The Trans Pacific Partnership (TPP) promises a very comprehensive trade deal that is anticipated to forge stronger ties among the 12 member nations. The said nations constitute 40% of the global economy with the US taking the lead. The partnership covers trade, investments and even patent deals and has the potential to affect both the labor market and the economy in general. But the recent move by US to withdraw from the partnership threatens a huge potential for trade and market access. According to its terms, the TPP will immediately take effect upon ratification from all 12 nations. If this is not the case, the same terms provide an alternative for it to take effect when at least six member-countries constituting 85% of their combined GDP will ratify the agreement. The US, however, constitutes more than 60% of the 12-nation GDP.
Given these conditions, the TPP is not likely to become a reality in the near future. While other nations that have earlier indicated interest to join may eventually help reach the numbers given for its ratification, there is a question as to whether the lure of the partnership has likewise been dissolved or diminished with the US withdrawal. For now, the TPP cannot be ratified under its existing terms. If that is the case, will there be any effect to the US economy?
Primary to the partnership is a free trade deal. The TPP promises to not only diminish tariffs but also eliminate tariffs, even for vulnerable commodities such as agriculture and textiles. Trade with the 11 remaining member nations constitutes around 41% of the US total trade. Of the 41%, 34% is coming from only three major partners namely Canada, Mexico and Japan. Other member nations would have less than 2% share in the US total trade. It is also important to note that the US is a net importer of commodities when trade with all eleven countries are combined. The proponent of TPP argues that it offers an opportunity and greater market access for the US, particularly in Asia. The diminution of rates, particularly in the field of agriculture and meat products would offer greater revenues to industries in general. But those opposed to the TPP provide a pessimistic view as competition in and out of the country will not likely create the additional revenue the proponents forecast.
As far as trade is concerned, the TPP would have provided no significant gains given the established deals and agreements among member-nations. As such, the withdrawal would not have incurred losses to the same effect. One may argue that the reduction and eventual eradication of tariffs would make the US products more price-competitive and provide an increase in demand. However, the more expensive labor force and currency is likely to dampen this possibility. The fact that US is a net importer across eleven nations makes it all the more less convincing that the US industries incurred any losses in the US withdrawal from TPP. More importantly, 6 out of the 11 nations already have a free trade agreement with the US. Brunei, Malaysia, New Zealand and Vietnam, nations without any trade agreement, presently constitute a little over 3% of the US total trade combined. However, the absence of trade agreement with Japan, US 4th top trading partner, provided the biggest potential loss as far as trade is concerned.
In terms of investments, US direct investments (Direct investments cover direct, portfolio and other foreign investments). With the exception of Brunei, the US posted a net outflow in all remaining nations. Seven out of the 11 nations have direct investments in the US and constitutes around 17% of the total foreign direct investments to the US. Of the 17%, 16% is coming from Japan and Canada alone. The TPP's take on investment is the same as all other free trade agreements. A most favoured nation clause as well as minimum standard of treatment has been included as well as failsafe measures in cases of a crisis. The partnership also welcomes foreign investments as well as government regulations whenever necessary. If any, the partnership promises an easier flow of investments and financial transaction without the usual strict rules and requirement, particularly for the latter. The partnership intends to treat the bloc as a whole so that establishing an operation within a member nation is no longer necessary to access markets.
The withdrawal from the TPP can neither diminish the direct investment or US access to the said markets. Should the TPP be ratified without the US, the significance of investments in today's economy would not have prevented the US from having access to their markets and the huge market in the US would not have been denied. It is the very nature of investment that makes the provisions friendly for non-members and hence, ratified or not, would hardly cause any significant negative effect in foreign investments.
Both arguments for and against TPP have likewise used the labor market as their main defense. The potential rise in trade will help create jobs while the mobility of the labor market can likewise send more jobs abroad than what it can create. The US labor market is currently nearing full employment but with a labor force participation rate that is at a four-decade low. Data suggests that rising exports may have contributed to falling unemployment rate, but it has failed to create enough jobs to entice greater participation in the domestic market. More importantly, the prospect of greater labor mobility will continue to weigh down on the US labor market as its high taxation and a system that provides indirect incentives to offshore operations will continue to strengthen corporate inversion with or without the TPP.
If neither existing trade nor investment has been lost from the TPP withdrawal, then what has the US lost? The biggest opportunity cost for this recent development is a free trade deal with Asia. The TPP had the potential to give US some stronger traction in the area where free trade hardly exists. Except for Singapore and South Korea, US has no free trade deal whether as a nation or within free-trade agreements with Asian nations. It also came at a time when China is slowly putting in place its leverage in the region mainly in the form of a modern Silk Road. Being the largest economy in Asia, the TPP originally challenged China's trading leadership in the area and the US withdrawal will further strengthen its supremacy as far as trading deals and partnerships are concerned. For now, getting a piece of the precious and emerging Asian market implies an individual negotiation with each target country. The sheer size of the US economy will prevent any potential alienation from TPP member nations as far as economic transactions are concerned. For now, the US withdrawal from TPP is not expected to have an impact on the economy and is not likely to have an effect until such time that new partnerships and agreements are forged in the global market.
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