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On February 4, 2016, after five years of negotiations, the members of the Trans-Pacific Partnership Agreement (TPP) signed the trade pact, considered to be the highest standard trade agreement to date.[1] The TPP includes not only traditional measures such as the reduction or elimination of tariffs, but also provisions on contemporary topics like trade facilitation, support for small- and medium-sized enterprises (SMEs), telecommunications, trade in innovative services (including digital technologies), issues of regulatory coherence and competitiveness, as well as higher standards on labor and environmental rights, sanitary and phytosanitary standards, and on the protection of intellectual property rights (IPR). In addition to the high standards of the agreement, the TPP is remarkable in its membership; together, the member countries (Australia, Brunei, Canada, Chile, the United States, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) account for 40 percent of global GDP, 26 percent of international trade, and 10 percent of the global population. If ratified, the TPP will be most significant achievement in global trade since the conclusion of the Uruguay Round at the World Trade Organization (WTO) in 1994.

An agreement of this size and scope will have important implications for Latin America and the Caribbean (LAC), and for the global trade architecture as a whole. At the global level, the TPP is contributing to the recalibration of the global trade architecture. Since the Doha Round, negotiations at the multilateral level have stalled, and although WTO members concluded the Bali agreement in 2013, it was a partial scope agreement that only addresses a narrow set of issues. Further progress was made last year at the Nairobi Ministerial where WTO members adopted the “Nairobi package,” containing commitments on agriculture, cotton, and less developed countries (LDC) issues. This includes a commitment to eliminate export subsidies, duty-free, quota-free market access for cotton exports from LDCs, and some preferential treatment and technical assistance for LDC trade in services and certain goods. Some progress was also made on the Trade Facilitation Agreement, as six additional countries ratified the agreement.[2] However, the Doha Development Agenda—launched over a decade ago—was left on the sidelines with little hope of resurrection.

This piecemeal approach at the multilateral level means that the international rules that govern trade and investment have not been updated to address contemporary trade issues, and a framework to address nontraditional barriers to trade is lacking. As a result many countries have turned to regional and plurilateral trade agreements to update their policies and procedures and advance trade liberalization. The TPP is the most significant achievement to date in terms of scope and coverage and will therefore play an important role in recalibrating the international system to better meet the needs of businesses and governments.  

For LAC, Asia and the Pacific has become an important trading partner, as the region has developed into a key engine of global economic growth. The TPP therefore provides an opportunity to deepen interregional trade by creating new market access opportunities in Asia and the Pacific, and by upgrading existing relations by including more comprehensive coverage of the trade and investment topics that are most relevant to trade in the 21st century.

Implications for the global trading system

The TPP is a first-of-its-kind agreement not only because of the depth of the agreement, but also because of its scope. It is the first agreement in decades that brings together a large group of countries of varying size and level of economic development, and binds them to a set of high standard rules. Such an ambitious agreement naturally draws criticism that it will unfairly advantage certain countries, producers, or industries. Although the economic effects will vary depending on the size and composition of each economy, it is clear that on the whole, the TPP agreement will have a positive economic effect on its members.

This is demonstrated through recent quantitative analysis. The Peterson Institute for International Economics (PIIE) and the World Bank offer the most comprehensive studies so far. PIIE provides an in-depth analysis of the TPP text and uses a computable general equilibrium (CGE) model to forecast the effects on global growth and trade over the next fifteen years. Their results show that annual exports for TPP members will increase by $1.025 billion (11.5 percent), while inward foreign direct investment increases by $446 billion (3.5 percent) and real income by $465 billion (1.1 percent). [3] Research by the World Bank forecast the economic effects of the TPP over the same time horizon. Their modeling exercise shows an increase in GDP between 0.4 and 10 percent for TPP members, and an increase in exports between 5 to 30 percent by 2030. [4] Although each study uses different methodologies and varying assumptions, they both conclude that the benefits from tariff liberalization, streamlining non-tariff measures, and removing FDI barriers will have positive overall effects for member countries and limit possible negative spillover effects for nonmembers.

Beyond the quantitative payoffs from the TPP, the agreement has important structural implications for the global trade architecture. First, the TPP closes a number of “missing links” in the global FTA network. Second, it addresses the need for convergence among the overlapping FTAs already in place. Finally, it tackles the issues of updating the rules of the international trade game.

FTAs have proliferated over the past two decades and have created a vast network of bilateral and plurilaterals agreements that connect different trading partners and regions. Despite this progress missing links still exist between major developed economies (e.g., European Union (EU), U.S., and Japan), between key developing economies (e.g., Brazil, India, and China), and among developed and developing economies like the U.S. and EU with Brazil, China, or India. The TPP contributes to closing these gaps by bringing together two of the world’s foremost economic powerhouses: the U.S. and Japan. The importance of closing this gap is twofold. First, it brings trade and investment relations between the two countries under a formal, legal framework that establishes rules for more fair and effective trade practices. Second, it sets a precedent for future negotiations between countries that may not have pursued partnerships in the past due to perceived obstacles between themselves and their trade partners. 

The TPP also connects important developed and developing countries (e.g., Mexico and Singapore), as well as developing countries with one another (e.g., Mexico and Vietnam). Making these connections is important given the shift in global trade patterns that has occurred during the last five to 10 years. During this time period emerging and developing countries (EDCs)—Asian economies in particular—have become increasingly important players in international trade, which has fueled an increase in the levels of North-South and South-South trade. For example, in 1990 South-South trade accounted for less than 5 percent of world trade; in 2013 it had grown nearly fourfold, and now makes up almost 20 percent of world trade. [5] Bringing trade relations between these regions into a formal framework like the TPP will not only create new market opportunities, it will also make trade transactions more efficient by streamlining policies and procedures.

The second structural issue affecting the global trade architecture is the increasing importance of global value chains (GVCs) in trade. GVCs fragment production across multiple actors, in multiple countries, and require multinational firms to delegate part of their production to foreign affiliates. This means that more and more firms are operating in a variety of countries than ever before. It also presents significant new opportunities for those countries, as it allows them to participate in one part of an international production network without having to build the entire supply chain domestically. At the same time, this structure of production highlights the need to streamline processes, and align rules and regulations. Multiple overlapping rules can impose additional trade barriers and unnecessary costs. For example, the existence of overlapping rules of origin (ROO)—the rules that determine the criteria for a good to be eligible for preferential treatment under a particular trade agreement—can deter companies from locating production in a certain country and affect the ability of firms to take advantage of preferential market access. This issue is especially acute under the current trading system, whereby a final good crosses multiple borders and goes through numerous stages of production before it reaches its final destination market. It is more important still under the TPP framework, where there is a large existing network of FTAs among members (see Table 1). Ten of the 12 countries have FTAs in place with at least half of the TPP members, and more than 80 percent of trade is already covered under these existing bilateral FTAs.

Table 1. Network of bilateral FTAs in force among TPP members

Sources: U.S. Trade Representative (USTR) Free Trade Agreements. https://ustr.gov/trade-agreements/free-trade-agreements.
Asia Regional Integration Center (ARIC) FTA Database, https://aric.adb.org/fta.
Inter-American Development Bank INTrade database, https://intradebid.org/intrade/site/.

TPP members agreed to a single set of ROOs and allow for regional accumulation. Under these rules inputs from one TPP member country are treated the same as inputs from another, which will expand the range of foreign inputs producers can use in t