5 Risks Associated with the Trans Pacific Partnership Deal

The Trans Pacific Partnership (TPP) is designed to promote trade between 12 countries; Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The TPP aims at trade liberalization in goods and services, including the reduction of over 18,000 specific tariffs. Of particular interest to the U.S. are the reduction of tariffs on agricultural products, lower barriers in services, and intellectual property (IP) protections. Despite the benefits of access to new markets and increased trade, there are still risks associated with the TPP.

By Dan North, Chief Economist at Euler Hermes North America

Risk 1: Little economic benefit to the U.S. Of the 11 other countries in the TPP, the U.S. already has free trade agreements with six of them. Of the remaining five, Brunei, Japan, Malaysia, New Zealand and Vietnam, only Japan represents a significant market at 7% of global GDP, and the remainder represent only about 1% of global GDP combined. Therefore the size of the potential new markets for the U.S. is rather small, as will likely be the economic benefit. That’s why the TPP is actually meant to be a strategic agreement which will cement U.S. trade ties to Asian countries, thus keeping China from dominating trade in the region.

“The bill seems unlikely to come up for a vote until at least after the 2016 elections. Depending on the outcome of the elections, the TPP may never be passed.”

Risk 2: Increased competition in some industries. Under the TPP, some industries may come under pressure. For example, autos parts makers in the U.S. and Canada may face tougher competition. Under NAFTA rules, auto parts had to have at least 60% North American content to qualify as duty free, but under TPP that threshold has been reduced to a range of 35%-45%, opening new markets to lower-cost manufacturers.

Risk 3: Currency manipulation. The TPP could subject U.S. trade to countries that manipulate their currencies to gain competitive advantage. In theory a country could artificially hold down the value of its currency to make its exports more competitive and imports from the U.S. less competitive, just the opposite of the level playing field a trade agreement should promote. The TPP does not include any sanctions for currency manipulation, although the U.S. may try to argue for a side deal to create protections against it.

Risk 4: A host of smaller risks. Many specific measures in the TPP carry risks. Some of these measures include: longer pharmaceutical patents which will quell generics, keeping prices high; intellectual property rights that could lead to Internet restrictions; lowering of standards on imported food; an investor-state resolution system which would allow foreign corporations to sue the U.S. government; downward pressure on U.S. wages; and many more unknowns risks—the TPP is thousands of pages long.

Risk 5: Passage. The TPP is unloved by large swaths of the public, the U.S. Congress, and about half of the presidential candidates. Among many other criticisms, opponents blame prior free trade agreements such as NAFTA for destroying millions of American jobs. The bill seems unlikely to come up for a vote until at least after the 2016 elections. Depending on the outcome of the elections, the TPP may never be passed.

Dan North is Chief Economist at Euler Hermes North America


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