What the Pacific-Rim Trade Deal Means for Your Business
As the 12-nation Trans-Pacific Partnership (TPP) is signed today, it’s worth taking a look at how the deal will affect both Americans and U.S. businesses alike, and the model it’ll provide for future trade agreements.
The TPP breaks the mold of past trade agreements in several respects, and not just by its size—weighing in at over 6,000 pages and covering the trade and investment of countries accounting for nearly half of the world’s economic output.
Never has an agreement provided for so much of world trade in goods to move free of duties. But the TPP does. For some products, this will take place over a period of years, but for most, it will occur immediately upon entry into force. For American businesses, where the foreign tariff was high (often in an emerging market like Vietnam), this provides fresh opportunity to gain market access. But even where the tariff is already low, if companies are operating in a low-margin business, they’ll have an edge competing with products from non-TPP countries.
For the first time, cross-border trade in services is required to be open to the companies of other signatories, unless a specific exception is taken in the agreement (and those exceptions are explicit and limited). This is a dramatic change. America is highly competitive in the services sector, with an annual trade surplus in excess of $200 billion.
The TPP forbids forced localization of data storage in almost all cases, which a number of countries outside of the deal have moved toward doing. This is vitally important. Modern commerce depends very heavily on the free flow of data across borders. It is impractical for even large businesses to store data in each country in which they bought or sold goods or services. For small and medium-sized businesses, this type of requirement could stop their participation in international trade altogether.
The TPP will smooth the way for goods that originate and are processed in the region to move duty-free through the stages of production throughout the TPP member economies. This is essential to current world trade, which is characterized by supply chains that stretch across borders. Many American businesses—from apparel to smart phone companies—depend on international supply chains to maintain their international competitiveness.
Private business is at a serious disadvantage when competing against governments. State-owned enterprises (SOEs) are a growing—not a shrinking—phenomenon. But for the first time, a broad international agreement will require SOEs to buy and sell on a commercial basis. Public disclosure is to make these entities far more transparent, and government bureaucrats will be forbidden from exercising their discretion to discriminate in favor of their government-owned national champions. And for the first time, a remedy is provided to act against a state enterprise that invests in a foreign market (such as the U.S.’s) using subsidies to gain market share at the expense of privately owned companies. Several TPP countries credit the TPP provisions with providing helpful external leverage to increase the role of the private sector in their economies, both to their benefit and to the benefit of their trading partners.
New restrictions on e-commerce are barred. Encryption regulation (necessary for confidentiality of business as well as private communication) is not to be used as a means of limiting trade or as an excuse for forcing technology transfer. This is one of the key provisions that makes the TPP a 21st-century agreement. Because the World Trade Organization’s rules were crafted over 20 years ago, they do not adequately address current challenges to international trade and investment.
Investors will receive enhanced protection through mandatory arbitration without any sacrifice of governments’ abilities to protect public health, safety, security, or the environment. One of the major benefits of this modern trade agreement: It expands the rule of law and provides due process to Americans engaged in international commerce.
The TPP places special emphasis on smoothing the way for small and medium enterprises (SMEs) to participate in international trade. In chapter after chapter, the TPP simplifies the process of providing goods and services across borders, making maximum use of the Internet for easy access to information on foreign government requirements. There are 28 million small businesses in the United States, and they’re providing the majority of American jobs. With e-commerce and the TPP, it will be far more feasible for these companies to expand into export markets—not just as second and third-tier suppliers to large multinationals—but especially through direct sales.
There is significant new increased access for numerous agricultural commodities, as food safety standards are to be science-based and implemented in a transparent, predictable, and nondiscriminatory manner and tariffs are to be lowered. U.S. agriculture is a major driver of exports—$150 billion annually, despite facing enumerable barriers abroad. The TPP will provide new foreign market access for farms across the country.
But signing the TPP is not the final step in opening Asia-Pacific trade and investment. Governments must act to ratify the agreement. Malaysia has already done so and Japan is expected to do so in the spring. The Obama Administration and Congress are working actively to solve remaining issues with Congress to agree on the necessary legislation to approve and implement the deal. Without the participation of the United States and Japan, the current agreement cannot enter into effect. With legislative approval, a large part of American business will be given major new export opportunities.
For the country as a whole, the Peterson Institute for the International Economics estimates that TPP will raise “annual real incomes in the United States by $131 billion, or 0.5% of GDP, and annual exports by $357 billion, or 9.1% of exports, over baseline projections by 2030, when the agreement is nearly fully implemented” with a consequent rise in U.S. wages. Even though the U.S has a very large economy, the prospective gains will be very substantial.
Alan Wm. Wolff is Chairman of the National Foreign Trade Council and a Senior Counsel with the international law firm Dentons. He was U.S. Deputy Trade Representative in the Carter Administration.