Trump pulls US out of Trans-Pacific Partnership (TPP)
One of President Trump’s first executive orders, written on 23rd January 2017, was to pull the US out of signing the Trans-Pacific Partnership (TPP).
While TPP will continue, it will not involve the participation of the USA, which will deprive it of its major participant. Trump’s decision not to ratify the TPP agreement was widely expected and in line with his general dislike of multi-lateral trade deals, and, in his view, their negative impact on US jobs.
What is TPP?
TPP is a regional trade agreement originally between the USA, and 11 countries of the Pacific-Rim. These countries account for around 25% of all world trade.
Along with the more recent Trans-Atlantic Trade and Investment Partnership (TTIP), TPP formed a key part of recent US economic policy towards the global economy. Since 2010, and in the wake of the financial crisis, the US has sought to rebalance its economy towards exports and away from an excessive reliance on domestic consumption and the US housing market.
The countries originally included in the agreement were:
USA, Canada, Mexico (NAFTA members), Chile, Peru, Japan, Malaysia, Singapore, Vietnam, Brunei, Australia and New Zealand.
The agreement, which was signed in New Zealand on February 4th 2016, had its origins in 2006 with the signing of the Pacific Four (P4) agreement, between New Zealand, Singapore, Brunei and Chile.
The full ratification process will take up to two years to complete.
Aims of TTP
The main aim of the agreement, which involves 30 chapters, is to enable all parties to benefit from the removal of tariffs and other barriers to trade, as well as establish common rules regarding trade.
Specifically, the agreement will enable US producers to benefit from the removal of around 18,000 individual tariffs on US goods in the other 11 markets. US trade with the Far East has been blighted by high tariffs, example of which include a 30% duty by Malaysia on US automobiles, and 10% duties imposed by Vietnam on US manufactured goods.
In contrast, some 80% of goods coming into the US from other TPP members have no tariffs at all.
Tariffs can distort the pattern of world trade by increasing domestic prices, and encouraging domestic consumers to buy from (often) inefficient local producers. Free-market economists argue that there is likely to be a net welfare loss from the use if tariffs (and other protectionist measures), even though tariffs may be justified in the short run or for specific industries.
TPP is not just about reducing tariffs, but also about removing other obstacles to free trade, such as:
Import licenses, which are required in order to sell to another country, add costs to trade and distort the benefits of free trade.
Agreements to reduce agricultural subsidies are also part of the trade deal, and will open up often heavily protected markets for foodstuffs.
The removal of export restrictions on foodstuffs is also central to the agreement. Export restrictions are regarded as protectionist and unfair given that, if a country deliberately limits exports to the world market, prices of foodstuffs are kept artificially high, which protects domestic producers as well as distorting world prices. This is to the detriment of many lower-income countries in the region, including Cambodia and Bangladesh.
TPP will also encourage investment between members. Many countries impose limits on foreign investment into particular industries, and in many cases these limits will be removed or reduced. For example, TPP members may be exempted from existing restrictions on overseas investors, which, in the case of Canada, involves a limit on foreign equity of 49% on overseas ownership of uranium mines. In addition, TPP members will not be required to have a joint venture with a Canadian mining partner.
The agreement must be ratified in each country, with ratification in the USA and Japan expected to be the slowest. These two countries make up around 80% of the GDP of the TPP members.