TPP Focus: Trade with Asia-Pacific

shutterstock_125804876The ambitious Trans-Pacific Partnership (TPP) is one step closer to being realized, as the Senate voted to end a filibuster on Trade Promotion Authority (TPA), granting the Executive branch fast-track powers when negotiating trade bills with the 11 Pacific Rim countries currently on board. The TPP has been in the works since 2005 and is a major priority for the final year of the Obama Administration. The regional trade pact, which dwarfs the North American Free Trade Agreement (NAFTA), represents the administration’s “pivot to Asia” strategy, simultaneously expanding market access and regulatory cohesion for American businesses and countering China’s influence in the region. In its breadth and capacity, the TPP will influence performance in a number of sectors and industries, forging winners and losers in the name of free trade.

The domestic economic impact of the TPP can be difficult to assess, particularly because its provisions were negotiated in secret and kept from the public eye. Some estimate models, namely the Peterson Institute for International Economics, suggest that its net impact will be modest, contributing $77.0 billion per year to US income by 2025, which is equal to less than half a percent of current gross national income. This is because trade restrictions are already low, and changes will likely be rolled out slowly. Still, the approval of the largest trade deal in history matters to operators across a range of industries. For example, TPP provisions for intellectual property and investment will favor sectors spanning from pharmaceuticals to telecommunications, while certain manufacturing industries will continue to experience downward pressure on wages. Small and medium-sized businesses (SMEs), which represent 98.0% of domestic exporting operators, may also stand to gain from trade liberalization by widening their reach to the Asia-Pacific’s ascending middle class.

Using analysis from IBISWorld reports and data from the US International Trade Commission, the following provides context to the current and prospective trade environment for US industries in Japan, the largest non-NAFTA partner in terms of trade value under the TPP, and Vietnam, which is anticipated to gain greater access to the American market.

Japan

A number of export-heavy manufacturing industries rely on the Japanese market, the largest economy among TPP negotiating members and the fourth-largest US export destination. In 2014, American exports to Japan totaled almost $67.0 billion, led by manufacturers of medical devices; aircraft, engines and parts; and power conversion equipment. These industries rely heavily on foreign demand, with exports’ share of revenue ranging from 37.2% (for medical device producers) to 60.6% (for aircraft manufacturers). In 2015, IBISWorld expects Japan to account for 13.2%, 7.0% and 8.0% of total exports in these respective industries. The United States currently runs a trade deficit with Japan almost equal to the value of exports, with imports amounting to $133.9 billion in 2014. An overwhelming share of Japanese imports compete with operators in the Car and Automobile Manufacturing and SUV and Light Truck Manufacturing industries; Japan claims about a quarter of total imports in both of these industries.

Agriculture and auto manufacturing will likely be the focal point of bilateral trade negotiations between the United States and Japan. The East Asian powerhouse formally announced its TPPchartintention to join the TPP in early 2013, but not without opposition from domestic interest groups that include the powerful Japan Agricultural Cooperative. Historically, Japan’s agricultural sector has been insulated from foreign trade with high tariffs and markups. The potential for greater access to the coveted Japanese market is encouraging to a number of agricultural industries, including Beef Cattle Production and Hog and Pig Farming. Japan is negotiating to cut import tariffs on American beef from 38.5% to 9.0% over 10 or more years, as well as duties on pork.

Automobile and vehicle trade remains a contentious issue, particularly due to heavy import penetration into the US market by Japanese manufacturers and a lack of reciprocity (Japan’s auto market is heavily protected, with imports accounting for a meager 7.0% of total car sales). The two countries are in talks to eliminate the tariffs levied on Japanese-made cars (2.5%) and trucks (25.0%), which has made domestic auto manufacturers nervous. Greater import penetration could drive down already-low profit margins for auto manufacturers; in 2015, IBISWorld expects profit in the Car and Automobile Manufacturing industry to reach 4.2% of revenue. Although the United States is seeking greater market access on behalf of its vehicle manufacturers under the TPP, critics have cited Japan’s potential to use currency manipulation to make it more expensive to import American automobiles.

Vietnam

Imports account for the lion’s share of trade activity with Vietnam. In 2014, exports to the high-growth Southeast Asian country totaled only $5.7 billion, while imports from Vietnam generated almost $31.0 billion. In fact, the United States overtook the European Union as Vietnam’s top export market in 2014, with total Vietnamese imports into the US growing by more than 15.0% per year since 2010. Additionally, apparel and garment industries experience high import volumes of Vietnamese goods. In the Men’s and Boys’ Apparel Manufacturing, Women’s and Girls’ Apparel Manufacturing and Shoe and Footwear Manufacturing  industries, Vietnam claims 11.7%, 13.0% and 15.0%, respectively, of total imports.

Vietnam’s entry into the TPP expands on the country’s economic reforms that began in 1986; the country signed a bilateral trade agreement with the United States in 2001 and achieved World Trade Organization accession by 2007. Under the TPP, Vietnam will gain even greater access to American markets; negotiations are underway to eliminate import tariffs on Vietnamese garment products, which currently stand between 7.0% and 32.0%. This reduction will undoubtedly be a boon for Vietnam’s garment industries, with domestic manufacturers likely experiencing growth in Vietnamese clothing imports.

Import penetration is already high among domestic apparel industries; in the Men’s and Boy’s Apparel Manufacturing, Women’s and Girl’s Apparel Manufacturing and Shoes and Footwear Manufacturing industries, imports already satisfy more than 93.0% of domestic demand. Growth in Vietnamese garment imports could accelerate the decline in domestic clothing manufacturing, but it is more likely that importers will shift their supplier channels away from China, where wage costs continue to rise, and toward Vietnam. Moreover, American trade representatives want Vietnam to reduce its dependency on imported yarns and fabrics (mostly from China) in exchange for preferential treatment. Vietnam is already investing in its own textile industry, but these stipulations could create export opportunities for US-based textile mills. Lastly, negotiations regarding rules of origin are ongoing, with American textile producers demanding “triple transformation” provisions, which stipulate that each component, starting with the yarn used to make the textiles or apparel, must be formed within the free trade area.

Conclusion

These two cases demonstrate the Trans-Pacific Partnership’s potential to shape trade activity in a number of industries, but the extent to which domestic operators will be affected depends on continued negotiations and approval from the legislature. Moreover, critics ranging from environmentalists to internet freedom activists will continue to push back, which may influence provisions related to intellectual property, labor rights, investor-state dispute settlements and climate change. However, if successful, the TPP could serve as a blueprint for future trade agreements, including a broader Asia-Pacific bloc that includes China.

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