PRA November-December 2015 Economy

Economy

Trans-Pacific Partnership: gains and losses in sight The Trans-Pacific Partnership (TPP)’s major goal may be to promote international trade, but observers say that it could leave winners and losers in its wake. This article is put together by Angelica Buan and Elaine Cotoner.

“..TPP will hinge the US’s continued engagement in Asia, to ensure stability in the region..”

T

he Trans-Pacific Partnership (TPP) is a free-trade agreement that removes tariffs and other barriers amongst the member nations: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.

The signatory group collectively holds 40% of the world’s Gross Domestic Product (GDP). Geographically, the partner-countries (excluding the US, Canada and Mexico), border the Pacific Ocean and have a collective population of 800 million people.

The TPP is an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4) which was signed by Brunei, Chile, New Zealand and Singapore in 2005. Participation since then expanded and other countries started joining, starting 2008. The US was the first country to expand the group in February 2008.

After years of negotiations, the final agreement, for what is dubbed as the world’s largest trade partnership, was reached recently on 6 October, with the accord signed in Atlanta, Georgia, US.

TPP will hinge the US’s continued engagement in Asia, to ensure stability in the region, especially during territorial disputes, and militarism.

Future at stake: protesters worry outcome Until the full implementation of the TPP in 2018, as well as full disclosure of the specifics of the deal, speculations will continue to haunt industries.

What concerns protesters are the several controversial aspects in TPP, which reports say are restrictive and may adversely impact several key industries.

The Investor-State Dispute Settlement clause (ISDS) is a crux for the backlash against the TPP. The clause allows private corporations to sue member countries if they harm present (and future) earnings through government policies. Critics say that the ISDS will put member countries under the mercy of private companies.

The ISDS clause is also present in other free trade agreements (FTAs) and has been used by companies to file lawsuits against countries.

One example is US cigarette and tobacco firm Philip Morris International Inc’s pending lawsuit against the Australian government.

The tobacco company sued Australia for laws that require cigarettes to be packaged in plain logo-free boxes with health warnings.

The TPP negotiators seeing this flaw, hence, omitted the tobacco sector.

Meaning, TPP-member countries can still continue plain-packaging of cigarettes. Tobacco is an exception and the ISDS will cover other products and industries.

TPP’s ISDS clauses states that lawsuits will not be tried in a public court, but in exclusive arbitration panels composed of corporate lawyers.

The North American Free Trade Agreement (NAFTA) contains an ISDS clause and was used in dozens of lawsuits in NAFTA’s 21-year history.

Mixed bag for Malaysia The TPP deal is expected to unlatch stiffer competition, even amongst its member countries.

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Economy

Malaysia, a TPP signatory, is embroiled in the midst of opposing opinions on whether or not the agreement will give rise to a positive outcome for the country, against the opportunity to access larger markets.

Malaysia is a hotbed for low-cost, high-tech manufacturing. Once the TPP is ratified, the country is expected to boost exports of electronic products to North America, Latin America, Australia, and New Zealand.

TMB Bank Chief Economist Benjarong Suwankiri said that Malaysia could witness an influx of Foreign Direct Investments (FDIs) with its participation in the TPP. He has been quoted as saying that foreign investors seeking to set up production bases for shipping to the US and other TPP members, particularly in electronics and automotive parts industries, will be eyeing Malaysia as a preferred destination.

“..Malaysia is embroiled in the midst of opposing opinions..”

Malaysian exporters will also enjoy the same benefits. “The TPP deal would provide Malaysian exporters with enhanced access to the entire North American market, and would also improve Malaysia's attractiveness as a hub for North American investment inflows," Rajiv Biswas, Asia Pacific chief economist at research house IHS, said.

A blow to the Indian pharmaceutical sector Will the TPP be the end of inexpensive medicines?

This is a dreaded possibility, particularly for India’s pharmaceutical sector.

For one, India, a non-TPP member, has significant market share of the global pharmaceutical industry, accounting for 2.4% in value terms and 10% in volume terms, according to an analysis published online by the India Brand Equity Foundation (IBEF), an initiative of the Ministry of Commerce & Industry, Government of India.

The Haryana-based organisation, which projected the industry to expand at a CAGR of nearly 16% to US$55 billion by 2020, stated that India’s cost of production is significantly lower compared to the US and nearly half that of Europe.

Generic drugs constitute 71% market share of the Indian pharmaceutical sector, and account for 20% of global exports. Indian drugs are shipped to more than 200 countries, with the US as the key market. This year, pharmaceutical exports were expected to reach US$25 billion.

Industry insiders are thus wary that the US-led TPP could hamper delivery of cheaper generic drugs in the market with drug data protection being included in the agreement. This means that data for a new drug will be exclusive to the

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manufacturer for a number of years before it can be used and copied by generic drug makers. The US lobbied over a 12 year-period for the drug data exclusivity. Some reports say that the TPP could impose between 5 to 8 years patent protection.

Experts argued that in the long run, the provision could hike up medicine prices in some TPP countries, and that could impact drug access especially for developing countries.

“..in the long run, the provision could hike up medicine prices in some TPP countries..”

Bracing for what seems to be an inevitable, DG Shah, Secretary General of the Indian Pharmaceutical Alliance, an industry group representing some of India's top drug makers, commented that from the end of 2017, “generics decline will be discernible”.

Indonesia may not yet be ready Indonesia plans to join the TPP, however, observers say that the country may need to review its policies in order to be accepted for membership. One condition would be to ease up on government procurement, which Indonesia might have to weigh in for some time. This is because it has more than 100 stateowned companies and a strong protectionist policy, including regulations in foreign ownership, for its local industries. As well, export and import barriers may have to be lifted.

