The Trans-Pacific Partnership - Into the home stretch

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Economist

FIVE years of trade negotiations, 29 chapters of dense rules and hundreds of tariff lines culminate, in one corner of Asia, in whirring spools of white fabric. Negotiators are still wrangling over the text that aims to establish a new Pacific trade zone, tying together 12 countries from America to Vietnam. But Penfabric, a textile company in Penang, north-western Malaysia, is not waiting around. In one of its mills, bright yellow flags distinguish rolls of high-end fabric from cheaper cloth. Lately, these flags have started to multiply. “We need to be in tune with what America wants,” says H. S. Teh, Penfabric’s managing director.

The zone, dubbed the Trans-Pacific Partnership (TPP), is the most important free-trade agreement in years. If completed, it will be the largest regional trade deal ever, with its members accounting for nearly 40% of the world economy. The countries leading the negotiations want to set a new standard for what trade agreements cover. They are taking on the morass of regulations, such as local-content rules determining how much of a product must be made from local inputs, that have replaced tariffs as the main obstacle to the free flow of goods across borders. After repeated failures to seal big global deals—the World Trade Organisation (WTO) has turned its focus to specific industries rather than comprehensive agreements (see article)—the TPP actually has a good chance at success. A meeting of trade ministers in Maui from July 28th to 31st is expected to put the final touches on the deal.

Gauging the exact benefits of the TPP is tricky, not least because the trade talks are still confidential. Critics have bemoaned the lack of disclosure but conducting negotiations in the open would have been a sure way to undermine them. Governments will have several months to review the final deal before deciding whether to give their assent.

Even when the details are known, it will still be hard to assess the impact. The most authoritative study, published by the Peterson Institute for International Economics, reckons the TPP will enlarge the economies of the 12 member states by $285 billion by 2025. But, as with any economic model, reality is more complex. Benefits could be smaller if exemptions on tariffs blunt its impact—Japan, for one, is still trying to protect its “sacred” food, such as rice, wheat and beef, from imports. But through knock-on effects—if, say, Vietnamese industry becomes more efficient—the gains could also be larger.

Trying to pin down the exact value of the deal misses the point, though. First, the TPP is not at its final destination. It is supposed to expand, drawing in more countries. The Philippines, South Korea, Taiwan and Thailand have expressed interest in joining. The hope is that it will eventually also attract China. If the initial 12-country zone is expanded to 17, the benefits could be much bigger (see chart). Second, TPP is not mainly about cutting tariffs (these are already low after years of trade liberalisation) but rather about setting new rules for global commerce.

By leaving China out, America has, to a certain extent, rigged the talks in its favour. Much as state-owned companies in Malaysia or Vietnam want to defend their fiefdoms, they do not have the clout to push back as strongly as their peers in China might have done. But if the TPP gets under way and proves successful, China may yet be compelled to join, or at least to agree to pacts with similar standards. “If China doesn’t promote its own ideas for trade, it will be influenced by those of others,” says Zhou Mi, a researcher in a think-tank under China’s commerce ministry.

The rules that America is pushing have faced criticisms, some valid, some not. Particularly controversial has been a demand from big pharmaceutical firms for a 12-year freeze on sharing data on a group of new medicines called “biologics”, which they say is necessary to spur more innovation. Groups such as Médecins Sans Frontières say that this would go too far and hinder the development of the cheaper alternatives needed for poorer countries. People familiar with the negotiations say the data-exclusivity term is likely to be pared back, perhaps to seven years.

Other rules are more welcome. Some economists have noted the TPP’s focus on intellectual property and its mechanism allowing investors to sue states, and concluded that it is more a political agenda than a free-trade agreement. But such provisions are not unique to TPP. And its boldness in tackling the rules gumming up the gears of global trade is laudable. Firms that straddle borders know that local-content rules can be just as distortionary as tariffs. “In South-East Asia, you basically have to build cars in the country in which you want to sell them,” says Matt Hobbs, vice-president of government relations at General Motors International.
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The TPP talks have dragged on since 2010 and there could be drama yet in the final weeks. Some think Canada could quit the group if its dairy farmers are not insulated. Malaysia might be pushed out because of American concerns about human trafficking. In America, Congress could scupper the deal, though goodies for beef farmers, carmakers and drug companies should tip the balance in favour. Japan will also face domestic blowback if it opens its door to agricultural trade. But as a hub of innovation, it has a strong interest in TPP. It has been a crucial ally for America in demanding more rigorous trade rules, says Matthew Goodman of the Centre for Strategic and International Studies.

The China syndrome

Ultimately, for TPP to really make a mark, it has to be bigger. Leaving out China is an expedient to get the deal done but, if kept that way, it would be a huge gap. China is the world’s biggest manufacturer. Any Asian trade zone without it faces one of two sorry fates. Either, because of China’s centrality to Asian supply chains, the deal is so riddled with exemptions that it becomes worthless. Or, if the zone gains traction, the effect is to divert trade away from the most efficient Chinese companies and hurt the global economy.

The TPP is likely to face both problems. In textiles, for instance, Vietnamese and Malaysian mills expect to be allowed to continue to source fabric from countries such as China or India that those inside the trade zone cannot produce. This exemption may be vast. Meanwhile, Vietnamese and Malaysian garment makers admit the exclusion of Chinese finished goods will help shelter them from their toughest competition—hardly the ideal of free trade.

In other areas, though, TPP could make waves of a good kind. Rules to protect labour rights, strengthen environmental safeguards and limit subsidies to state-owned companies should go further than any previous trade deal. Officials in China, who previously viewed TPP as a gambit to isolate it, now drop hints about wanting to join the club. “It won’t be the gold-standard deal they’ve been talking about, and they will be lucky to get a silver. Perhaps it will be a bronze,” says Jayant Menon of the Asian Development Bank. With other ambitious trade talks gathering dust, however, even a bronze would glitter.