By: Antoni Estevadeordal From Brookings

On February 4, 2016, after five years of negotiations, the members of the Trans-Pacific Partnership Agreement (TPP) signed the trade pact, considered to be the highest standard trade agreement to date.[1] The TPP includes not only traditional measures such as the reduction or elimination of tariffs, but also provisions on contemporary topics like trade facilitation, support for small- and medium-sized enterprises (SMEs), telecommunications, trade in innovative services (including digital technologies), issues of regulatory coherence and competitiveness, as well as higher standards on labor and environmental rights, sanitary and phytosanitary standards, and on the protection of intellectual property rights (IPR). In addition to the high standards of the agreement, the TPP is remarkable in its membership; together, the member countries (Australia, Brunei, Canada, Chile, the United States, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) account for 40 percent of global GDP, 26 percent of international trade, and 10 percent of the global population. If ratified, the TPP will be most significant achievement in global trade since the conclusion of the Uruguay Round at the World Trade Organization (WTO) in 1994.

An agreement of this size and scope will have important implications for Latin America and the Caribbean (LAC), and for the global trade architecture as a whole. At the global level, the TPP is contributing to the recalibration of the global trade architecture. Since the Doha Round, negotiations at the multilateral level have stalled, and although WTO members concluded the Bali agreement in 2013, it was a partial scope agreement that only addresses a narrow set of issues. Further progress was made last year at the Nairobi Ministerial where WTO members adopted the “Nairobi package,” containing commitments on agriculture, cotton, and less developed countries (LDC) issues. This includes a commitment to eliminate export subsidies, duty-free, quota-free market access for cotton exports from LDCs, and some preferential treatment and technical assistance for LDC trade in services and certain goods. Some progress was also made on the Trade Facilitation Agreement, as six additional countries ratified the agreement.[2] However, the Doha Development Agenda—launched over a decade ago—was left on the sidelines with little hope of resurrection.

This piecemeal approach at the multilateral level means that the international rules that govern trade and investment have not been updated to address contemporary trade issues, and a framework to address nontraditional barriers to trade is lacking. As a result many countries have turned to regional and plurilateral trade agreements to update their policies and procedures and advance trade liberalization. The TPP is the most significant achievement to date in terms of scope and coverage and will therefore play an important role in recalibrating the international system to better meet the needs of businesses and governments.

For LAC, Asia and the Pacific has become an important trading partner, as the region has developed into a key engine of global economic growth. The TPP therefore provides an opportunity to deepen interregional trade by creating new market access opportunities in Asia and the Pacific, and by upgrading existing relations by including more comprehensive coverage of the trade and investment topics that are most relevant to trade in the 21st century.

Implications for the global trading system
The TPP is a first-of-its-kind agreement not only because of the depth of the agreement, but also because of its scope. It is the first agreement in decades that brings together a large group of countries of varying size and level of economic development, and binds them to a set of high standard rules. Such an ambitious agreement naturally draws criticism that it will unfairly advantage certain countries, producers, or industries. Although the economic effects will vary depending on the size and composition of each economy, it is clear that on the whole, the TPP agreement will have a positive economic effect on its members.

This is demonstrated through recent quantitative analysis. The Peterson Institute for International Economics (PIIE) and the World Bank offer the most comprehensive studies so far. PIIE provides an in-depth analysis of the TPP text and uses a computable general equilibrium (CGE) model to forecast the effects on global growth and trade over the next fifteen years. Their results show that annual exports for TPP members will increase by $1.025 billion (11.5 percent), while inward foreign direct investment increases by $446 billion (3.5 percent) and real income by $465 billion (1.1 percent). [3] Research by the World Bank forecast the economic effects of the TPP over the same time horizon. Their modeling exercise shows an increase in GDP between 0.4 and 10 percent for TPP members, and an increase in exports between 5 to 30 percent by 2030. [4] Although each study uses different methodologies and varying assumptions, they both conclude that the benefits from tariff liberalization, streamlining non-tariff measures, and removing FDI barriers will have positive overall effects for member countries and limit possible negative spillover effects for nonmembers.

Beyond the quantitative payoffs from the TPP, the agreement has important structural implications for the global trade architecture. First, the TPP closes a number of “missing links” in the global FTA network. Second, it addresses the need for convergence among the overlapping FTAs already in place. Finally, it tackles the issues of updating the rules of the international trade game.

