The Trans-Pacific Partnership (TPP) has been called one of the most “ambitious” free trade agreements in our time. It’s the largest, most diverse, and possibly most comprehensive regional trade agreement ever reached. Certainly, the TPP will affect a great number of people and businesses around the world. The 12 member nations that signed the agreement last October make up 40 percent of the world’s GDP and account for one-third of global trade.
President Obama is calling on Congress to ratify the agreement while supporters and detractors argue the merits of the trade deal. As proponents of free trade, we are cautiously optimistic about a trade agreement that will accelerate the free flow of goods and services across borders. The TPP reduces a sweeping number of tariffs and non-tariff barriers to trade, some of which are more significant than tariffs themselves. Restrictive non-tariff measures include import licensing requirements, rules for customs valuation, and discriminatory standards. Lifting them will account for 53 percent of the improvement in TPP member nation GDP.
Who stands to benefit?
This is a promising trade deal for U.S. exporters. It will eliminate 18,000 tariffs on U.S.-made goods in TPP markets, including all manufacturing tariffs. Although many tariffs are already low between the U.S. and TPP countries, there are notably high tariffs in a number of key areas that have been protected by trade policies. U.S. exports in agriculture and manufacturing will gain a stronger position in trade with TPP countries, which include a number of the fastest growing Asian markets. According to a recent Petersen Institute study, U.S. exports will increase by $357 billion or 9.1% by 2030 as a result of the TPP.
However, the U.S. is the not the country that benefits most from the agreement. A 2016 World Bank study on the macroeconomic effects of the Trans-Pacific Partnership estimates that the U.S. will actually benefit the least in relative income out of all the TPP signatories. Participating countries on average will gain 1.1% GDP by the year 2030 from the agreement, though the small open economies of Vietnam and Malaysia will experience the most dramatic relative gains, 10% and 8% of GDP respectively, by 2030, as they gain favored status in large export markets such as the U.S. The United States, which relies less on trade as a whole, will gain only 0.4% GDP by 2030 from participating in the TPP.
What about China?
The Trans-Pacific Partnership is an important component to the Obama Administration’s “Pivot to Asia.” U.S. allies in Asia see the TPP as a balance against China’s rising economic and military influence in the region and a way to depend less on China’s economy, which has been deepening economic ties with most countries in Asia. The TPP’s open architecture allows countries like China to join later. At the moment, China is taking a neutral stance, waiting to see how the trade deal plays out. With the signing of the TPP, the U.S. has taken a leadership role in writing the rules of global trade. If China wants to join, it will have to agree to the labor, environmental, and intellectual property standards set forth by the agreement.
Photo: Courtesy of NFarmer
Graphs: World Bank study