The Big Three of the TPP

On October 5, after 10 years of negotiations, 12 Pacific Rim countries that account for a combined 40 percent of global GDP agreed to a sweeping trade deal called the Trans-Pacific Partnership (TPP). The final text of the agreement isn’t public yet, but it appears that it would eliminate a large number of tariffs on goods and services, require state-owned enterprises to obey international trade laws, set stricter environmental and labor standards, and establish international tribunals to settle disputes between businesses and nations over laws that corporations see as unfairly restrictive. It’s now up to the legislatures in participating countries to approve the deal – and in places like the United States, where the treaty is controversial, that promises to be more than a mere rubber-stamp exercise. If the agreement does take effect, however, Credit Suisse economists believe it will have mixed economic effects on the countries involved and potentially significant consequences for one that is conspicuous by its absence.

The U.S.

Jay Feldman, a U.S. economist at Credit Suisse, cites research that estimates the TPP would only increase American GDP 0.2 percent by 2025. After all, the U.S. already has free-trade agreements with six of the 11 other participating countries – Australia, Canada, Chile, Mexico, Peru, and Singapore.

Japan

The same research that predicts only a slight increase in GDP for the United States anticipates a bigger boost for Japan—1 percent of GDP—but Credit Suisse’s chief Japan economist Hiromichi Shirakawa believes that may be overly optimistic. Japan’s Cabinet Office says GDP would only increase by 0.66 percent if all import tariffs disappeared, and some would remain in place under the TPP. Lifting Japan’s import taxes on food products such as beef and pork would reduce overall consumer prices by 0.075 percent a year. That might encourage consumers to spend a little bit more freely, but not enough to send GDP soaring.

The TPP also wouldn’t lift net export levels. Japanese manufacturers of transportation equipment and electrical machinery would benefit the most from the trade agreement, as they face high tariffs on exports to the U.S. and the rest of Asia. Removing tariffs in these industries could increase Japanese exports by some ¥1.6 trillion ($13.35 billion) each year, according to Credit Suisse, but getting rid of Japanese tariffs on agricultural products, medical equipment, and pharmaceuticals would more than offset the export gain, increasing imports by some ¥1.7 trillion ($14.19 billion). All told, Shirakawa expects the TPP to lift Japan’s GDP by just 0.06 percent.

The Remaining 10

Of the 10 other countries in the partnership, Malaysia and Vietnam stand to benefit the most, with a potential GDP boost of 5.5 percent and 10.4 percent, respectively, by 2025.

New Zealand, Peru, and Singapore all stand to see GDP rise by between 1 and 1.5 percent (1.3 percent, 1.2 percent, and 1.4 percent, respectively). Australia (0.3 percent), Brunei (0.9 percent), Canada (0.3 percent), Chile (0.7 percent), and Mexico (0.5 percent) would see economic growth increase less than 1 percent, according to the study.

For small economies such as Malaysia, Vietnam, and Peru, the potential benefits are relatively large because they would gain preferential access to the enormous U.S. market, according to the Peterson Institute for International Economics. Vietnam, for example, already accounts for 34 percent of U.S. apparel imports, and the country’s low-cost clothing and footwear manufacturers stand to gain an even greater toehold when tariffs are eliminated. New Zealand’s dairy farmers will likewise benefit from being able to export tariff-free to Canada, Japan, Mexico, and the U.S. Meanwhile, Canada and Mexico already have free-trade agreements with (and proximity to) the U.S., and thus have less to gain from the treaty than some of their smaller peers.

China

The treaty does have important economic consequences for a country that didn’t take part in the talks: China. Credit Suisse’s Head of Non-Japan Research Dong Tao says Chinese goods will become less competitive in Asia, Latin America, and North America if the treaty goes into effect, since they will still be subject to tariffs that the TPP will eliminate for signatory countries. China stands to become a less attractive destination for foreign direct investment for the same reason, Tao notes. The sheer size of the agreement means China would also likely have to abide by the TPP’s trading rules on issues such as environmental and labor standards, with no power to influence them.

Theoretically, China could solve these problems by joining the TPP, as five other countries (Colombia, Indonesia, the Philippines, South Korea, and Taiwan) have already asked to do. But the treaty sets up too many difficult requirements for that to be practical, including a freely convertible currency and strong intellectual property protections. China has tried to make an end-run around the agreement by signing free-trade deals with Australia, Korea, Japan, and Singapore in recent years, but without the U.S., China’s biggest export market, these smaller agreements don’t add up to the TPP. Since the agreement comes at a time when economic growth is already slowing, Chinese politicians are likely to take action to stay competitive – and one of the only options available to them is further devaluing the currency. Tao believes the treaty has made that scenario much more likely.

China’s exclusion from the multilateral treaty achieves certain geopolitical goals for the U.S. and some of its Asian allies, who want to temper China’s growing influence in the region. If the Trans-Pacific Partnership comes to fruition, the geopolitical ramifications may be more profound than the economic ones – particularly for the United States.