Thursday, January 29, 2015

Study Shows TPP Would Boost U.S. Income, Divert Trade From China

Posted: January 10, 2013

An analysis issued late last month projects that a Trans-Pacific Partnership (TPP) agreement among current TPP participants would yield $24 billion in income gains for the United States by 2025, and would overall yield $74 billion in gains for the 11 current TPP members. The study also predicts that TPP would cause $21 billion in income losses for China because TPP would give other Asian exporters an advantage over China in accessing the U.S. market.

The study, unveiled Dec. 19 at the Peterson Institute for International Economics, also examines the much larger gains that would result from conclusion of a Regional Comprehensive Economic Partnership (RCEP). These talks -- which are taking place between China and 15 other Asian partners -- are projected to yield $644 billion in income gains over the same period, of which $297 billion would accrue to China.

While these projected RCEP gains dwarf those of TPP, the study predicts that conclusion of the RCEP would not negatively affect the U.S. One of the authors of the study explained that, with few exceptions, products shipped from the U.S. to RCEP countries do not compete with products shipped from other RCEP countries. This means that preferential tariff rates put in place pursuant to RCEP would not harm U.S. exports directly, he said.

According to Peter Petri, a visiting fellow at the Peterson Institute for International Economics who co-authored the study, U.S. exports to Asia that are expected to largely be unaffected by conclusion of the RCEP include aircraft, pharmaceutical products, medical devices and communications services. In fact, he argued that the U.S. could stand to benefit indirectly from RCEP due to the overall increase in the productivity of RCEP economies that would result from conclusion of the deal.

By contrast, Chinese exports to the U.S. compete more directly with textiles, electronics and other exports from other Asian countries that are participating in TPP, including Vietnam and Malaysia, he explained.

While the study projects that TPP will likely be a more ambitious agreement than RCEP in most areas -- including tariff liberalization and the elimination of barriers to services trade and foreign direct investment -- the study nonetheless concludes that RCEP would yield much larger economic gains, for a number of reasons.

First off, TPP countries have fewer trade restrictions currently in place, meaning there is less to gain. By contrast, RCEP countries are so stringently protected that even marginal efforts to knock down trade barriers can produce large results, Petri explained in an interview this week. In addition, large economies like China, India and Japan are participating in RCEP, which magnifies the gains expected to accrue from even a comparatively less ambitious trade deal.

If the current TPP group were expanded to also include Japan, South Korea, Indonesia, Thailand and the Philippines, then the overall gains would approach RCEP levels. According to the study, such a "TPP 16" agreement would yield in excess of $500 billion in total income gains, of which $108 billion would accrue to the U.S. and $129 billion would accrue to Japan. Such a "TPP 16" deal would also increase losses for China to $84 billion.

Overall, the study suggests that TPP and RCEP countries should work together to create a Free Trade Area of the Asia-Pacific (FTAAP), as this would yield the largest overall gains. Under such a scenario, the U.S. incomes would rise by $267 billion while Chinese incomes would rise by $678 billion. Therefore, the study suggests that while the U.S. and China are somewhat "opposed" on TPP and RCEP, they are "aligned" when it comes to FTAAP efforts.

Such a united trade agreement would likely amount to a "hybrid" between the two FTA templates now being negotiated, as China and other Asian countries are not prepared to take on TPP-like obligations, the study notes.

The study's projections are based on a variety of assumptions, including that a TPP agreement will follow the model of recent U.S. trade agreements in the Asia-Pacific region, most notably the U.S.-Korea FTA. Following this model, the study assumes that TPP will eliminate 96 percent of all tariffs by 2025. But most U.S. gains from TPP -- about 55 percent of total gains -- are projected to come in the services sector, according to the study.

In the interview, however, Petri conceded that projected U.S. gains in services could be overly optimistic in light of the fact that TPP countries like Vietnam and Malaysia have long resisted opening up their services markets, meaning it is unclear which concessions these countries will ultimately make in the TPP negotiations. Moreover, it is difficult to measure trade flows in this area.

"Service barriers and trade are notoriously hard to estimate and project, so these estimates have a wider margin of error than others," Petri noted in the interview.

Even in goods, the study is forced to make assumptions because the talks are ongoing. For instance, when it comes to the controversial area of textiles and apparel -- where Vietnam is pressing hard for increased access to the U.S. market -- the study anticipates that 58 percent of textiles imported from other TPP members will qualify for preferential tariffs, and that those tariffs will be gradually reduced by 96 percent overall, Petri explained.

But it is unclear whether the actual outcome will be more or less ambitious than this projected result. Currently, Petri noted, no more than one-quarter of Vietnam's garment exports would meet the strict yarn-forward rule of origin, which is the general rule the U.S. is advocating in the TPP talks. The study therefore assumes that TPP will feature a more lenient rule of origin, or Vietnam's industry will change to incorporate a greater use of inputs from the TPP region, he said.

Under a yarn-forward rule, all components in a garment must be sourced from the region in order for that garment to qualify for preferential tariffs. The U.S. is now in the process of exploring with TPP partners and domestic stakeholders the extent to which it could agree to certain deviations from this yarn-forward rule if a particular garment uses fabric that is not readily available in the TPP region.

While the study does not measure the amount of jobs created or lost by the TPP, it does forecast that TPP would accelerate the shift of employment from declining industries, such as manufacturing, to growing industries, including services industries. In particular, the study predicts that TPP will cause an additional 100,000 workers to "shift" in such a manner. Petri pointed out that between two and three million workers enter and exit the labor force each year.

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