After five years and 19 formal rounds of negotiations, the Trans-Pacific Partnership (TPP) was finalized in October 2015 by representatives of the United States and 11 other nations. The comprehensive, 30-chapter document aims to lower trade barriers and create a rules-based trading system for TPP nations, which represent about 40% of the world’s total gross domestic product.1
In addition to the United States and its neighbors, Canada and Mexico, other TPP countries are Australia, Brunei, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, and Vietnam. The TPP is the largest trade deal in history, and the most significant since the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994.2
The TPP must still be ratified by lawmakers in all 12 countries, and is likely to face plenty of opposition in the U.S. Congress. The president has already gained congressional approval for trade promotion authority, which allows the White House to present the TPP to Congress for an up-or-down vote, without amendments. Many details of the trade package are still hazy, however, and it could be many months before Congress votes on whether to approve the deal.3
A Template for Trade
U.S. trade officials say the ambitious accord will open new markets for American products and set higher standards for worker and environmental protections, intellectual property, investment, and competition (including requirements for state-owned enterprises). The TPP also addresses new 21st-century issues such as e-commerce and cross-border Internet communications.4
The TPP is written so that other Asian countries, such as South Korea or even China, could join the pact later. China was not involved because leaders have not been willing to open up their economy to outside competition or meet other requirements, such as financial sector reform.5–6
The United States is already a fairly open market, with 80% of goods from TPP countries entering duty-free and tariffs averaging only 1.4%. Thus, the TPP strives to level the playing field for U.S. manufacturers, farmers, and ranchers by making 18,000 tax cuts on a wide range of U.S. exports.7
The Peterson Institute for International Economics estimates that if the TPP is implemented, China stands to lose an estimated $100 billion a year in exports as TPP countries trade more among themselves and less with China, and that U.S. income (adjusted for inflation) could rise by around $77 billion per year starting in 2025.8–9
Sticking Points
The following issues in three major industries complicated negotiations between TPP parties but were ultimately resolved.
Automobiles. Under NAFTA rules, 62.5% of a vehicle’s content must be produced in the region to avoid import tariffs. Some countries wanted the TPP requirement to be at least 60%, but Japan was demanding 40%. Negotiators ultimately settled on a level of 45% per vehicle.10
Biologic drugs. The final agreement protects brand-name drugs from generic competition for five to eight years, which is less than the 12-year exclusivity period the biotech industry enjoys in the United States, but more than the time frame currently observed by many TPP countries.11
Agriculture. The deal expands market access for U.S. livestock producers, simplifies inspections for fruits and vegetables, and lowers taxes for many types of farm goods. Canada also agreed to open access to a small portion of its highly protected dairy and egg market.12
Labor organizations and others who oppose TPP say it paves the way for employers to move more U.S. jobs and factories to low-wage nations, while others argue that lost jobs will be replaced by higher-paying positions in more competitive U.S. industries. In some TPP countries, there are still concerns that the patent protections could lead to higher prices on medicine.13
Economic Power Play
Why has the United States taken such a strong leadership role in crafting the TPP? The president and U.S. trade officials contend that the TPP offers critical strategic benefits. If ratified, the pact could have a far-reaching impact on global trade and future trade agreements.
Closer ties with key trading partners could help the United States compete with China and counter its growing economic influence in the region. As China pursues separate agreements around the world, the TPP also provides an opportunity to shape the future of global commerce in ways that are consistent with U.S. interests and values. TPP rules and standards could even push China toward reforms that help it transition to a market-driven economy.14
1–2) Bloomberg Businessweek, October 8, 2015
3, 5) The New York Times, August 1, 2015
4, 7) Office of the United States Trade Representative, 2015
6, 11, 13–14) The Wall Street Journal, October 5, 2015
8) The Wall Street Journal, November 2, 2014
9) Peterson Institute for International Economics, 2015
10, 12) Bloomberg News, October 5, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.
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