What Does the TPP Mean for Latin America and the Caribbean?

January 4, 2016

On October 5 the twelve members of the Trans-Pacific Partnership Agreement (TPP) announced the conclusion of negotiations. Together, the member countries (Australia, Brunei, Canada, Chile, United States, Japan announced, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) account for 40% of global GDP, 26% of international trade and 10% of the global population. The agreement includes not only traditional measures such as the reduction or elimination of tariffs, but also issues of regulatory coherence, competitiveness, trade facilitation, support for small and medium sized enterprises (SMEs), investment promotion and trade in innovative services (including digital technologies), higher sanitary and phytosanitary standards, labor and environmental rights, the protection of intellectual property, government procurement, and telecommunications, among others. 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).

 

In recent years, the Asia-Pacific region has become a key engine of global economic growth, and the eventual entry into force of the TPP will have important implications for Latin America and the Caribbean (LAC). On the one hand, the TPP provides a good opportunity to expand trade and investment links to the participating economies, enhance the role of the private sector in LAC’s dynamic supply chains, and links to Asian production chains. On the other hand, the TPP presents significant challenges for the region since it will require reforms and investments needed to strengthen the competitiveness of LAC economies, and allow them to take advantage of opportunities presented by the agreement.

 

Opportunities and challenges for countries in the region

In the case of Chile, the TPP could allow the country to increase its share of market access to Canada, Japan, Malaysia and Vietnam, building on its strategic advantages in the category of food (especially in the agribusiness, dairy and livestock sectors) and the forestry sector. In addition, Chile could diversify its exports by taking advantage of the rules of origin agreement. Indeed the business sector in Chile has already identified potential competitive advantages, for example, in the metalworking sector where Chilean companies could use parts and components from TPP member countries as inputs in their exports, thus benefiting from the tariff preferences. Additionally, the TPP may facilitate the diversification of markets for Chilean fruit exports, a sector that also would benefit from a more robust mechanism to address disputes related to phytosanitary barriers.

 

For Mexico, the TPP represents new business opportunities for the manufacturing sector, especially in Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam, as well as deepen market access preferences in Japan. In that sense, thanks to TPP Mexico hopes to increase its exports by 150,000 million dollars over five years. The sectors that stand to gain the most include: automotive; electric; electronics; agribusiness; chemical; steelmaking; perfume and cosmetics. Moreover, the TPP would strengthen the integration of production chains of the US, Mexico and Canada vis-à-vis the Asian market.

 

With regard to Peru, the TPP would expand access to five new markets where there was no existing trade agreement (Australia, Brunei, Malaysia, New Zealand and Vietnam). The agreement would also deepen Peru’s preferential market access to Japan and Canada, which represents a particularly important opportunity for their agricultural products. Moreover, TPP is expected to boost Peru’s non-traditional exports in agribusiness, fishing, manufacturing, cotton and alpaca clothing, as well as miscellaneous manufacturing.

 

The TPP may also have an impact on non-TPP members in the LAC region. Several Central American countries, and also the Dominican Republic and Haiti, could see an impact on one of its main exports (textiles and apparel) due to increased competition from Vietnam, the second largest textile and apparel exporter to the US market. However, the effects on the Central American market will not be as severe as many critics say. First, the agreement will likely have a very long phase-out schedule for tariffs (12 to 15 years). Second, if the TPP does include a yarn forward rule (most commonly used in US FTAs), not all Vietnamese exports will receive duty-free entry to the US market. In addition, Central American exporters still have comparative advantages in geographic proximity to the US 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. In the case of Haiti and the Dominican Republic specifically, the US government recently extended the ‘HOPE’ program until 2025 by which textile exports from these countries will continue to benefit from the trade preferences granted by the program.

 

The participation of the Mercosur countries in Asian markets could face major challenges because the TPP includes some highly competitive countries (like the United States, Canada and New Zealand) with competing exports in the region. In addition, Mercosur could face new barriers due to regulatory harmonization related to agricultural trade (sanitary and phytosanitary standards) included in the TPP. More broadly, since international trade in intermediate goods accounts for an increasingly greater share of global trade, the harmonization of regulatory rules, simplification of rules of origin, increased customs efficiency and other cooperative initiatives will have a significant and positive impact on trade in intermediate goods. If Mercosur does not consider participating in this initiative at some point in time, the formation of production chains could tilt in favor of Asian markets and companies from TPP countries.

 

Meanwhile, countries such as Colombia, Costa Rica and Panama have expressed interest in joining the TPP. While plausible, it is unlikely to happen in the near future. While not an official requirement, all TPP members are members of the Asia-Pacific Economic Cooperation (APEC), and have expressed that the new accessions will initially focus on other APEC members. In addition, Colombia, Costa Rica and Panama have trade deficits with major Asian economies (China, Japan and Korea), therefore entry into TPP may incur an additional challenges, for which the countries must adequately prepare. However, these efforts could be offset by the new market opportunities that arise to as regional supply chains become more integrated.

 

Timeline of ratification in the United States

Before the TPP can enter into force, the agreement must first be ratified by the signatory countries, meaning the agreement must go through the respective legislative approval in each country. Undoubtedly, many countries will be watching the ratification process in the United States, the world’s largest economy. The TPP was negotiated by the United States using “fast track” authorization by Congress, which means the agreement can either be voted up or down, but not 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 presidential campaign taking place in late 2016.

 

The elephant in the room

It should be noted that the TPP does not include the largest economy in Asia and the second largest in the world, China. While China initially was invited to join the TPP, no progress was made due to needed reforms in intellectual property rights, 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 as 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) allowing them some advantages similar to those in the TPP. On the other hand, China could seek to have 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.

 

Conclusions

Given the current state of the international economy, characterized by sluggish growth, the TPP represents a positive step forward and demonstrates the ability and the will of countries to work on deepening integration. This is critical to increasing confidence in the private sector, which will promote greater economic growth and increased competitiveness. Given the large potential impact of the agreement – both the scope of its rules and the scale of economies involved – the TPP represents the a new global standard in the rules that govern international, and will undoubtedly impact future deliberations of the Doha Round.

 

The TPP is a dynamic agreement, and it requires LAC countries to redouble their efforts to adopt reforms and make the necessary investments to take advantage of international trade opportunities and overcome the challenges of an increasingly integrated global economy. To do this, governments must work together with the private sector to ensure coordinated action and better flows of information 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, created e effective mechanisms for dialogue and public-private partnerships will be better positioned to compete internationally and maximize the benefits of economic growth.

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Antoni Estevadeordal is the Manager of the Integration and Trade Sector at the Inter-American Development Bank (IDB). A Spanish citizen, he has expertise in trade policy, economic integration and regional cooperation policies in Latin America and the Caribbean, Asia and Europe. Since joining the Bank in 1993, he has contributed to multiple Bank strategies and operations, in particular in the design of new programming instruments and financial products to support trade development and regional integration initiatives. He was responsible for IDB technical assistance to the FTAA process from 1995 to 2000. He has coordinated the Bank’s policy research program on trade and integration issues as well as several joint initiatives with the WTO, WCO, ADB, EU, OAS and UN agencies, among others. Before joining the IDB he taught at the University of Barcelona and Harvard University. He holds a Ph.D. in Economics from Harvard University and a B.A. in Economics from the University of Barcelona.

 

Topics: TRANS-PACIFIC PARTNERSHIP (TPP)

Agreements: EUROPEAN UNION-ASEAN FTA

Regions: ASIA-PACIFIC

Authors: ANTONI ESTEVADEORDAL

RTA

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