FTAs have proliferated over the past two decades and have created a vast network of bilateral and plurilaterals agreements that connect different trading partners and regions. Despite this progress missing links still exist between major developed economies (e.g., European Union (EU), U.S., and Japan), between key developing economies (e.g., Brazil, India, and China), and among developed and developing economies like the U.S. and EU with Brazil, China, or India. The TPP contributes to closing these gaps by bringing together two of the world’s foremost economic powerhouses: the U.S. and Japan. The importance of closing this gap is twofold. First, it brings trade and investment relations between the two countries under a formal, legal framework that establishes rules for more fair and effective trade practices. Second, it sets a precedent for future negotiations between countries that may not have pursued partnerships in the past due to perceived obstacles between themselves and their trade partners.

The TPP also connects important developed and developing countries (e.g., Mexico and Singapore), as well as developing countries with one another (e.g., Mexico and Vietnam). Making these connections is important given the shift in global trade patterns that has occurred during the last five to 10 years. During this time period emerging and developing countries (EDCs)—Asian economies in particular—have become increasingly important players in international trade, which has fueled an increase in the levels of North-South and South-South trade. For example, in 1990 South-South trade accounted for less than 5 percent of world trade; in 2013 it had grown nearly fourfold, and now makes up almost 20 percent of world trade. [5] Bringing trade relations between these regions into a formal framework like the TPP will not only create new market opportunities, it will also make trade transactions more efficient by streamlining policies and procedures.

The second structural issue affecting the global trade architecture is the increasing importance of global value chains (GVCs) in trade. GVCs fragment production across multiple actors, in multiple countries, and require multinational firms to delegate part of their production to foreign affiliates. This means that more and more firms are operating in a variety of countries than ever before. It also presents significant new opportunities for those countries, as it allows them to participate in one part of an international production network without having to build the entire supply chain domestically. At the same time, this structure of production highlights the need to streamline processes, and align rules and regulations. Multiple overlapping rules can impose additional trade barriers and unnecessary costs. For example, the existence of overlapping rules of origin (ROO)—the rules that determine the criteria for a good to be eligible for preferential treatment under a particular trade agreement—can deter companies from locating production in a certain country and affect the ability of firms to take advantage of preferential market access. This issue is especially acute under the current trading system, whereby a final good crosses multiple borders and goes through numerous stages of production before it reaches its final destination market. It is more important still under the TPP framework, where there is a large existing network of FTAs among members (see Table 1). Ten of the 12 countries have FTAs in place with at least half of the TPP members, and more than 80 percent of trade is already covered under these existing bilateral FTAs.

See Table 1 attached

TPP members agreed to a single set of ROOs and allow for regional accumulation. Under these rules inputs from one TPP member country are treated the same as inputs from another, which will expand the range of foreign inputs producers can use in their exports while still maintaining tariff preferences. This should incentivize producers in TPP member countries to integrate their production networks through value chains, which will boost intra-TPP commerce.

The final issue affecting the global trade architecture is the need to craft new rules to address the developments in the global economy that affect the way businesses trade. For example, advances in information and communication technologies are improving transportation and supply chain logistics by allowing precise monitoring of the movement of goods throughout the logistics chain, which makes supply chains significantly more connected and efficient. Similarly, the Internet of Things (IoT) and the advent of new technologies like cloud computing and 3-D printing are transforming trade by removing traditional barriers and creating new channels for trade by allowing previously untradeable products to be moved around the world. The ability to connect to new customers and trade products electronically means more and more businesses are entering foreign markets at very low costs, and exporting services that were once considered untradeable. These advances, however, require an update to the rules that govern international trade. The TPP has made significant inroads by including rules on electronic commerce, the promotion of small and medium-sized enterprises, stronger trade facilitation practices, and disciplines on services and investment.

