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Potential Macroeconomic Implications of the Trans-Pacific Partnership

By the World Bank

Over the last quarter century, trade flows of goods and services have increased rapidly. The value of world trade has more than quintupled, from $8.7 trillion in 1990, to more than $46 trillion in 2014. The relative importance of trade has increased too, from 39 percent of world GDP in 1990, to 60 percent in 2014. That said, global trade growth has slowed to about 4 percent per year since the crisis from about 7 percent, on average, during 1990-07. This slowdown in world trade reflects weak global investment growth, maturing global supply chains, and slowing momentum in trade liberalization….

This analysis discussed the features of new-generation free-trade agreements and TPP, specifically, and traced out potential macroeconomic implications for member and non -member countries. As a new-generation, deep and comprehensive trade agreement, TPP addresses a wide range of complex trade policy issues that go beyond the scope of traditional trade agreements. The agreement will reduce tariffs and restrictiveness of non-tariff measures as well as harmonize a range of regulations to encourage the integration of supply chains and cross-border investment.

TPP could be an important complement to other policies to lift medium-term growth:

  • By shifting resources towards the most productive firms and sectors and expanding export markets, TPP has the potential to lift overall GDP of member countries by 1.1 percent by 2030. The impact could be considerably more in countries facing currently elevated barriers to trade (as much as 10 percent in Vietnam and 8 percent in Malaysia). In countries that export labor-intensive products, incomes of low-income and low-skilled households could expand strongly.
  • To the extent that the TPP produces positive spillover benefits for other countries, detrimental effects on non-member countries may be limited. Such positive spillovers could arise from harmonized regulatory regimes in TPP export markets.
  • TPP could also lift member countries’ trade by 11 percent by 2030. This would be an important counterweight to the trade slowdown underway since 2011. At current 2011-14 trends, member countries’ trade would fall 25 percent below pre-crisis trend by 2030.
  • Policy reforms are needed to enhance the benefits of TPP—like other RTAs—in developing countries. Governments in several member countries see the liberalization required by the TPP as a driver for difficult policy changes. However, implementation of MRTAs, including the TPP, requires institutional capacity not available to some developing countries (Michalopoulos 1999; Hoekman et al. 2003). As the TPP is implemented over time, emphasis on the following issues would be important to mitigate unfavorable effects on developing countries:
  • Capacity building. Capacity building and technical assistance for developing country members are an important building block of the TPP.
  • Liberal rules of origin. TPP members and nonmembers will benefit if rules of origin mandating higher-cost inputs from TPP members are implemented in a permissive rather than restrictive manner.
  • Liberalize labor- and resource-intensive industries. Low- and middle-income economies often have a comparative advantage in labor-and natural-resource intensive industries. By cutting tariffs for labor-intensive garments, the TPP thus benefits countries like Vietnam.
  • Multilateral framework. Bringing MRTAs into a global framework would broaden the gains to a wider set of countries and reduce detrimental diversion effects for non-members. Implementation of the “living agreement” clause that keeps TPP membership open is particularly important.

Against the background of slowing trade growth, rising non-tariff impediments to trade, and insufficient progress in global negotiations, the TPP represents an important milestone. The TPP stands out among FTAs for its size, diversity and rulemaking. Its ultimate implications, however, remain unclear. Much will depend on whether the TPP is quickly adopted and effectively implemented, and whether it triggers productive reforms in developing and developed countries. Broader systemic effects, in turn, will require expanding such reforms to global trade, whether through TPP enlargement, competitive effects on other trade agreements, or new global rules.

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