From Liberty Street Economics:
U.S. involvement in what could be one of the world’s largest free trade agreements, the Trans-Pacific Partnership (TPP), has garnered a lot of attention, especially since the entry of Japan into negotiations last year. The proposed free trade agreement (FTA) encompasses twelve countries, which combined account for 45 percent of U.S. exports and 37 percent of U.S. imports. This broad coverage of U.S. trade seems to suggest large potential gains for the U.S. from the agreement. However, three quarters of this trade is already within the U.S. free trade agreement with Canada and Mexico (the North American Free Trade Agreement (NAFTA)), making the assessment of potential gains to the TPP less clear cut. In this post, we investigate some implications of TPP for U.S. international trade, with a focus on identifying areas with the greatest potential for liberalization and, hence, benefits to U.S. exporters and consumers.
We find that while the potential gain from tariff reduction on the typical U.S. export or import is small (that is, for the average trading relationship across all products and countries), potential gains for a small subset of products and partners may be quite large. We highlight the role of agricultural products and the inclusion of Japan under a potential TPP deal for their outsized potential benefits. We also note that the extent of agricultural liberalization in the United States and Japan is highly uncertain. Reduction of agricultural subsidies and tariffs in advanced economies is a politically charged issue, and one credited for multiple derailments of the World Trade Organization (WTO) Doha round of multilateral negotiations prior to the recent deal. Therefore, given the lopsided distribution of tariff barriers and the complex political economy of agricultural industries in the United States and Japan, the expected value of the deal for U.S. trade arising from lowering import tariffs is correspondingly uncertain.
The United States entered into negotiations to join the TPP in February 2008. Since then, Australia, Peru, Vietnam, Malaysia, Mexico, Canada, and Japan have also joined the negotiations, a series of over twenty official meetings through December 2013. The TPP focuses primarily on promoting trade and investment. However, there are also many other issues on the table beyond trade, such as intellectual property protection and investor-state dispute settlement, which could turn out to be stumbling blocks. Since the specifics of the TPP pertaining to these other issues are not yet widely known and nontariff barriers are so difficult to measure, our focus will be on the potential gains arising from tariff reductions.
At first glance, the TPP does not represent a substantial opportunity to increase U.S. market access abroad. As illustrated in the chart below, while the share of U.S. trade covered by TPP partners is large, at roughly 40 percent of both imports and exports in 2012, free trade agreements already in place with Canada, Mexico, Australia, Singapore, Chile, and Peru represent the vast majority of this share. Almost three quarters is already covered by NAFTA alone. Therefore, if the tariff levels negotiated under the TPP are more or less in line with those in place under NAFTA and other bilateral agreements, the scope for further tariff reduction to current U.S. export destinations is limited. One exception is Japan, which accounts for 4.5 percent of U.S. exports and which does not have a bilateral free trade agreement in place with the United States.