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On Monday, to much fanfare, the United States, Japan, Canada, Australia, and 8 other nations on both sides of the Pacific concluded a “mega” free trade agreement, the Trans-Pacific Partnership (TPP). On some measures this trade deal is the largest ever outside of the World Trade Organization (WTO)—it is said to “cover” 40% of the global economy. The deal, whose detailed terms have yet to be released, also addresses important trade-related matters such as policies towards intellectual property, state-owned enterprises, and use of local parts, components, labour, and the like.

At this early stage, what are the implications for economies outside this new exclusive club? Should they (a) keep calm and carry on, (b) panic, or (c) revisit their trade strategies towards the WTO and free trade agreements?

Keep Calm and Carry On?

Some business associations, analysts, and trade negotiators will fret that firms based outside the TPP free trade zone will lose out. Quite frankly, at this stage no one can know for sure how large those losses will be—but why let such details get in the way? These players will pile on pressure on governments to engage in trade talks in the World Trade Organization (WTO) and elsewhere. Some will argue that outsiders should seek to join the TPP or form alternative trade groupings. Trade deals can deliver important benefits-but they are increasingly controversial, so it’s better to think first and then act. When formulating a response, outsiders should keep the following considerations in mind.

First, any TPP deal will have to be ratified by national parliaments and then implemented before it really starts having an impact. If previous agreements are anything to go by, the changes won’t be implemented overnight. According to some press reports, the US will phase out its tariffs on imported cars over a 25 year time horizon! In which case, outsiders’ exporters won’t face abrupt competitive threats, so they and their governments will have time to devise proper plans. There is some evidence that firms alter investment plans in advance of ratification but this effect should not be overdone.

Ratification of TPP needn’t be smooth and will certainly run into the electoral timetables and legislative constraints in certain key members, such as Australia, Canada, Japan, and the United States. Most attention will focus on the US, where the immediate reaction reported in the press was strikingly unbalanced. Opponents to the deal were well organised. Not a single Republican or Democrat member of Congress publicly backed the deal, at least not in the reports of the major international newspapers. This silence is deafening. Despite this, given President Obama or his successor are likely to point to the geopolitical benefits to the US of the TPP, ultimately some version of the deal is likely to be enacted.

Table 1: Many imports into the larger TPP members haven’t faced tariffs for years

TPP member	Percent of imported merchandise goods where TPP member gave up tariffs after Uruguay Round	Percent of imported agricultural goods where TPP member gave up tariffs after Uruguay Round
Australia	18.8	31.3
Canada	35.8	46.1
Japan	55.9	34.1
USA	47.4	30.2

Source: WTO World Tariff Profiles 2014.

 

Beware the Numbers Game

Second, beware of the large numbers being bandied about. The 12 members of the TPP may well account for 40% of the world’s economy, but much of their trade won’t be affected by this deal. Long ago at the WTO Japan gave up the right to use tariffs on 55% of the manufactured goods its imports. For America, the corresponding percentage is 47% (see Table 1). This means that for exporters to the two largest TPP economies—whether inside or outside this new free trade zone—will continue to pay zero tariffs on a wide range of products. The amount of trade where competitive conditions change markedly is likely to be much smaller than the 40% headline figure implies. It’s a mistake to evaluate TPP’s impact without taking into account the low levels of tariffs locked in via WTO agreements (and, for that matter, a bevy of other factors).

Likewise, no doubt some will throw around the quarter-of-a-trillion dollar figure. This relates to the estimate in several high profile studies of the impact on worldwide GDP of TPP’s implementation. It is worth noting that this estimate relates to the impact on the global economy 10 years from now (not now).

Table 2: TPP inflicts small losses on outsiders

TPP Outsider	Loss in GDP (2007 US$ billion)	Loss as % of GDP	Number of days of economic growth needed to make up loss
China	-34.7	-0.2	11.2
India	-2.7	-0.1	2.7
Indonesia	-2.2	-0.1	11.3
Korea	-2.8	-0.1	18.1
Thailand	-2.4	-0.1	63.6
Russia	-1.4	0.0	N.A.*
Europe**	-3.7	0.0	3.5

Sources: For second and third columns see figure 2.5 of http://www.pecc.org/state-of-the-region-report-2014/265-state-of-the-region/2014-2015/595-chapter-2-can-rcep-and-the-tpp-be-path-ways-to-ftaap . To calculate the data in the fourth column the GDP growth forecasts from this week’s World Economic Outlook were used along with the baseline GDP reported in the source for columns two and three.

