Negotiators Reach Tentative Agreement on TPP
Years of difficult negotiations reached an important milestone early last week, as a group of happy but exhausted negotiators announced tentative agreement on the Trans-Pacific Partnership (TPP) trade agreement. The largest trade agreement in history, TPP covers 12 countries in the Americas and the Pacific Rim that constitute around 40% of the world's GDP and 13% of global trade.
The mere announcement of a tentative agreement accomplished a stunning feat: it got Donald Trump, Hillary Clinton, Mike Huckabee, and Bernie Sanders to all agree on something. Each has come out against the bill, for a series of different reasons. Still, anything that politicians of both parties dislike can’t be all bad.
Something For Everyone to Dislike
Critics of the trade bill have valid points whether they come from the left or the right. Critics on the left charge that the bill either will take away American jobs or act as a windfall to big corporations. Critics on the right argue that the deal is bad for some important industries such as tobacco and pharmaceuticals and that that it does not address currency manipulation. Others are concerned that we are giving up too much in terms of sovereignty and that intellectual property rights are being abused.
Meanwhile, advocates point to increased economic growth throughout the TPP regions and an increase in jobs as American companies sell more products overseas. As it is, the US ships over $1.9 billion in goods to TPP-member nations daily, according to the Office of the United States Trade Representative (USTR). The Peterson Institute estimates that TPP would provide a $223 billion worldwide boost to the global economy by 2025.
They are all correct, to a point. These agreements depend on compromise, a dirty word in Washington of late. That's why these deals are generally reached in secret, with occasional strategic leaks. If your industry is one of the ones on the short end of the trade deal, you're probably not as interested in whether it's an improved deal for the country as a whole. You want to see it defeated.
Free Trade Through Tariff Removal
From America's perspective, who are the winners and losers so far? On a broad scale, the Wall Street Journal lists aerospace, agriculture, and apparel as among the winners, with tobacco and pharmaceutical companies among the losers. It is simply too early to tell in most cases, and it's certainly too early to gauge the effect on individual companies.
The deal has reportedly cut or eliminated 95-98% of tariffs between the member nations — over 18,000 tariffs on American products alone. These tariffs involve a wide variety of goods including dairy and agricultural products, automobiles, chemicals, and heavy equipment. TPP does not so much establish free trade as it does eliminate as much of everybody's protectionist policies as possible (including America's) through the art of compromise.
However, application and enforcement of these rules will depend on the details of the agreement and how "rules of origin" are defined for any particular field. These rules set percentages of components that must be domestic in origin to receive duty-free treatment. The New York Times gives the example of the auto industry, where reportedly 45% of each car's value must originate within a TPP member nation to have duty-free status. With a complex supply chain, multinational corporations can easily stretch the definition given vaguely written rules.
In approximately a month, we'll know more details and then TPP winners and losers can be assessed accurately.
Changing of the Rules
Tariffs are only half of the story. The other part is the establishment of common rules and regulations across the TPP nations. These rules are more controversial, and arguably more consequential, than the tariff removals themselves.
Not all these rules are anti-labor, as some critics claim. For example, Brunei must deal with minimum wage issues, Malaysia with human trafficking, and Vietnam with independent rights for labor unions. However, the biggest criticism within US circles on the rules regards patent/intellectual property rights and the corporate/government relationships.
The most contentious battle was in pharmaceuticals, where makers of biologics were seeking 12-year protection on the data used to create the biologics in order to prevent knock-off formulations and allow pharma companies to recoup their investments. In the end, the US agreed to a 5-year period within the TPP (the Affordable Care Act keeps the number at 12 years domestically).
One chapter of the TPP agreement involves investor-state dispute settlement (ISDS). In essence, corporations can legally challenge regulations of a particular country outside the courts of that country in a binding arbitration process with three arbitrators (one from each party plus a mutually agreed-upon third arbitrator).
Can corporations supersede a country's laws if they can show sufficient economic damages, such as a tobacco company challenging anti-smoking laws? Indeed, they can — and have. Philip Morris did just that against Australia through its Hong Kong subsidiary. ISDS is a component of many trade agreements already, including NAFTA. The arbitrators can't force a country to change its laws, but it can inflict economic penalties that may influence states to change the law.
For reference, the US has never lost such a case. Since the US has 70-80% of the world's lawyers, depending on the source, we might as well use them to our advantage.
Regardless of how you feel about trade agreements in general, history has shown that it makes sense to engage the rest of the world constructively. America's economy cannot grow without improved overseas trade — consider how much Chinese growth assumptions affected our economy. President Obama phrased it well when he said, "When more than 95 percent of our potential customers live outside our borders, we can't let countries like China write the rules of the global economy."
Until the full text comes out, it's hard to say whether the TPP is a good or a bad deal for any particular country, or for the world economy as a whole — although it stands to reason that an agreement that removes thousands of tariffs almost has to result in some economic stimulus by definition. However, the real winners and losers will be determined within individual countries and their respective industries, and how they are affected by tariff removal.
So it will also be with the effect on investors and how their respective investments will be affected case-by-case. Do your homework on individual companies through press releases and other statements to see how they may be affected by either a tariff removal or a rule change.
Remember, ratification of the TPP will take some time — if it is ratified at all. Don't bail on a stock based purely on expected TPP effects, and look at such an abandoned stock as a potential buying opportunity.