The Future Of Trans-Pacific Partnership Deal

by: Deena Zaidi

Summary

The 12-member pact of TPP is likely to have Indonesia as its 13th member.

The TPP deal is likely to impact corporate earnings of firms that are in agreement with the deal.

Investors may want to revise their investment strategies once the regional deal becomes a law.

The Trans-Pacific Partnership ("TPP") is one of the largest regional trade deals that will connect the U.S. to 11 Pacific Rim nations.

The twelve members in the pact are tied to common international standards and include the following countries - Japan, United States, Brunei, Chile, Australia, New Zealand, Malaysia, Mexico, Vietnam, Canada, Singapore and Peru. Indonesian President Jokowi has promised that Indonesia will join the TPP deal, which will provide market access to the largest economy in Southeast Asia.

1. Impact on Existing Trade Rules

Once implemented, TPP is likely to influence the labor costs, taxes and prices of products. Eliminating tariffs and non-tariff barriers could significantly affect the consumer firms by cutting their costs and improving profit margins.

A large portion of the 29th draft chapter also deals with investment laws like improved investment dispute settlement, intellectual property rights, patents etc.

The fair trade deal will help in providing more transparency in international transactions. This will make cross investments and trade more non-discriminatory and will ensure fair treatment of new financial services.

The pact eliminates around 18,000 tariffs across 12 nations that will impact both trade relations and existing economic policies.

2. Impact on Coalition Companies to TPP

Due to new intellectual property rules and more transparency in trade rules, companies may shift their focus to the TPP countries.

If the U.S. firms have many manufacturing units or huge direct suppliers in non-TPP countries, they may relocate or look for other profitable avenues through the TPP alliance.

Through low/no-tariff barriers and low labor costs, the earnings of such coalition companies will get a boost, which will reflect in their quarterly earnings report.

In such scenarios, once the deal is passed as a law, investors may consider revising their portfolios, since many companies' performances may look more positive due to the TPP deal as compared to others.

Included in a long list of coalition members are already some of the largest companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Boeing (NYSE:BA), Caterpillar (NYSE:CAT), the Walt Disney Company (NYSE:DIS) and Intel (NASDAQ:INTC) that may benefit from the regional trade deals.

The largest U.S. exporter, Boeing sees TPP as an opportunity as it helps the company in competing globally, where it gets maximum of its commercial revenues.

As corporate earnings of firms get affected, the firms' stocks and the exchange-traded funds (ETFs) with larger holdings in the firms may see a significant change in performance.

Retail and Consumer Sector

The Retail and Consumer sectors may also get positively affected by the TPP deal, which is supported by National Retail Federation.

Huge retail and consumer companies like Procter & Gamble (NYSE:PG), Wal-Mart Stores Inc. (NYSE:WMT), Target Inc. (NYSE:TGT) and Archer Daniels Midland Company (NYSE:ADM) have supported the free-trade deal.

Coalition firm to TPP, Nike (NYSE:NKE) has already planned to create 10,000 jobs in the U.S. and with the introduction of automation in its manufacturing process, the firm is likely to cut down its costs, thus positively affecting its financial performance.

The SPDR S&P Retail ETF (NYSEARCA:XRT) provides exposure to the retail sector. Besides this, ETFs like Columbia Select Large Cap Growth ETF (NYSEARCA:RWG) hold 5.18 % in Nike and 4.67% in Visa (NYSE:V), both of which have agreed to the TPP deal.

Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) holds significant shares of coalition firms to TPP like Procter & Gamble 11.56%, Coca-Cola Co. (NYSE:KO) 9.17% , Philip Morris International (NYSE:PM) 7.66%, Wal-Mart 5.04% and Mondelez International Inc. (NASDAQ:MDLZ) 3.91%.

ETFs like RevenueShares Navellier Overall A-100 Fund (NYSEARCA:RWV) are also exposed to firms that are in agreement with TPP such as Target Corp. (7.31%), Nike (6.73%) and Visa (2.93%).

Pharmaceuticals

U.S. pharmaceutical companies like Pfizer (NYSE:PFE), GlaxoSmithKline (NYSE:GSK), Novartis AG (NYSE:NVS) will most likely benefit from the TPP deal due to patent protection and "data exclusivity window". The data exclusivity window blocks competition from another drug company for at least 5 years even though large pharma companies were looking at a 12-year window.

Tech Companies

Tech Companies will see a slash of import taxes that are as high as 35%. This elimination of taxes on U.S. technology exports to TPP countries may boost corporate earnings in the sector.

Many exchange-traded funds (ETFs) that hold a substantial percentage in such coalition firms will also get impacted.

iShares U.S. Technology ETF (NYSEARCA:IYW) has an exposure from Apple 19.01%, Microsoft 10.70%, Intel 4.33% and Oracle (NYSE:ORCL) 3.55%.

Similarly, many ETFs like Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC), Technology Select Sector SPDR (NYSEARCA:XLK) and iShares Core U.S. Growth (NYSEARCA:IUSG) have significant exposure to both Apple and Microsoft.

3. Impact on TPP member countries

Countries in the TPP include export-driven countries, like Vietnam, that will mostly likely see a reduction in import duties on its products in U.S. and Japan.

According to Eurasia Group, Vietnam will see 50% increase in its apparel and footwear exports in 2025 owing to the deal.

Developed economies like that of Japan and Singapore will also see a 2% rise in their GDP by 2025. Japan will gain cheaper access to the U.S. auto market, which also remains its biggest export market.

With removal or lowering of tariffs, the U.S. could also export at a cheaper price to emerging markets like Vietnam. Tariff cuts will give the U.S. more access to markets of Canada and Japan for poultry, soybeans, fruit and dairy.

Japan has already agreed to increase access for sugar, beef, dairy, rice and horticulture from Australia, which were tightly protected before the TPP deal.

The Downside of TPP

Despite many benefits that TPP may provide to its member countries, it is faced with much criticism from many economists and analysts.

Exclusion of China: The trade is said to benefit nations that are in the Asia-Pacific region, but ignores important Asian countries like China, India, Taiwan and South Korea. China accounts for 12% of the world GDP and is already part of 19 Free Trade Agreements, with 14 already signed and implemented.

However, the emerging market may contemplate on joining the trade-bloc in order to gain larger market share and not lose its existing one.

Secrecy: The pact has been kept secret enough for it to remain a worry. The pact is said to be a threat to interest groups in different sectors.

Environmental issues: The pact has raised some environmental concerns that focus on individual member countries lose environmental standards. For example: countries like Japan and Singapore continue to struggle with large commercial whaling and shark fin trade.

Also, if environmental laws do exist in TPP pact, they may be layered with complicated and vague terms.

Economy: There remain high chances that the impact of TPP on member countries may not be as positive as what's planned in the pact. According to Joseph E. Stiglitz, the benefit of the TPP will go to the 'global elite at the expense of everyone else'. According to Vermont Senator Bernie Sanders, the trade deal may hurt consumers and may cost Americans their jobs.

One of the biggest concerns may arise from the high level of corruption, political instability and loose environmental standards that many member economies currently face.

In Conclusion

TPP is a deal that will affect the countries, sectors and companies involved in the pact. The deal could also remodel the working structure of industries across the 12 member countries. This may provide relief to countries that suffer from low wages, poor working conditions, non-existent patent rights and strict state laws.

The deal currently faces tough challenges from the U.S. Senate, but once it becomes a law, it may get mixed reactions from both members and non-members of the deal.

Once TPP is implemented, the performance of companies and sectors will get impacted and this sudden shift will be captured by the markets and investors' portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.