Capital Economics: It could be years before we see the TPP making a difference

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The Trans-Pacific Partnership (TPP) agreement announced today may not come into force for years to come.

And assuming that it is eventually implemented, while it should have large and positive implications for global growth, its effects might only be seen over an extended time period.

The TPP, agreed between Australia and 11 other nations on the Pacific Rim including the US and Japan overnight, will open up trade within the region and cover 40% of global GDP.

For Australia, the deal will see 98% of tariffs for Australian exports to the region eliminated, preserve the government’s preferred 5-year grandfathering of patent rights for pharmaceutical companies and open access to US markets for Australia’s sugar exporters.

Andrew Kenningham, senior global economist at Capital Economics, believes there are reasons for caution following the announcement of the historic deal overnight.

Firstly, Kenningham points out that there is usually a significant lag time between when a free trade deal is announced and actual implementation by the US government.

“The last three US trade agreements were implemented only four-to-six years after they were signed,” notes Kenningham.

“The US Congress granted President Obama “fast-track” authority to negotiate the TPP, but many Democrats are opposed, as are leading Republican presidential candidates, including Donald Trump. With presidential elections due next year, the TPP may well get blocked in Congress.”

The chart below from Capital Economics shows the significant time lag between the signing of previous free trade agreements involving the US and actual implementation.

The complexity of the trade deal means it needs a raft of legislative instruments needed for the US to bring it into force, and some of the industries affected will see little difference in its first years of operation.

“Tariffs are due to be lowered and market access increased only gradually. National legislation will be required for key components of the deal to take effect. And new regulations covering patents and direct investment, for example, will take years to make their mark,” he notes.

Although Kenningham is cautious towards implementation of the deal given hurdles that still need to be overcome, he suggests the TPP – which would reduce or eliminate as many as 18,000 tariffs as well as setting new standards on areas such as subsidies for state-owned enterprises, data protection and intellectual property rights – has the scope to reinvigorate global trade and investment over the long term.

“It is the largest trade deal the U.S. has negotiated since NAFTA and the Uruguay Round were signed over twenty years ago,” he said.

“Although it is often claimed that traditional tariff barriers have already been eliminated, the US Trade Representative, Michael Froman, said tariffs were in some cases still as high as 70% on autos and 50% on machinery. These will be sharply reduced or eliminated under the agreement.”

Kenningham also suggests the deal may put pressure on other free trade agreements that have stalled in recent times.

“It will also put pressure on the European Union to accelerate progress with the ‘Transatlantic Partnership’, on which talks have been floundering. And over time, it is likely to put pressure on China to open up its economy on similar terms to those in the TPP.”

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