13 Oct 2015
The Trans-Pacific Partnership: Impacts upon Hong Kong, the Chinese Mainland and the Global Economic Landscape
Following a week of intensive discussions, the Trans-Pacific Partnership (TPP) group of countries – spearheaded by the US – finally reached a landmark agreement in Atlanta on 5 October 2015. The TPP, which covers about 36% of the world’s GDP and 25% of global trade, is a comprehensive regional trade agreement (RTA) that sets rules on international trade, as well on related issues, such as investment, e-commerce, intellectual property, state-owned enterprises, government procurement, labour and environment. If enacted, China, which is not part of the pact, could face deterioration in its export competitiveness in the TPP markets. However, the TPP deal is unlikely to hinder the progress in forging other RTAs or free trade agreements (FTAs) that do include China. Hong Kong, as a regional business hub, could benefit from a thriving RTA and FTA-derived regional economy.
Background to TPP
Since 2010, the TPP group of countries has been negotiating an ambitious and broad-based agreement that seeks to include rule-based commitments and liberalise trade in nearly all goods and services. Countries that have participated in the TPP talks include the US, Australia, Brunei-Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The US already has FTAs with Australia, Canada, Chile, Mexico, Peru and Singapore, but not with the remaining nations listed.
While a TPP deal has been struck, it still needs to be signed formally by the leaders of each signatory party and ratified by their legislatures, where smooth sailing is not guaranteed. The US is a notable case in point. President Obama, apart from facing stiff opposition from labour unions, environmentalists and other stakeholders, will have an uphill battle to get the deal through Congress next year given the forthcoming presidential election. These difficulties were foreshadhowed last June by the President’s narrow victory in attaining Trade Promotion Authority (TPA) from Congress. The TPA, which grants fast-track consideration of trade pacts in Congress through a yes-or-no vote without amendments, was seen as a prerequisite in order for the US to finalise the TPP.
In any event, the significance of the TPP process and its potential impact on both regional and global economic growth and investment cannot be understated. The TPP is the cornerstone of US economic policy in the Asia-Pacific region under the Obama administration. It signals recognition of the growing importance of the region to US exports and the US economy as a whole. The TPP countries are collectively the US’s largest trading partner, accounting for more than 40% of its merchandise trade, or some 45% of US exports and 38% of US imports.
It comes as little surprise, then, that the TPP has caught the attention of other countries. South Korea, Indonesia, Thailand and the Philippines have expressed varying levels of interest in becoming members. Several countries in Latin America that already have FTAs with the US – notably Costa Rica, Colombia and Panama – could also be interested in joining the TPP at a future date. Current participants have maintained that new members are welcome so long as they are willing to accept the TPP’s rigorous standards.
Major Contents of TPP
The TPP agreement includes 30 chapters that encompass the following issues: trade in goods; customs and trade facilitation; sanitary and phytosanitary measures; technical barriers to trade; trade remedies; investment; services; e-commerce; government procurement; intellectual property; labour; environment; ‘horizontal’ chapters meant to ensure that the TPP fulfils its potential for development, competitiveness and inclusiveness; dispute settlement; and exceptions and institutional provisions. The deal incorporates new and emerging trade issues and cross-cutting issues, including matters related to the internet and the digital economy, the participation of state-owned enterprises (SOEs) in international trade and investment, and the ability of small businesses to take advantage of trade agreements.
With regard to merchandise trade, most tariffs on industrial goods will be removed immediately, but tariffs on a range of sensitive products will be phased out over longer time frames. Of particular relevance to Hong Kong exporters and manufacturers, most tariffs on textiles and apparel are to be eliminated immediately, although tariffs on certain sensitive products will have longer phase-out periods. As expected, the rules of origin for these products will require the use of yarn and fabrics from the TPP region so as to promote regional supply chains. Importantly, the parties agreed to a single set of rules of origin, and will implement a common TPP-wide system of showing and verifying that goods made in the region meet the applicable rules of origin.