Implications for LAC
The LAC members of the TPP will be able to widen their trade and investment ties in new key Asia-Pacific markets, as well as deepen economic ties with existing trade partners. Although Chile, Mexico, and Peru have a number of FTAs already in place with the other TPP members, significant gaps in the trade network existed. For example, prior to the TPP agreement, Mexico, and Peru had no FTAs in place with important Asia-Pacific players like Australia, Malaysia, and Vietnam. The TPP effectively closes these gaps and provides a channel through which LAC countries can upgrade their trade policies and practices, and create a framework for engagement beyond traditional trade areas. The PIIE and World Bank studies forecast similar export growth for LAC members over the next fifteen years. Peru is expected to see the biggest increase in its exports, around 10 percent by 2030, while Chile and Mexico should experience a 5 and 4 percent increase in their exports respectively.[6]

Increased engagement in Asia is particularly important for LAC countries given the growing trade ties between the two regions. What’s more, economic and demographic changes that have taken place throughout Asia over the past several years have resulted in a growing middle class with strong purchasing power and a rebalancing in some economies away from investment-led to consumer-led growth. This opens the door for LAC countries to access these new markets and potentially diversify their exports to the region. For example, Chile will be able to increase its market access share in Canada, Japan, Malaysia, and Vietnam, and build on its strategic advantages in the food (especially in agribusiness, dairy, and livestock) and forestry sectors, and allow Chile to diversify its export markets. In Mexico, the TPP presents new business opportunities for the manufacturing sector, especially in Australia, Brunei, Malaysia, New Zealand, Singapore, and Vietnam, and will help Mexico deepen market access in Japan. Sectors like electronic, automotive, agribusiness, chemical, steelmaking, perfume, and cosmetics stand to gain the most by preferential treatment. For Peru, the TPP will provide access to new markets in Australia, Brunei, Malaysia, New Zealand, and Vietnam, and expand existing economic relations with Japan and Canada, which represents a particularly important opportunity for their agricultural products. The TPP is also expected to boost Peru’s nontraditional exports in agribusiness, fishing, manufacturing, cotton, and alpaca clothing, as well as other manufacturing.

Beyond filling in the missing links between LAC countries and Asia-Pacific trade partners, the TPP also provides important convergence measures that will allow LAC members to deepen existing trade ties. In the context of the TPP, regulatory convergence is achieved through harmonization and accumulation of ROOs. The adoption of a single ROO should eliminate the patchwork of overlapping rules and allow producers to take advantage of the free trade zone. LAC members like Mexico and Peru could benefit from increased investment in their textile sectors, to upgrade facilities in order to boost trade with the U.S. This may also help countries’ efforts to upgrade their exports to higher value products in other industries and strengthen existing production chains. For example, business sectors in Chile have already identified potential competitive advantages in the metalworking sector, where Chilean companies could use parts and components from TPP member countries as inputs in their exports, thereby benefiting from the tariff preferences. In Mexico, producers will be able to further integrate Mexican-U.S.-Canadian production chains and strengthen the integration of U.S., Mexican, and Canadian production chains vis-à-vis Asian markets.

The agreement also presents a strategic opportunity for its LAC members to increase productivity and competitiveness. The TPP includes WTO-plus provisions that go beyond multilateral rules established in the WTO, in areas like electronic commerce, trade in services, rules on investment and intellectual property rights. Such standards will require Chile, Peru, and Mexico to undertake reforms, update rules and procedures, and invest in more value-added sectors. This will allow these countries to better compete internationally, and attract more businesses and investment to the region. This is particularly important for Peru and Chile whose exports are being hurt by the dip in the prices of commodities and the lower demand from China.

Non-TPP members in LAC will also be affected once the agreement is ratified. For example, the textiles and apparel sector in several Central American countries like the Dominican Republic and Haiti could see an impact on exports due to increased competition from Vietnam, the second largest textile and apparel exporter to the U.S. market. However, these effects are not likely to be as severe as some critics suggest. First, tariff phase-outs are scheduled over 12 years, and second, the agreements include a “yarn forward” rule, meaning not all Vietnamese exports will receive duty-free entry to the U.S. market. In addition, Central American exporters still have comparative advantages in geographic proximity to the U.S. and lower transportation costs. If Central American exporters invest in expanding and improving their production capacities, they can strengthen their competitiveness enough to deal with any surplus product from Vietnam. Additionally, the U.S. extended its Hope Program until 2025, giving exports of apparel from Haiti preferential access to the U.S. market, and provides a sort of adjustment assistance to producers. [7]