“..Indonesia may need to review its policies in order to be accepted for membership..”

Not fully sold on President Joko Widodo’s intent of joining the pact, the former head of state Susilo Bambang Yudhoyono cautioned against it, explaining that the country may not yet be ready especially since infrastructure is still inadequate and the costs and benefits of the TPP are not clear.

Yudhoyono said, “Our market will be flooded with goods and services from other countries, while our exports will fail to be competitive abroad.” He also mentioned that the country is also preparing for the ASEAN Economic Community (AEC) integration, which will be in effect at the end of this year. The AEC is also trade liberalisation, but on the regional scale.

Windfall for Vietnam Vietnam is expected to gain an increase in FDIs with the TPP. Moreover, the country prospects that its trade deficit will narrow with TPP, and on the other hand push up its GDP by more than US$23 billion by 2020 to nearly US$34 billion by 2025.

Economy

One of the 12 signatories, Vietnam’s labour costs are almost half than that of its other Asian signatories.

It also boasts a labour-intensive production base. In this aspect alone, Vietnam is seen as a big winner in the TPP deal.

“..Vietnam is expected to gain an increase in FDIs..”

The Peterson Institute of International Economics (PIIE) notes that Vietnam would see the largest percentage income gains and export increases, of all countries, at 13.6% and 31.7%, respectively.

Preparation is also gearing up as firms are reportedly stepping up strategies and products with more R&D. Ready to take advantage of the lower tariffs, Vietnam’s top export products, apparel and footwear, will also get a tariff-free entry to the US and the other members of the TPP. Before the TPP, the tariff for these commodities ranged from 17% to 32%.

Boon for Thailand’s trade and automotive sector Thailand is also keen in joining the TPP, and the intent does not seem to meet any opposition on the home front, unlike Malaysia.

Prime Minister Prayut Chan-o-cha, in a weekly televised address, said that some influential private organisations in Thailand including the Thai Bankers' Association, Thai Chamber of Commerce, and the Federation of Thai Industries, were encouraging the country’s participation, provided that the move has been carefully considered since the country is also discussing another major trade accord involving China, a non TPP-member.

Nonetheless, nine of the 12 TPP members have bilateral trade ties with Thailand, which could make participation a fruitful decision for the country, the investments group opined.

Meanwhile, the automotive sector of Thailand has been mulling the benefits of joining the TPP agreement.

A recent analysis by the Siam Commercial Bank Economic Intelligence Centre (SCB-EIC) suggested that joining the TPP could boost, rather than obstruct, Thailand’s positioning as a key global production hub for Japanese cars.

“..Thailand could enjoy direct privileges for the automotive sector, if it joined..”

The report said that the member countries already accounted for “42% of Thailand’s total automotive exports in the first seven months of 2015”.

On a similar note, Yoshihiro Yano, Vice-President of the Japan Automobile Manufacturers Association (JAMA), commented that Thailand could “enjoy direct privileges for the automotive sector”, if it joined.

Japanese automotive makers see gains One of the biggest winners is the Japanese automotive industry. The TPP will remove the 2.5% US duty on imported cars as well as the 2.5% levy on many automotive parts. The US is one of the biggest export markets of Japanese car makers like Honda and Toyota.

The deal “would build a framework for economic partnership with very important markets for the automotive industry that were not covered by Japan’s existing economic partnerships, such as the US and Canada,” Fumihiko Ike, Chairman of the Japan Automobile Manufacturers Association (JAMA) lobbying group, said.

Canada is also removing its 6.1% levy on imported cars in five years.

Prior to the TPP, Japanese automotive makers were dealing with the tariff problem by building plants in North America and producing their cars there. As of December 2015, Japanese car makers own 26 plants in the US. JAMA says that 71% of the Japanese cars sold in the US are made in the US, anyway.

Automotive parts are also primarily locally-made.

Around 80% of the parts for Honda cars made in the US are from the region as well. Lowering the tariff gates opens a lot of possibilities for the Japanese automotive industry, but an expert says that it will not derail the car makers’ long term strategies.

Japanese car makers’ “mid-to-long-term strategy is to manufacture vehicles where there is demand, and this strategy is not likely to change significantly,” said Masahiro Akita, an analyst at Credit Suisse.

But JAMA says that the TPP goes beyond tariffs issue by “addressing non-tariff barriers, harmonisation of standards, intellectual property rights, and a wide range of other trade issues.”

Japanese automotive makers' long term strategies aside, dropping import duties make it possible for car makers and other manufacturers to leave the US and other countries when times get rough.

On a downside, several labour groups in the US are worried that more of their jobs will be outsourced to countries that boast lower wages and have stricter labour laws.

Non-member countries at risk of losing out Countries excluded in the elite group of 12 will not be able to benefit from the “perks” that TPP members would get. The PIEE predicts that the TPP’s trade diversion effect would mainly weigh down on China, the largest manufacturing base in the world and a key contender to the US economy.

China’s key industries could face stiff competition from TPP-member countries and their markets. In the textile market, for example, Vietnam could unseat China as well as other non-members like Bangladesh, Cambodia, Pakistan, and Sri Lanka, opined Biswas of IHS.

Meanwhile, interest to have an affiliation in the TPP is growing and the core group is encouraging membership from other countries as well. For instance, the Philippines, South Korea, Thailand, Taiwan have already expressed their interest in joining the TPP. NOVEMBER / DECEMBER 2015

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