The investment chapter provides the basic investment protections found in other investment-related agreements. These include: national treatment; most favoured nation treatment; minimum standard of treatment; prohibition of expropriation; prohibition on performance requirements such as local content or technology localisation requirements; free transfer of funds; and freedom to appoint senior management positions of any nationality. The TPP parties have adopted a negative list approach to investment, meaning that their markets are fully open to foreign investors, apart from where they have taken an exception in the country-specific annexes.
The parties also agreed to implement transparent, non-discriminatory rules for developing technical regulations, standards and conformity assessment procedures, while preserving their ability to fulfil legitimate objectives. Additionally, the parties will co-operate to ensure that technical regulations and standards do not create unnecessary barriers to trade. To reduce costs for TPP businesses, especially small businesses, the parties have agreed to rules that will facilitate the acceptance of the results of conformity assessment procedures from the conformity assessment bodies in the other parties, making it easier for companies to access TPP markets.
The chapter on intellectual property establishes standards for patents based on the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement and international best practices. It provides trademark protection for brand names and other markings that businesses and individuals use to distinguish their products in the marketplace. In addition, certain transparency and due process safeguards are required regarding the protection of new geographical indications. As for copyright, it establishes commitments requiring protection for works, performances and phonograms such as songs, movies, books and software.
On labour, the TPP requires all member countries to meet core, enforceable labour standards stipulated by the International Labour Organisation. These include: the freedom to form unions and bargain collectively; prohibitions against child labour and forced labour; requirements for acceptable working conditions such as a minimum wage, number of working hours and a safe workplace; and protections against job discrimination. The agreement also ostensibly includes the strongest environmental protections of any trade agreement negotiated to date. These provisions include requiring the parties to combat wildlife trafficking, illegal logging and illegal fishing, while prohibiting some of the most harmful fisheries subsidies and promoting sustainable fisheries management practices.
In addition, the deal includes the first-ever disciplines to ensure that SOEs compete on a commercial basis. The parties also committed to ensure that their SOEs or designated monopolies do not discriminate against the enterprises, goods and services of other parties. The parties will give their courts jurisdiction over the commercial activities of foreign SOEs in their territory, and will ensure that the administrative bodies that regulate both SOEs and private companies will act impartially. Plus the parties will provide a list of their SOEs to the other parties, and will supply additional information upon request as to the extent of government ownership or control and the non-commercial assistance provided to SOEs.
Potential Benefits to TPP Members
As with any other RTA or FTA, the potential benefits of the TPP lie largely in two areas. For TPP members, deepening economic integration is likely to mean higher economic growth, greater competitiveness, better scale of economies, lower production costs and gains in efficiency and economic welfare. In terms of non-economic benefits, there would also be deeper mutual understanding among members, closer social ties and, conceivably, greater political and social connections.
Ultimately, the removal of trade barriers between TPP members represents a market enlargement; businesses in member countries will be given the opportunity to sell into a larger, more integrated market and on an enhanced scale. Purchasers in one economy would be free to switch to suppliers from other TPP member states at the expense of either domestic production (trade creation) or of imports from non-TPP members (trade diversion). The overall net effect of the TPP will then be measured by assessing the resulting changes in levels of both intra-bloc trade (between TPP members) and extra-bloc trade (between TPP members and non-members).
Changes in trade flows may also induce changes to the production bases among TPP member countries. Such relocation would be determined largely by members’ comparative advantages, the sites of industry clusters and, possibly, the technology transfer associated with foreign direct investment (FDI). According to the Peterson International Institute for Economics, a TPP agreement is projected to bring global income benefits of an estimated US$223 billion per year by 2025. Income benefits to the US are estimated at US$76.6 billion per year, with an additional US$123.5 billion in total US exports.
Likely Impacts on China
The likely impacts of the TPP on Chinese exports to the US and other TPP member countries largely depend on the breadth and scope of the agreement’s market access provisions and on the rules of origin for products of interest. As it now stands, most tariffs on industrial goods will be removed immediately, with longer phase-out periods applying to a range of sensitive products. As an outsider to the deal, and therefore excluded from preferential duty treatment, China will risk facing a deterioration in its export competitiveness in the TPP markets. However, higher-end items competing on non-price factors are less vulnerable.