 

In terms of adverse impact on outsiders’ national incomes, even by 2025 these are estimated to be only 0.2% of Chinese GDP, 0.1% of Indian GDP and less than 0.1% of EU GDP. Such estimates hardly imply a large defensive interest in joining the TPP.

Moreover, seen in terms of the growth of their economies, the losses from being outside TPP are minor. Using the forecasted 2015 growth rates published this week by the IMF, it is possible to calculate how many days of economic growth an outsider economy would need to sacrifice to make up the losses resulting from the creation of the TPP. Even in slow growing Europe (where the real GDP of “Europe” is forecasted by the IMF to grow by only 1.9% this year) it takes just over three days of growth to compensate for being outside the TPP.

In India, where growth this year is expected to be an impressive 7.3%, in just 64 hours its economy will grow enough to make up for TPP-inflicted losses. Consequently, any temptation by New Delhi to shrug off the TPP won’t be too hard to understand. For China and Indonesia, where expected growth rates are slower, still less than two (out of 52) weeks of growth are needed to compensate for being outside the TPP club. Interestingly, the number of days of economic growth needed for Korea and Thailand to make up TPP-related losses are higher and may well account for both countries reported willingness to eventually join this club.

Now, these estimates of TPP’s impact should not be taken too seriously—after all, they were computed before the details of the TPP deal were known. Still, they don’t imply that many outsider economies—in particular, the larger outsiders—are about to fall off a cliff because they weren’t admitted to the TPP club.

So what should outsiders do?

In addition to undertaking a fact-driven as opposed to a fear-ridden assessment of TPP’s impact, the creation of this mega-free trade zone provides an excellent opportunity to revisit reform plans for the national business environment and the role that binding trade deals can play in supporting national development strategies. I deliberately distinguished between reforms and trade deals because, while they are related, the case for each is different.

The case for a transparent, predictable, and competitive business environment is well established. Much economic orthodoxy has been questioned in recent years, but not this. For sure, imperfections exist in every economy, but the general direction of desired reform is pretty clear—even if the politics of reform are considerably harder to manage.

What’s relevant for trade negotiations, however, is whether it is worth binding reforms. If the experience of the past 15 years is anything to go by, it’s the reluctance to bind that’s the real sticking point for many governments. After all, many of the recalcitrants in the Doha Round of multilateral trade negotiations have undertaken economic reforms. So one way of looking at the TPP is to ask: will the TPP demonstrate that binding pays?

Business people argue, quite plausibly in my view, that too much policy-induced uncertainty deters investment and trade flows. At some point if bindings curb uncertainty in ways that the private sector finds useful then this should manifest itself in the data and up-to-date numbers can be put on the value of governments tying their hands in trade deals.

The TPP is often marketed as a 21^st century trade deal that reaches well beyond borders into national regulations. Quite frankly, on behind-the-border measures the evidential base on the benefits of bindings is weaker. For far too long trade negotiators have been ahead of the available analysis. In which case the TPP can serve the following useful purpose: Outsiders can see if the TPP really delivers and decide accordingly. Rather than fear the TPP, learn from it.

* For 2015 Russian economic growth is forecast by the IMF to be negative.
** The source for these estimates of TPP’s effects refers to “Europe” not the European Union.

An abridged version of this note was published by the Financial Chronicle on 7 October 2015.

Simon J. Evenett is a member of the E15 expert groups on Competition Policy, Regional Trade Agreements, and Global Value Chains. He is Professor of International Trade and Economic Development, University of St. Gallen, Switzerland; Co-Director of the CEPR International Trade and Regional Economics Programme (the most established group of international trade researchers in Europe), and Coordinator of the The Global Trade Alert, the independent trade policy monitoring service.

Tag: Functioning of the WTO, Mega-regionals, Negotiations, Regional Trade Agreements, Tariffs, Trans-Pacific Partnership