The Trans-Pacific Partnership and Latam

The Trans-Pacific Partnership (TPP) aims to increase trade and deepen economic ties between participating nations by reducing tariffs and regulatory red tape, as well as creating free trade zones, thereby boosting member nation economic growth. The agreement would set new terms for trade and business investment among the United States, Canada, Mexico, Peru, Chile and seven Pacific rim nations (Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore and Vietnam).

If passed, the TPP would become the world’s most extensive trade agreement in history, encompassing approximately 40% of the world’s GDP, nearly 30% of world FDI and one-third of world trade. According to initial estimates, the deal is expected to raise member country GDP by roughly 1.1% and increase trade by 11% a year on average by 2030. While the agreement addresses over 18,000 tariffs in most sectors of production, some pockets of the economy will be less affected, such as the textile, automotive and pharmaceutical markets.

For Latin America, the agreement represents an important attempt to shift the national economies of Peru and Chile to value added products and away from commodities. While commodities have served the region well in times of high prices, the reliance has also brought significant volatility with boom/bust cycles and has hindered expansion up the value chain and into new markets. For Latin American countries not currently included in the TPP, such as Colombia, Brazil and Argentina, the hope is that the agreement will serve as an open-trade model and as a way to bring prosperity, economic diversification and stability to the region.

Mexico

Beginning in the early 1990’s, Mexico has transformed its trade policies and has become one of the world’s most open economies, with a trade network of 45 countries. Mexico’s free-trade agreements give it access to 58% of the world’s GDP, 53% of global commerce and 1.2 billion potential customers. Studies have shown that these open policies have driven the growth of foreign investment, high-tech manufacturing, and rising wages from trade-related activity. The TPP agreement will continue this trend and give Mexico access to six new markets: Australia, Brunei Darussalam, Malaysia, New Zealand, Singapore and Vietnam, representing 155 million potential consumers.

However, the most important aspect of the TPP for Mexico will be upgrading its existing relationship with the U.S. and Canada, thus strengthening its highly integrated North American supply chains. Since the implementation of NAFTA in 1994, regional trade has increased to US $1.1 trillion in 2016 from US $290 billion in 1993. While at the time NAFTA was a cutting edge treaty, changes in the economy, the impact of technology and the creation of new industries since then requires revisiting and implementing new trade guidelines. Additionally, industries and matters that were originally excluded from the 1994 treaty, such as energy, labor, environmental, and state-owned enterprises, will now be addressed in the TPP.

Further, the TPP represents a defensive move for Mexico given the potential for a U.S. – European Union trade deal (Trans-Atlantic Trade and Investment Partnership, “TTIP”), which has been in the works. Such a deal could limit Mexico’s long-standing strategic advantage regarding trade with the U.S. For Mexico, which sends approximately 80% of its exports to the U.S., defending this market is a top priority.

Peru

Peruvian officials expect that the TPP will transform the nation into a competitive and diversified exporting country offering products with higher added value. Improved market access to global value chains for small and medium-sized enterprises are among the potential economic benefits touted. Specifically, Peru has the potential to export over US $2.2 billion in agro-industrial products and services to five key countries that it had no trade deals with prior to the TPP: Australia, Brunei Darussalam, Malaysia, New Zealand and Vietnam. However, a challenge for Peru stems from the agreement’s provisions on intellectual property rights, which opponents argue could lead to higher pharmaceutical prices and affect Internet access.

Despite such concerns, over the past 10 years, Peru has consistently pursued trade agreements with major partners at bilateral, multilateral and regional levels, signing a total of 21 preferential trade agreements. If finalized, the TPP could increase the nation’s exports by US $3.2 billion by 2025.

Chile

Like Peru, Chile is a heavy exporter of commodities, with China as its top trade partner. While the majority of Chile’s exports are currently copper-related (22%), the TPP allows Chile to diversify its exports, such as agricultural, dairy and food products. However, Chile has already established bilateral trade agreements with all member countries of the TPP (Chilean trade with TPP countries totals approximately US $45 billion). Indeed, commercial openness has been a cornerstone of Chilean foreign policy since the 1990s, as reflected in its 26 trade agreements with 64 partners that together account for 63% of the world’s population, 85% of world GDP and close to 94% of Chilean exports. Consequently, Chilean critics of the TPP argue it does not represent significant progress for the nation’s foreign trade. While the TPP may not do much to gain new markets for Chile, proponents assure it will help improve innovation, upgrade exports and produce products in competitive ways.

Approval

After five years of negotiations, countries involved with the TPP concluded discussions in late 2015 and signed the agreement in February 2016. The accord is now awaiting approval in each of the twelve signatory countries, which must happen in the next two years by at least six countries representing 85% of member GDP. In Mexico, President Enrique Peña Nieto already has the necessary votes in the Senate to pass the agreement, as does President Michelle Bachelet in Chile. In Peru, while President Pedro Pablo Kuczynski’s party has limited representation in Congress, his rivals are expected to support the agreement.

Passage of the agreement in the U.S. is more complicated. While Democratic presidential candidate Hillary Clinton once supported the TPP as Secretary of State, she now voices concerns over the lack of protection for U.S. workers. Meanwhile, Republican presidential candidate Donald Trump has voiced much stronger rhetoric against the deal. A failure to pass the deal by the U.S. will have significant negative political and economic effects. Politically, non-passage would damage the U.S.’s reputation as a reliable negotiation partner and would diminish perceptions of U.S. interests in the region. More importantly, the TPP is intended to challenge China’s growth over the last 10 years as it relates to its political and economic influence throughout Latin America. Economically, this deal represents a rare opportunity to liberalize trade and encourage open market reforms globally, while supporting the mainstays of long-term U.S. economic policy.

There are high hopes that President Barack Obama will push for the agreement’s approval in the “lame duck” session after the November elections and before the new president and Congress take office. As a key policy for the Obama administration, the ratification process of this legislation will likely command his attention up until his final days in office.

Authored by: Roberto Erana