convinced that 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 Obama on 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 US industries 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, as this article from the New Republic explained. 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 as Australia, Canada, and New Zealand. Canadian farmers, for example, could take a big hit. Some Australians are also concerned that the 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 but not 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 witnessed the most “vibrant” protests against it.

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

Vietnam and Malaysia are generally considered to be among the happy campers, for a good reason. They both could potentially get an edge over such 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. This South China Morning Post article makes 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. Now all 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.

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.

Image credit: ©iStockphoto.com/Daniel Barnes