In addition, China already has FTAs with eight of the 12 TPP members, a fact that may help lessen some adverse impacts. China is expected to encounter intensified competition mainly in the four TPP countries that currently do not have FTAs with the mainland, particularly the US, by far the mainland’s largest TPP market with a 17% share of its total exports in 2014, followed by Japan (6%), with Mexico (1%) and Canada (1%) some way behind. To be sure, increased TPP benefits will boost the competitive edge of export-oriented members – such as Vietnam, Malaysia and Japan – which do not have FTAs with the US at present and hence will gain free access to the US market. This will particularly pose more challenges in product sectors that overlap with those of the mainland once the TPP deal is in force.
In 2014, China’s exports to the US, Japan, Mexico and Canada amounted to US$608 billion, or 26% of its exports. However, only those products that face direct competition from TPP member exporters to TPP markets will likely be affected, notably garments and footwear made in Vietnam, but destined for sale in the US. In 2014, China exported US$71 billion worth of garments and footwear to these four TPP markets, accounting for only 3% of China’s total exports.
Vietnam, for instance, would be expected to increase its share of the US textile, clothing and footwear markets at the possible expense of China and other major suppliers. Vietnam is currently the second largest textile and clothing supplier to the US in value terms. It accounted for more than 8% of total US imports in 2014, while its share of the market has grown steadily over the past decade. For its part, China remains the leading US textile and clothing supplier, with a 38% share in 2014, but demand for Chinese products has been trending down modestly. Vietnam, frequently a supplier of cheaper alternatives to Chinese exports, could increase its shipments of products previously liable for very high import duties in the US. With this in mind, companies from the mainland, Hong Kong, Taiwan and South Korea have already increased their investment in textile production in Vietnam, with an eye to satisfying the TPP’s rules of origin and be able to continue exporting apparel to the US.
In the footwear market, Vietnam also ranks behind China in terms of US imports, taking up almost 14% of the total in 2014, compared with China’s nearly 66% share. As in textiles and apparel, US demand for Vietnamese footwear is expanding briskly, while sales of Chinese footwear are decelerating – and a TPP with generous duty treatment could reinforce those trends. Vietnam may also gain in a number of other product sectors as the TPP agreement will provide market access benefits.
In addition to Vietnam, China might have to contend with increased competition in certain product sectors from several other TPP countries, notably Malaysia and Japan. For example, Malaysia could benefit in certain electronics and parts items. Meanwhile, although many Japanese products already enjoy low duty in the US, Japan could further enhance its competitive edge stemming from extended duty-free treatment in other sectors, particularly with regard to automobiles, auto parts, and a range of machinery and industrial equipment.
Possible Repercussions on Other RTAs and FTAs
Unsurprisingly, some observers opine that China could lose relevance in the Asia-Pacific region if it stays out of the TPP. These fears, however, are probably overstated, especially given China’s extensive web of RTAs and FTAs across the region, including agreements with the Association of Southeast Asian Nations (ASEAN), Chile, Peru and New Zealand, the finalised (but yet to be implemented) deals with Australia and South Korea, and its ongoing negotiations for a trilateral pact with Japan and South Korea. Another even more important development is the emergence of the Regional Comprehensive Economic Partnership (RCEP), a new economic and trade area that would cover all 10 ASEAN nations, plus Australia, China, India, Japan, South Korea and New Zealand.
Some onlookers believe the TPP model runs the risk of overshadowing other narrower, product-based RTAs and FTAs. Admittedly, the TPP differs from most existing FTAs and RTAs in that it would not only involve comprehensive provisions on goods, services, investment and intellectual property rights, but also seek to address new trade issues such as SOEs and supply chain facilitation. In so doing, it sets the tone for future bilateral, regional and multilateral negotiations.
After all, the TPP negotiations do not appear to have had a dampening effect on the parallel RCEP discussions, which have proceeded at a steady pace. While the six partner nations participating in the RCEP process already have bilateral FTAs with ASEAN, this new arrangement is expected to expand on the existing regional framework by creating a modern, high-quality agreement designed to underpin and promote future growth, development and integration in the participating countries. Economic ministers from the RCEP countries believe that this free trade area could potentially transform the region into an integrated market that would account for some 29% of the world’s GDP and 28% of global trade.