LAC’s biggest economic player, Brazil, is notably absent from the agreement. The country will likely face stiffer competition in Asian markets, where their exports will be competing against countries like the U.S., Canada, and New Zealand. Brazil could also face new barriers due to regulatory harmonization related to agricultural trade (sanitary and phytosanitary standards) included in the TPP. Other countries like Colombia, Costa Rica, and Panama would be natural additions to the TPP. Colombia is a part of the Pacific Alliance, whose other members are already TPP members, and has done a great deal of work to implement reforms to its trade rules and regulations and introduce new rules in new WTO-plus areas like financial services, trade facilitation provisions, movement of people, and rules on investment. Costa Rica and Panama are other promising candidates, as they have made progress in implementing trade and investment reforms, and expressed interest in becoming TPP members. The TPP agreement is considered a “living agreement” meaning it will, in theory, accept new members so long as they are willing to commit to the high standards of the agreement and address new issues as they evolve.

Implications for LAC Regional Integration
The TPP is an expansion of the Trans-Pacific Strategic Economic Partnership (P4) Agreement that included Brunei, Chile, New Zealand, and Singapore, and entered into force in 2006. In 2010, the agreement was expanded to include the U.S., Australia, Peru, and Vietnam. Collectively they formed the TPP. The addition of new members was part of an effort to expand the scale and scope of the P4 agreement, whose founding goal was to provide a high-quality vehicle for economic integration in the Asia-Pacific region and was designed so that other countries could be integrated later on. The TPP continued this vision by adding Malaysia during the third round of negotiations in 2010, Canada and Mexico in 2012, and Japan in 2013. It is therefore conceivable that once the TPP comes into force, it will continue to expand membership and create an eventual free-trade area of the Asia-Pacific. This would require bridging certain parallel regional trade initiatives that are in line with the TPP in terms of scope and long-term goals for integration.

The Pacific Alliance (PA) is an example of a forward-looking integration initiative whose goals are in line with the TPP. The PA is comprised of Chile, Peru, Mexico, and Colombia and focused on creating a modern, high standard agreement that reflects the current trade architecture and deepening integration by improving the efficiency of the existing network of FTAs through rules convergence. The PA has also prioritized “beyond the border” issues like the harmonization and convergence of rules and regulations that govern trade such as rules on investment, protection of intellectual property rights, and technical standards. Given the synergies between the two agreements, the PA could act as a building block toward the participation of its members in larger scale agreements like the TPP. For example, the PA negotiated a new ROO regime that allows for accumulation among all four members. The TPP agreed to a single set of ROO. Since three of the four PA countries are already members of the TPP, convergence between the two agreements should be feasible.

Mercosur is another important regional initiative that will likely be impacted by the TPP. Unlike the PA, none of the six members of Mercosur (Argentina, Bolivia, Brazil, Paraguay, Uruguay, and Venezuela) are part of the TPP. Exports from Mercosur countries may be negatively affected by the TPP. Mercosur members like Argentina and Brazil export a significant amount of goods to TPP countries—mainly the U.S., Chile, and Japan. Once the TPP enters into force, Mercosur exporters could be displaced from these markets if they do not comply with the new regulations or cannot meet new standards. More broadly, since international trade of intermediate goods accounts for an increasingly greater share of global trade, the harmonization of regulatory rules, simplification of ROOs, and increased customs efficiency generated by the TPP will have a significant positive impact on trade in intermediate goods. Therefore, Mercosur would face some challenges since the formation of production chains could tilt in favor of Asian markets and companies from TPP countries.

Aside from seeking future membership in the TPP, Mercosur could consider ways in which they can cooperate with the PA initiative. There is already a good degree of overlap between the PA and Mercosur. All four PA members have agreements in place with Mercosur, and both Mercosur and PA countries (with the exception of Mexico) are members of the Union de Naciones Suramericanas (UNASUR),which integrates Mercosur and Andean Community customs unions; as well as members of the Iniciativa para la Integración de la Infrastructura Regional Suramericana (IIRSA), which integrates LAC through the development of transportation, energy, and telecommunication projects. The two blocks should build off of this groundwork and find new ways to promote deeper integration, which in turn could be a stepping stone towards greater participation of Mercosur countries in the international trading system.

