Free trade agreements
TPP: What’s the big deal?
Published 10 September 2016
TPP is significant because it constitutes the largest regional trade agreement ever implemented outside of the WTO. TPP was negotiated among 12 countries on both sides of the Pacific. Those countries together generate roughly 40% of global economic output (GDP).
If you are following trade issues, even casually, you will likely have heard the acronym “TPP” in recent months. That’s because the campaigns for and against the Trans-Pacific Partnership, or TPP, are in full swing as approval in the U.S. Congress hangs in the balance. Unfortunately, with communication about the TPP being dominated by these two camps, it has not always produced a balanced understanding of what the agreement has in it, who’s part of it, and what the implications are for the countries that negotiated it.
In an ongoing series, TradeVistas will take a balanced look at some of the key issues, questions, and controversies that have arisen in the TPP discussion. Our objective will not be to persuade you of anything, but rather to provide you with the context and background to draw your own conclusions.
We’ll start with the broadest question: What’s the big deal about TPP?
TPP is significant because it constitutes the largest regional trade agreement ever implemented outside of the WTO. TPP was negotiated among 12 countries on both sides of the Pacific. Those countries together generate roughly 40 percent of global economic output (GDP).
It does not include China (more about that later), but it does include Japan, the world’s third largest economy, and the US — still the largest economy in the world by most measures. It also includes a number of rapidly emerging Pacific economies (such as Vietnam and Malaysia), as well as highly developed regional economies such as Australia and Singapore. The TPP allows for new members to join the pact later, and several East Asian countries (including Indonesia, Thailand, and the Philippines) are actively considering that possibility.
Not including the European Union’s approach to economic integration, the last major regional trade agreement that comes anywhere close to the magnitude of the TPP was the substantially smaller North American Free Trade Agreement (NAFTA), which came into effect more than 20 years ago in 1994. NAFTA was highly effective at creating a tightly integrated manufacturing platform, but there are many forms of economic activity that were not included at the time in NAFTA (often called the “grandfather” of regional trade agreements) such as a variety of services and e-commerce.
And importantly, NAFTA was an agreement among countries that share borders and that were already each other’s largest trading partners, so the potential was lower for what we call “trade diversion” where agreements open up new channels of trade sometimes to the detriment of countries that are not part of the agreement.
TPP is significant because it constitutes the largest regional trade agreement ever implemented outside of the WTO.
In future articles, we will take a closer look at the types of barriers to trade among these 12 countries that the agreement is meant to remove. The content matters — is the agreement commercially relevant, does it include new provisions to address constraints to modern types of commercial transactions, does it open markets fast enough? But meanwhile, the debate over whether to approve TPP is also viewed – correctly or incorrectly — as as a bellwether for broader questions about the future of the global trade system, trends toward more protectionism, and geo-strategic leadership.
Advocates for the TPP suggest that its approval is important to stem the rising tide of protectionism globally, that its implementation could give a boost to other trade liberalization efforts. The last attempted round of global trade negotiations under the WTO (called the Doha Round) failed to produce a comprehensive agreement after more than 13 years of negotiation, while two other major trade initiatives currently underway, the US-EU trade deal and the Canada-EU free trade agreement, are facing stiff headwinds and very uncertain prospects.
On the other hand, rejection of the TPP might feel like yet another major investment of negotiating effort, resources, and political capital with no outcome to show for it, only extending a lengthy fallow period of trade liberalization. There’s always a Plan B but no one wants to go down that path yet when one U.S. administration is winding down and 11 other countries waiting and watching.
The geo-strategic implications of the TPP are equally significant. Passage of the TPP would be interpreted by many as a strong statement that the United States intends to remain firmly engaged in East Asia, and that China will not be permitted to supplant the historical leadership role played by America. These impressions have been fueled by White House statements on the TPP which have repeatedly stressed the need for the United States to “write the rules” for trade in the region, rather than ceding that imperative to China.
While China is not a member of the TPP, it is spear-heading negotiations on a Regional Comprehensive Economic Partnership (RCEP), which includes all of ASEAN, plus the other major economies of East Asia — but excludes the US. Some observers have attempted to paint the TPP and RCEP as competing trade blocs, one led by the United States and the other by China. According to this view, failure to pass the TPP would damage America’s standing and influence in the region.
It should be noted though that there is a wide divergence of opinion over whether it is wise or productive to view trade agreements through this geo-strategic lens. But for better or for worse, these geo-strategic considerations have in fact become intertwined with the TPP debate, and go a long way towards explaining why the TPP has attracted so much attention, perhaps to the detriment of a thorough examination of the agreement’s economic merits and consequences.
The focus now shifts to the U.S. Congress, which must ratify the TPP in order for it to take effect. The Obama Administration has signaled its intention to submit the deal to a “lame duck” session of Congress after the November election. It is unclear if there will be sufficient votes to approve the TPP or whether it will be taken up in the weeks following the election. If so, expect voices on both sides of the debate to be out in full force.
Other topics we’ll explore in this series include:
• Why is the TPP being called a “Gold Standard” free trade agreement?
• What are the core provisions and which are proving controversial?
• What’s the view on TPP outside of the U.S.?
• What happens next if the U.S. Congress does not vote on TPP this year?