The interplay between the TPP and eventual RCEP deal, and the impact one arrangement may have on the other remains unclear. However, Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam are participants in both pacts and regard them as complementary to each other. Many observers believe that these two efforts are important drivers for regional and global integration that could eventually facilitate a broader Free Trade Area of the Asia Pacific (FTAAP), which is expected to include all 21 members of the Asia-Pacific Economic Cooperation (APEC) and account for some 57% of the world’s GDP and 49% of global trade. Interestingly, steps have already been taken to draw up a blueprint for the proposed FTAAP following the APEC Summit held in Beijing at the end of 2014.
Separately, the Belt and Road Initiative, another major development strategy led by China to promote economic co-operation among countries along, but not limited to, the ancient land and maritime Silk Roads, will likewise complement the TPP by furthering market integration and creating a regional economic co-operation framework.
Strategic Implications for Hong Kong
As an international trade and financial centre where services account for more than 90% of GDP, Hong Kong should be able to benefit from any RTAs or FTAs in the region. This is particularly true if these agreements put significant, if not equal, emphasis on comprehensive economic co-operation, including FDI and investment facilitation, on top of merchandise trade liberalisation. Leveraging on its world-class business and physical infrastructure, its international commercial network and its strategic location between East and West, Hong Kong is well positioned to capture new demand for its services arising from an increasingly thriving RTA and FTA-derived regional economy.
Hong Kong’s extensive business networks on the mainland and in neighbouring countries give it an unparalleled advantage in terms of intra-regional trade. Its status as a re-export hub aside, Hong Kong is the preferred location of multinational corporations for their regional headquarters and for offices intended to oversee their trade and investment activities in the region. The city is ideally suited to providing a platform from which to explore Asian markets and the mainland market. When it comes to capitalising on RTA and FTA agreements in the region, however, the potential benefits for Hong Kong will very much depend on the scope or comprehensiveness of such agreements and, crucially, whether or not China is included. Should the mainland be excluded, or exclude itself, from any significant RTAs or FTAs, then Hong Kong might also be sidelined and suffer from a resultant diversion of trade and investment.
Take the TPP as an example. As the pact will likely hurt the competitiveness of made-in-China exports, this means that Hong Kong manufacturers across the border, apart from increasing the value added to their exports, will have to move their production facilities to Vietnam. Indeed, many of them have already relocated there or are in the process of doing so in order to stay competitive. This relocation away from the Pearl River Delta will somewhat weaken Hong Kong’s role as a regional service hub, particularly with respect to logistics, although cargo diversion is not expected to undermine the provision of other trade supporting services.
On the other hand, Hong Kong has much room for catching up in terms of RTA and FTA partnerships. Hong Kong, the world’s eighth largest trading economy, currently has just one FTA with another signatory ranked as one of the world’s top 10 traders, namely the Closer Economic Partnership Arrangement (CEPA) with the Chinese mainland. Apart from this, Hong Kong has only concluded FTAs with the European Free Trade Association (EFTA), whose members are Iceland, Liechtenstein, Norway and Switzerland, and with Chile and New Zealand. FTA negotiations with ASEAN are in progress.
Given its free-port status, Hong Kong may appear at a disadvantage when bargaining with its trade partners, especially as it has little to offer in terms of tariff cuts. However, this argument may not hold much weight, as RTAs and FTAs now increasingly focus on non-tariff barriers, services, investment and other economic issues. This development may in fact provide Hong Kong with a distinct edge in RTA or FTA negotiations, thanks to the city’s strengths in financial and business services, along with its widespread global and regional connections, especially on the mainland.
All in all, the value of establishing RTAs or FTAs with Hong Kong are likely to be clear to the many countries interested in accessing the city’s sophisticated services market or using its competitive services platform to target the mainland or other overseas markets. To fully explore these emerging business opportunities, Hong Kong must sharpen the competitiveness of its services sector and take advantage of its strategic links with the mainland and other major economies.