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TPP Expected to Have Modest Positive Impact on U.S. Economy; Could Displace Some Imports from Mainland China

The U.S. International Trade Commission issued on 18 May its much-anticipated report on the likely impact of the Trans-Pacific Partnership on the U.S. economy as a whole as well as on specific industry sectors. The USITC found that TPP is likely to have positive - albeit small - effects on U.S. gross domestic product, employment and trade. Specifically, real GDP is projected to be US$42.7 billion (0.15 percent) higher as a result of the agreement, while employment would likely be 0.07 percent higher (128,000 full-time equivalents). In addition, U.S. exports and U.S. imports would be US$27.2 billion (1.0 percent) and US$48.9 billion (1.1 percent) higher, respectively, relative to baseline projections for 2032. U.S. exports to new free trade agreement partners would grow by US$34.6 billion (18.7 percent), while U.S. imports from those countries would increase by US$23.4 billion (10.4 percent).

Among broad sectors of the U.S. economy, agriculture and food would see the greatest percentage gain relative to the baseline projections, with output estimated to be US$10.0 billion or 0.5 percent higher by year 15. The services sector would enjoy a gain of US$42.3 billion in output, but output in manufacturing, natural resources and energy would be US$10.8 billion (0.1 percent) lower with TPP than it would be compared with baseline estimates without the agreement.

The USITC estimates that TPP would result in a 1.4 percent (US$1.9 billion) increase in U.S. apparel imports over the 2032 baseline (i.e., expected level of imports in 2032 without TPP) as well as a 0.3 percent (US$10 million) increase in U.S. apparel exports. Apparel imports would be expected to grow most significantly from Vietnam, the second-largest supplier to the United States, while those from mainland China, the largest U.S. apparel supplier, would be expected to decline.

The USITC notes that initial growth in U.S. imports from Vietnam under TPP preferences would likely be moderated, particularly in the short term, by Vietnam’s inability to meet the yarn-forward origin rules coupled with long duty phase-outs for certain key products. Although Vietnam has a competitive, export-oriented apparel manufacturing industry, it lacks upstream production of textile inputs and dyeing and finishing capabilities and therefore relies heavily on imported yarns and fabrics. According to the American Apparel and Footwear Association, about 88 percent of the yarns and fabrics used in Vietnam are imported and only eight percent (US$1 billion) of Vietnam’s yarn and fabric imports were from TPP partners in 2014. Mainland China is Vietnam’s largest source of textile imports, followed by South Korea and Taiwan. Under a yarn-forward rule, apparel manufactured with imported textile inputs from non-TPP countries would not qualify for preferential duty treatment in the United States.
The report adds that capacity constraints and related price effects could also moderate some of Vietnam’s market access gains under TPP. For example, one U.S. importer noted concerns that apparel manufacturing costs, as well as other indirect transportation costs, would increase in Vietnam as a result of TPP. Wage rates in Vietnam grew by double-digit rates in recent years and could drive up production costs for apparel if the trend continues. Finally, it is likely that U.S. importers would increasingly compete with European Union firms for apparel manufacturing capacity in Vietnam, given that the EU also recently concluded a free trade agreement with Vietnam.

The USITC model results also indicate that U.S. output and employment in the apparel sector would increase slightly (by 1.0 percent and 0.9 percent, respectively), over the projected 2032 baseline. High-end niche products, replenishment or quick turnaround products, and other items that generally do not compete with imports are among the types of products being produced domestically. Examples of such products include those that require customised, often smaller orders, such as sports team uniforms, test market products or reorders, as well as fast- fashion items.

Moreover, the USITC estimates that U.S. textile exports would be 1.3 percent (US$257 million) higher than the baseline estimate under TPP, while imports would be 1.6 percent (US$869 million) higher. Output and employment in the domestic textile sector would be slightly lower compared with the 2032 baseline, however, down by 0.4 percent each.

The USITC also expects TPP to result in a US$1.1 billion (2.7 percent) increase in U.S. imports of footwear from all countries, as compared to the baseline estimate for 2032. U.S. imports from all TPP countries would rise by US$1.6 billion (23.4 percent), with most of that increase accounted for by footwear imports from Vietnam, the second-largest footwear supplier to the United States after mainland China. The report adds that the significant growth in U.S. footwear imports from TPP countries, especially Vietnam, is expected to occur at the expense of mainland China and other non-TPP footwear suppliers, with footwear imports from the mainland projected to fall by US$400.4 million or 1.3 percent compared to baseline estimates for 2032.

Moreover, U.S. imports of chemicals would be US$5.3 billion (1.3 percent) higher annually as a result of TPP, with pharmaceuticals accounting for 30 percent of the projected increase. The increase in chemicals imports would likely be driven by the new FTA partners, particularly Japan and Malaysia, with smaller absolute increases from Brunei, New Zealand and Vietnam. U.S. imports of chemicals from Japan would reach US$10.8 billion (about US$1.8 billion or 20 percent above the baseline), while imports from Malaysia would reach US$5.1 billion (about US$1.2 billion or 30 percent above than the baseline). TPP imports would likely displace shipments from mainland China, the EU and South Korea, as well as some U.S. production.

The report also indicates that TPP would generally establish trade-related disciplines that strengthen and harmonise regulations, increase certainty and decrease trade costs for firms that trade and invest in the TPP region. According to the USITC, interested parties particularly emphasised the importance of TPP chapters addressing intellectual property rights, customs and trade facilitation, investment, technical barriers to trade, sanitary and phytosanitary standards, and state-owned enterprises. In addition, many stakeholders believe that two new electronic commerce provisions that protect cross-border data flows and prohibit data localisation requirements will be crucial to the development of cross-border trade in services and vital to optimising the global operations of large and small U.S. companies in all sectors.

According to U.S. Trade Representative Mike Froman, the USITC report forms part of “a growing body of evidence that shows that TPP will benefit our economy at home and allow the U.S. to help set the rules of the road for trade in the Asia Pacific.” Mr. Froman highlighted the importance of securing congressional approval of TPP this year, warning that failure to do so would allow mainland China “to carve up the Asia-Pacific through their own trade agreement.” He concluded that if the United States lets Beijing define the rules for trade “it will undercut our workers and businesses and prevent us from taking badly needed steps to improve worker rights, bolster intellectual property protection, and protect the environment through TPP.”

By contrast, House Ways and Means Committee Ranking Democrat Sander Levin (Michigan) criticised the projected decline in overall U.S. manufacturing employment as a result of TPP. He described the economic gains that the USITC expects from the agreement as “insignificant” and “based on an optimistic assumption that our trading partners will open their markets to our exports, rather than simply replacing their existing tariff barriers with new non-tariff barriers.” Rep. Levin added that the report appears to confirm a nagging concern that “the weak automotive rules of origin in the agreement will result in lost auto parts jobs in the United States.”

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