Free Trade Boost as CPTPP Gets Underway

You do not need to be a trade expert to appreciate that the ideal of free movement of goods between nations, long part of economic and political orthodoxy and actualized in the form of bilateral and multilateral free trade agreements (FTAs), has taken something of a battering over the last two years. Trade issues, usually of esoteric interest to readers of the business pages, are increasingly and literally becoming front page news, most notably with the current US-China trade spat, which could well have adverse effects for the global economy in 2019 should current negotiations prove unsuccessful by the March 1 deadline.

 

Given this rather fraught backdrop, free trade proponents would have been heartened by the long awaited launch of the Asia Pacific FTA known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, just before the turn of the new year. The clue is the name and acronym that this is the successor to the Trans-Pacific Partnership (TPP) multilateral FTA that was famously scuppered on Donald Trump’s first day in office when the new president kept his campaign promise to remove the US from ratifying an agreement that he likened, in typically direct fashion, to “the rape of our country”.

Many observers believed that the withdrawal of the largest (in terms of GDP and trade volumes) member of the original 12-country pact would mean an ignominious end to an FTA more than a decade in the making. However, the remaining 11 members regrouped, renegotiated, and rather remarkably, managed to craft out a new agreement, the CPTPP, that was signed last March and came into force on December 30 after ratification by the six countries of Australia, Canada, Japan, Mexico, New Zealand and Singapore. A seventh country, Vietnam, officially joined the CPTPP on January 14, and the remaining four – Brunei, Chile, Malaysia, Peru – will enter the pact 60 days after their domestic ratifications.

While the size of the FTA has taken a hit after the US exit, with the CPTPP encompassing 13.5 percent of global GDP and a market of 500 million people versus the TPP’s 40 percent and 825 million, the core of the agreement remains largely unchanged, with the main difference being the suspension of 20 provisions originally mandated for the TPP by the US. Plans are also afoot to increase membership, with the agenda for the January 19 CPTPP ministers’ meeting in Tokyo including extending the agreement to beyond the 11 members. Countries reportedly keen to join the pact include Indonesia, South Korea and Thailand.

So what benefits does the newly minted Comprehensive and Progressive Agreement for Trans-Pacific Partnership bring to its members? For Singapore (location of the ARC Southeast Asia HQ), the CPTPP immediately eliminates tariffs from 94 percent of trade with fellow countries (the remaining six percent set to be phased in over a longer timeframe). And for the first time, the CPTPP provides Singapore free trade relationships with both Canada (tariffs removed from 99 percent of trade) and Mexico (tariffs removed from 88 percent of trade). For the latter, Singapore’s now tariff-free exports of pharmaceutical products and organic chemicals to Mexico compares with a pre-CPTPP tariff 15 percent and 6.6 percent, respectively.

As a small country with an export dependent economy, Singapore is an enthusiastic supporter of  the CPTPP and sees the new trade agreement providing valuable additional benefits above and beyond those from its existing and extensive network of bilateral FTAs, including ones with pact members. Elsewhere in Southeast Asia, Vietnam’s footwear, food & beverage and garments sectors are expected to be the major industrial beneficiaries, and the government forecasts direct CPTPP benefits of a 1.3 percent increase in GDP and a 4 percent increase in exports, by 2035.

In a session chaired by ARC Advisory Group at the LogiSYM 2018 conference in Singapore, Dr Deborah Elms, executive director of the Asian Trade Centre, pointedly referred to the CPTPP as the most consequential trade deal in decades and one that goes beyond typical trade agreements by being both broader – covering markets for services, investment, government procurement, e-commerce, as well as all goods (including agriculture), and also deeper – including rules for aspects such as intellectual property, the environment, and labor. So although tariff eliminations may grab the headlines, these other provisions serve to increase the value of participation for member states. For example, Vietnam, which has seen burgeoning FDI in recent years, notably in the electronics industry, anticipates CPTPP commitments on services and investment will help it attract even more foreign direct investment in the coming years.

While the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership is expected to be overall positive for the participating economies, the benefits may not be distributed equally across different sectors in each country, and some will need to face up to new challenges. For instance, in Canada, dairy products across 16 different categories can now enter the country tariff-free from CPTPP member countries, with New Zealand’s butter exports in particular seen as a major threat to the domestic dairy industry. Conversely, the country’s pork farmers welcome the deal for its securing of the huge Japanese market. “We project an annual increase of more than C$600 million thanks to the CPTPP through reduced tariff access and a competitive position over other global pork exporters such as the EU and US,” said the Canadian Pork Council.

Trade issues are likely to continue to grab headlines in 2019, especially if the US and China get embroiled in a lengthy trade war. Whether protectionism becomes the new normal or an aberration remains to be seen, but the newly launched CPTPP defiantly plants a flag for the ideals of free trade. Last July when Singapore ratified the new trade agreement,  Minister for Trade and Industry Chan Chun Sing said this: “Against the current backdrop of trade tensions and anti-globalization sentiments, the CPTPP sends a strong signal of our commitment to trade liberalization and a rules-based trading system. The CPTPP is an open and inclusive agreement and we welcome like-minded parties to join the CPTPP after it has entered into force.”

Bob Gill is General Manager, Southeast Asia, at ARC Advisory Group.

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