President Obama recently came closest to securing the biggest legacy any US president can ever hope for. The United States, Japan and other ten countries, on 5th October 2015, concluded negotiations on the Trans-Pacific Partnership (TPP) — the biggest regional free trade deal in history. If approved, it will set new terms for nearly $28 trillion in trade and investment among the countries under the agreement. The countries involved in TPP aggregately produce 40 percent of the world’s total GDP of $107.5 trillion, 26 percent of its trade, and 793 million of its consumers.
Before commenting on the Trans-Pacific Partnership (TPP) which is being termed as the biggest trade deal in history, it is apt to delve into the concept of ‘economic integration’.
Economic integration is the process in which countries reduce tariffs and non-tariff barriers for each other to ensure smooth flow of goods and services, subsequently leading to increase in trade, cutting costs for manufacturers and lowering prices for consumers hence betterment of their economies holistically. The stages of economic integration are: PTA (Preferential Trade Agreement), FTA (Free Trade Agreement), Customs Union, Common Market, Economic Union and, at the top, Political Union.
Many examples of economic integration exist. NAFTA (North American Free Trade Agreement), European Union and ASEAN (Association of Southeast Asian Nations) are some important among them. But the best ones so far are EU and ASEAN. These FTAs have positively affected their members. The main purpose of these agreements is to increase the welfare of the people and consolidate economic growth. If we talk about ASEAN, which was formed in 1967 and originally had 5 members namely Singapore, Malaysia, Thailand, the Philippines and Indonesia, had it been a country, it would have the 7th highest GDP in the world, with a combined GDP of $2.4 trillion in 2013. It covers approximately 9 percent of the global population. Same is the case with European Union (EU). It has 28 member states and a single currency, Euro, which makes it jump to the “Economic Union” stage of economic integration. Its total GDP in 2014 was $18 trillion and it covers a population of 508 million people. But as we move to Trans-Pacific Partnership, these figures will start to sink into significance when compared to those of TPP.
The one benefit of trade agreements, among many, is that there is least possibility of war. After reading this article, one would see that how this new trade deal is going to give US a strong global position and how it can ‘encircle’ China by involving countries close to it, threatening China’s economic prowess and thwarting the hopes of the emerging superpower.
Trans-Pacific Partnership (TPP) is a trade agreement between twelve countries of the Pacific Rim. The aim of this trade deal is to low tariffs, or in some cases, waive them off, in order to build economic integration, the biggest free trade area ever and to help boost exports and imports on reciprocal basis. The true nature and documents and points of this agreement have been kept in secrecy though this has stirred much controversy against it. What we know about TTP is only through the WikiLeaks. If one looks at the list of countries, it includes United States, Australia, Canada, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore, New Zealand and, of course, Japan. Recall some geography; look at the map. Vietnam, Malaysia, Philippines and Japan are the countries China is at loggerheads with due to its claim over the South China Sea. This is the area from which $5 trillion of trade passes annually. And China’s recent actions of building artificial islands in South China Sea have also attracted the ire of many neighbouring countries. The United States can exploit the angst, which these countries have against China, by making them its allies. And that is what it is actually doing.
Why is TPP So Big and Important?
The 12 TPP countries host a population of nearly 650 million people. The current members of TPP are also members of APEC i.e. Asia Pacific Economic Cooperation of 21 countries, which comprises 44 percent of global trade and 40 percent of world population. Out of the $70.3 trillion global GDP, around $40 trillion was that of Asia-Pacific. The GDP of TPP is expected to be $24 trillion which can grow to colossal levels if other countries also jump in. But, even during its nascence, the GDP beats that of ASEAN and EU.
And this very prospect can propel other APEC members to join in at some time later.
Before leaping onto the yarn-forward rule, one needs to understand the textile cycle. So, the first step is cotton farming. Then it is ginned, and afterwards the process of spinning is performed and what comes out is called ‘yarn’ or in common parlance ‘thread’. This thread goes to the weaving phase and a greige cloth is made which is then dyed. Finally, this cloth is sent to factories where it is turned into a finished product. The first step is “labour intensive” in some countries and moderately “capital intensive” in developed ones. Then dyeing is capital intensive process but the final one requires labour. Keeping this in mind, now let’s analyze the yarn-forward rule:
Yarn-forward rule of origin is a very potent tack which US has taken. United States is the one of the world’s largest producers of cotton — the third largest in 2014 according to www.statista.com. The yarn-forward rule of origin means that in order to enjoy the low tariffs, which TPP proposes, the members should only make fabric from the yarn produced by other TPP member countries. In this way, countries that are not members of TPP; for instance China, will suffer badly. The US will produce cotton and then after performing the first 4 phases i.e. till dyeing, it will export it to other TPP members and will, in turn, allow readymade garments to be imported from them. Now look at it carefully, the labour costs in US are very high though they produce cotton in big quantities. But owing to the exuberant labour costs, it won’t be lucrative for them to do this in their own country. Where would this cotton go? To Vietnam, that is a popular destination for textile factories, for instance. The US will be able to produce finished textile products for themselves at a cheap labour cost and will sell it at lucrative prices in US after importing it from Vietnam and that too without any tariffs and duties. But in this whole picture where will China do the outsourcing now? Vietnamese factories have, hitherto, been using China-made fabric. Moreover, 80 percent of Vietnamese factories outsource contracts to various countries. Although, it may be a bad call for Vietnam, yet the huge benefits of exporting to the world’s largest economy without duties are suffice to outweigh the aforesaid quandary.
Among many chapters of the TPP, one is related to Intellectual Property according to which patents for medicines, among other copyrights, would be made more stringent and hard to copy and extend; thus, making difficult for third world countries the access to life-saving drugs, etc.
It will also help pharmaceutical companies to maintain a monopoly over medicines hence charge more. It will also give companies the power to challenge any sort of government policies that may threat their profits due to the Investor-State-Dispute-Settlement principle, a part of TPP.
The TPP would have an output of $28 trillion — more than 38 percent of the world’s total output. The agreement would be making up for 40 percent of total US trade. Moreover, the main purpose of TPP is to snap the neck of China’s economy. For example, who will want to pay “duties” on exports and give China the contracts where a more feasible and economical solution of only exporting, importing and off-shoring among TPP members is at hand? Which country would behave as cretinous as to bereave themselves from such economic favours?
Pakistan, our beloved country, along the world will too fall into the way of this economic tsunami: Pakistan is the 4th largest producer of cotton with the third largest spinning capacity in Asia. Pakistan heavily relies on textile. It is the 8th largest exporter of textile products in Asia, and country’s textile sector contributes 8.5% to GDP. But our exports like those of China suffer the same fate, with a fact that our products are not “value-added”. Textile industry in Pakistan needs to wake up and start taking preemptive measures to avoid bearing the brunt of this deal.
All this can be concluded by calling the TPP an economical bomb which, if dropped, will make the world feel its shocks, and will leave China with no choice but to scupper to the sheer force of this ‘explosive trade treaty’.
The US Congress has 90 days to approve or reject it. But most likely it will be approved.