Home / Points of View & Perspectives / TPP – 11 is the upcoming free-trade zone

TPP – 11 is the upcoming free-trade zone

Teaser: The global trade routes are currently challenged due to increased import tariffs and movement within the free-trade zones, though it also opens new opportunities.

The stormiest agreement about a free-trade zone within the recent years is, in my view, the TPP (Trans-Pacific Partnership) treaty that was concluded in February 2016. The agreement was signed while Barack Obama still was the U.S. president. Before the treaty was finally implemented in the USA, President Trump had taken over The White House, and thereby, the political sponsor of the agreement in the United States was gone. One of the first initiatives as president that Trump undertook was to cancel the American participation in the TPP agreement.

USA represents 24 pct. of the total global GDP, so missing such an economy in a free-trade zone is of course, a setback. But 11 countries behind the original TPP agreement earlier this year agreed about a new treaty, officially named CPTPP or TPP-11.

This week, the trade winds took me past Singapore, where the focus was developments in Saudi Arabia and China. Though a long-term development, which I find interesting to discuss, is the new TPP-11 free trade zone that is on the way. Obviously interesting is the immediate positive effects the agreement has for trade among the TPP-11 countries. Further, a couple of countries looking for new friendships and the movement within free trading zones might leave some Emerging Market countries on the half-stretch.

Despite the setback due to the American withdrawal of the original TPP agreement, a new deal was negotiated between the 11 countries. The agreement is made as an open invitation to other countries, and quite interestingly, the Peterson Institute for International Economics have calculated that the free-trade zone agreement could generate an additional global income of 147 billion dollars.

As graphic one shows, Japan’s economy weight represents almost half of the total GDP in the TPP-11 group, but otherwise, dominance is fairly spread among the other ten members. As mentioned, the free-trade zone is based on openness and, of course, if a new country wants to join, it must accede to the trade zone rules.

China is invited to enter, and it would be both a commercial and political leap for China to become a member, which China also deeply considers. However, copyrights, intellectual property rights, etc., also ruled in the treaty. Areas that China is often criticized for having a too lax behaviour about, so I think it’s very exciting to follow – it would be fascinating if an open platform thinking from a new free-trade zone could move China’s government more than all the trade war threats from Washington D.C. ever can.

It is my clear expectation that the TPP-11 will become a reality, though the group will still have t0 define itself in a world ruled by NAFTA / USA, China and the EU.

I could imagine that at one point, the Philippines and Indonesia will also find their way into the free-trade zone, and thus the TPP – 11 will then truly represent the Pacific region, excluding China and the United States. As graphic two shows, the current size of TPP – 11 is about 13 pct. of the global economy, but if the Philippines and Indonesia join the expanded TPP – 11 zone, GDP share increases to 15 pct. It is about the same size as China, and only three percentage points from the EU’s share of global GDP (excluding UK).

It’s very easy to do this kind of desktop exercises by moving-around on countries like pieces in a puzzle, though the world is after all more complicated than it looks on the desktop. However, my assessment is that this is the direction, and it would make the Philippines even more attractive as an investment destination. The ASEAN group will probably lose in economic power and importance. But due to the large population in the ASEAN countries, the political weight can quite well continue for some time yet.

However, the TPP – 11 may not only be relevant concerning trade in countries around the Pacific Ocean. Recently, Japanese Prime Minister Shinzo Abe stated that United Kingdom is welcome to join the TPP-11 cooperation. Obviously, negotiating a free-trade agreement cannot be finalised within a few days, but U.K. needs to redefine its role in the world of trade agreements and might have the interest in striking a quick deal with TPP-11.

As the Brexit negotiations are approaching the crucial phase (maybe), these global trade zone movements really have my interest. My view remains that too much fear is built in the pound sterling exchange rate and global investors are underweighted British shares too much. In my opinion, it is absolutely possible, and even the most likely scenario, that United Kingdom gets a fair-trade agreement with the EU in connection with the Brexit divorce.

It’s also likely that Britain can enter a partial free-trade agreement with USA. This even could be the lead to a full free-trade agreement with the United States, though such a step has its complexities. When assessing the current and coming moves in the trade agreements, China might feel a need to make one or several moves as well. Here, United Kingdom again could come into play, and suddenly, the country has a completely different global trading position than when the prime orientation was towards the continental Europe, due to the EU membership.

But where there are winners, there are also losers, and to revert to the developments following the TPP-11 agreement, then Taiwan and Thailand have so far found a membership in ASEAN, though not immediately in TPP – 11. There are a few Emerging Markets countries that could be squeezed, if the cooperation pattern changes, which I give extra attention in my assessments. On the other hand, I find it interesting how Vietnam positions itself, while continuously attracting outsourcing production lines – the country continues to prove to be a future destination for some of the savings money.

Leave a Reply

Your email address will not be published. Required fields are marked *