The elephant in the room: China
It should be noted that the TPP does not include China; the largest economy in Asia and the second largest in the world, and an increasing key trade partner for the LA region. China was invited to join the TPP back in 2012; however, no progress was made due to an impasse on required reforms in the areas of IPR, internet and government regulations, environmental and labor standards, and the role of state-owned enterprises. It remains to be seen how China will position itself once the agreement enters into force. China has trade agreements with 15 countries in the Asia-Pacific region, including half of the TPP members (Australia, Brunei, Chile, New Zealand, Peru, Singapore, and Vietnam), which gives them some advantages similar to those in the TPP. On the other hand, China could take a more proactive role in the region in order to continue to influence the standards and rules for trade and investment, and avoid losing market share due to the more dynamic trade linkages generated by the TPP.

Timeline for ratification
Before the TPP can enter into force, the signatory countries must first ratify the agreement, meaning the agreement must go through the respective legislative approval process in each country. Undoubtedly, many countries will be watching the ratification process in the U.S., the largest economy in the agreement. The TPP was negotiated by the U.S. using “fast track” authorization by Congress, which means the agreement can be passed by an up or down vote, but cannot be altered. Once the president has notified Congress of its intention to sign the agreement, it will have 90 days to consider it. Congress is expected to consider the adoption of TPP in the first half of 2016. The legislative process will be influenced by the political situation, marked by the 2016 U.S. presidential campaign.

Conclusion
Given the current state of the international economy, characterized by sluggish growth, the TPP represents a positive step forward and demonstrates the willingness and ability of countries to work together to implement reforms, deepen integration, and keep trade liberalization moving forward. Given the large potential impact of the agreement—both the scope of its rules and the scale of the economies involved—the TPP represents a new global standard in the rules that govern international trade and will undoubtedly impact future deliberations at the multilateral level.

For LAC, the TPP represents an opportunity to implement reforms and make the investments need to boost competitiveness, overcome the challenges of an increasingly integrated global economy, and take advantage of new international trade opportunities. To do this, governments must work together with the private sector to ensure coordinated efforts and improved communication on existing and future opportunities. When the global economy is back on a track of sustained growth, the countries in the region that have successfully implemented reforms and created effective mechanisms for dialogue and partnership with the private sector will be better positioned to compete internationally and reap the benefits from increased trade and economic growth.

The views expressed in this paper are strictly those of the author and should not be attributed to the Inter-American Development Bank, its executive directors or its member countries. Other usual disclaimers also apply.

[1] Although the agreement has been signed, it will not go into force until at least six countries that account for 85 percent of the combined GDP of the twelve TPP countries ratify the agreement.

[2] This includes Brunei, Myanmar, Norway, Ukraine, Vietnam and Zambia. The TFA will enter into force once two-third of WTO members ratify the agreement. To see a complete list of countries that have ratified the TFA go to http://www.tfafacility.org/.

[3] “Assessing the Trans-Pacific Partnership Volume 1: Market Access and Sectoral Issues,” PIIE Briefing 16-1, Peterson Institute for International Economics, February 2016. http://www.iie.com/publications/pb/pb12-16.pdf.

[4] “Potential Macroeconomic Implications of the Trans-Pacific Partnership,” Global Economic Prospects, the World Bank, January 2016. http://www.worldbank.org/en/publication/global-economic-prospects/GEP-Jan-2016-Implications-Trans-Pacific-Partnership.

[5] Information System of Trade and Integration (INTrade). “Statistics and Indicators.” Washington: Inter-American Development Bank. http://www10.iadb.org/int/intradebid/?lang=ing.

2014; and World Integrated Trade Solutions (WITS). “Trade Data (UN Comtrade).” Washington: The World Bank. 2015. http://wits.worldbank.org/WITS/WITS/AdvanceQuery/RawTradeData/QueryDefinition.aspx?Page=RawTradeData.

[6] PIIE (2016) and World Bank (2016).

[7] The Hemispheric Opportunity for Partnership Encouragement (HOPE) Program allows duty-free treatment for certain apparel wholly assembled, knit, or knit-to-shape in Haiti, using yarns and fabrics from any country.

For more on this story go to: http://www.brookings.edu/research/opinions/2016/03/09-tpp-latin-america-caribbean-estevadeordal

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