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Without the US, the TPP is back but for how long?

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Ramon L. Clarete

Introspective

APEC-TPP-110917
Trade ministers and delegates from the remaining members of the Trans Pacific Partnership (TPP) attend the TPP Ministerial Meeting ahead of the Asia-Pacific Economic Cooperation (APEC) leaders summet in the central Vietnamese city of Danang on November 9, 2017. World leaders and senior business figures are gathering in the Vietnamese city of Danang this week for the annual 21-member APEC summit. -- AFP

On sidelines of the APEC summit in Danang, Vietnam, the remaining 11 contracting parties of the Trans-Pacific Partnership deal or TPP are expected to sign the TPP-11 trade deal or at least say they will do so in at most a year’s time.

The TPP, before US President Trump pulled out the US from it last Jan. 23, would have been the world’s biggest preferential trade agreement. Two of the world’s largest economies are in it, US and Japan, along with the 10 other Pacific rim countries most of which are the world’s fastest growing dynamic economies.

The Philippines is not one of the TPP 12, but like the rest of the ASEAN countries it was under great pressure to join the TPP deal or lose its US markets to TPP members Vietnam or Malaysia, or to second-wave TPP countries like Indonesia and Thailand.

That pressure eased somewhat when President Trump decided to abandon TPP and instead pursue bilateral trade deals with its members like Japan.

However, Japan decided to instead take on the leadership to salvage the trade agreement its Diet had already ratified. Over 10 months, it shepherded the remaining TPP 11 members through series of trade negotiations. Now they announce they have a TPP-11 deal or are committed to have one in a year’s time or less.

Japanese Economy Minister Toshimitsu Motegi said at the APEC forum in Danang late Thursday that the TPP 11 have an agreement that has “high standards and balanced.”

This is a significant achievement of Prime Minister Abe given that the US footprint in TPP is very large. The big question of the orphaned TPP 11 is whether they have to renegotiate the deal, which takes at least a year, or leave the deal stillborn like the International Trade Organization that the US trashed in 1947.

AN OVERVIEW OF TPP
The Trans-Pacific Partnership (TPP) agreement is dubbed as the gold standard of free trade agreements in the world. Twelve states in the Asia-Pacific region signed the agreement on Feb. 4, 2016. They are Brunei Darussalam, Chile, New Zealand, Singapore, Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam.

The TPP is a “comprehensive, next-generation” preferential trade and investment agreement that responds to the key challenges of the 21st century. Five key features define it.

First, TPP liberalizes and facilitates trade and investment flows among its members in “all areas.” It lifts about 11,000 import tariffs and removes non-tariff trade barriers in “all areas.” Unless an exception is declared, all services and investment areas are deemed liberalized. Even opportunities in government procurement get expanded.

Secondly, TPP is designed to attain the higher-level objective of stronger, more sustained, broad-based, and inclusive growth. The deal supports the development of global value chains (GVCs) among its members. Products these days are made in the world, not in China or USA. But such multi-country fragmentation of production can only happen with liberalized and facilitated trade and investment regimes among TPP members.

Active participation in GVCs makes trade and investment reforms cooperative rather than competitive. Job losses and other adverse effects of trade and investment reforms are offset by opportunities elsewhere in the economy for displaced resources.

Third, it incorporates four cross-cutting trade issues, namely: (a) regulatory coherence in support of a more seamless and efficient trade among its members; (b) competitiveness and business facilitation to ensure members to improve their respective domestic value chains to make them more competitive; (c) encouragement of micro, small, and medium enterprises (MSMEs) to participate in the expanded regional trade; and (d) promotion of overall institutional development.

Fourth, TPP responds to challenges of how to promote trade and investments in new innovative products arising from the introduction of new technologies. Lastly, it is a living agreement.

Members expect that the agreement will have to evolve in response to unforeseen shocks such as those due to the introduction of new technologies or to emerging issues such as those associated with climate change.

The stakes are still large without the US.

In 2015, TPP-11 countries’ total exports to the world amounted to $3 trillion or 14% of global exports in goods and services. The combined gross domestic product (GDP) in current prices of TPP-11 members reached $ 9.9 trillion or 13% of global GDP in 2015.

Before the US pulled out, many other Asian-Pacific economies had expressed their intentions of joining the agreement, and five were likely to accede after the agreement is launched: Chinese Taipei, Republic of Korea, Thailand, Indonesia, and Colombia. Many of these may still join TPP-11.

TPP-11 might bring the US back to the deal especially if and when in the sidelines of the 32nd ASEAN Summit in Singapore next year the Regional Comprehensive Economic Partnership (RCEP) with ASEAN and its six free trade area partners in it is launched.

“There will be no future TPP 12 [with the US] if there is no TPP 11,” Minister Motegi added. “The US obviously has its position, but we will be persistent in explaining to the US [the merits of TPP] so that they come back.”

With the US back, the opportunities in TPP rise with a larger preferential global market of 41% of the world’s GDP and 30% of global exports.

WHAT’S IN IT FOR THE COUNTRY?
I calculated the trade implications of TPP for the Philippines using an estimated gravity model of trade of the relevant countries in the world. The potential boost of TPP membership to Philippine exports is significant. These are some key points of the analysis.

One, if the Philippines were a TPP member and it was exporting to any trading partner in the world, its exports may expand by 33.99% and imports from any partner in the rest of the world by 26.34%. If it’s confined only to TPP 12 countries, its exports go up by 33.5%.

Two, with a stronger expansion in exports compared to imports, the country may tend to build a trade surplus.

Third, if TPP gets expanded to TPP 17 with Chinese Taipei, Colombia, Korea, Indonesia, and Thailand in it, the export expansion is larger. The TPP may deepen even more the country’s trade with these five countries (see table).

TPP Membership

TPP membership assigns obligations to the country to become more open to trade and investments, key to making the economy competitive.

The estimated increase in exports may be interpreted as being what the Philippines may obtain if it were to become more competitive and integrated with the rest of the world as the TPP members are. Inputting the added exports to an economic model of the Philippines implies that the GDP has to rise by 59% to produce it. In other words, more jobs can be created and use of idle resources promoted.

MORE WORK AHEAD
The good thing is that the TPP 11 countries agreed to save the TPP. But the road ahead is littered with challenges.

Japan has to do careful balancing of responding to the concerns of its partners, but keeping the remaining trade negotiations to so-called “core elements” and away from opening up the debates on old issues in TPP 12 trade talks.

 

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.

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