Twelve countries, including the world’s largest and third-largest economies, the US and Japan, have signed the Trans-Pacific Partnership (TPP) trade deal, creating a new trade block that comprises 40% of the world’s GDP. It is the biggest trade agreement in history, and it will significantly alter the trade terms of the countries involved.
For Japan, the largest Asian economy in TPP, the agreement is a first in many respects. The country has never had a bilateral trade agreement with the US, and it has previously imposed a blanket exemption on its heavily protected agricultural sector from any trade negotiations. Other Asian countries in the TPP are Brunei, Malaysia, Singapore, and Vietnam.
The main Japanese beneficiaries include car companies and car parts producers, as Japan has won a gradual elimination of US tariffs on these goods. Japan’s domestic agricultural sector will be negatively affected, as prohibitive tariffs on imported beef and pork will be slashed. Import quotas for rice will be relaxed. The government will implement support measures to help farmers adjust to the changes, as well as continue to buy up rice to support domestic prices.
On the other hand, local food companies, retailers, and restaurants will benefit from lower input costs and gain from TPP. Domestic consumers will benefit from lower food prices. Japanese companies involved in distribution, warehouse operators, and trading houses are also expected to benefit from increased trading volumes.
In Malaysia, the sectors that are expected to benefit from TPP are some of the country’s major exports: electronics, chemical products, palm oil, and rubber. But the business environment will also be affected by the higher environmental and labor standards included in the accord than are currently prevalent in the country; the latter is an issue for Vietnam as well.
Already, many of the Asian countries that have not signed the agreement are reportedly considering joining TPP, as the US is the main export market for many of them. This is especially true of low-wage emerging economies that rely on basic manufactured exports — such as Bangladesh and Cambodia, both with large textile and garment sectors. They are now facing the prospect of competing with Vietnamese garment exporters to the US on unequal terms. Even China is supposedly considering TPP membership. Whether China would be admitted, however, will have more to do with geopolitics than economic considerations.
The deal will also cause ripples in areas that at first glance do not appear related. For instance, member states will have less freedom to engage in currency manipulation. In recent months there has been a palpable unease among policy makers worldwide about the effects of competitive devaluations.
Japan, where a weak yen is crucial to the central bank’s objective of reflating the economy, will find it difficult to expand its monetary stimulus program and push inflation upwards if this also results in a depreciated yen. Japan’s closer economic ties with the US complicate that course of action.
Meanwhile, there is near-universal agreement that the biggest winner of the agreement is Vietnam. Some estimates put the gains from TPP at 11% of GDP by 2025, as companies are expected to relocate there from other Asian countries. The sectors that are expected to benefit the most are the garment and fishing industries, as import taxes for those products will be eliminated in the US.
The extent of Vietnam’s gains, however, depends critically on how many other low-cost economies will join TPP. On the other hand, the country’s local pharmaceutical companies will suffer, as foreign companies will now have free access to the Vietnamese market, and better-enforced patent rules (another consequence of TPP) will favor them as well.
The agreement still has to be ratified by each country’s parliament, and while this is expected to happen eventually, TPP is not likely to produce changes for at least a year.
Read about the TPP’s potential impact on Latin America in this article by Bizmology contributor Michelle Campbell.
Oana Aristide is a Senior Economist on D&B’s Global Data, Insight and Analytics team. Based in the UK, she covers three Scandinavian countries as well as Romania, Japan, Malaysia, and the Philippines as a contributor to D&B’s Macro Market/Country Insight Products. She has a background in central banking.