The magnitude of impact from trade diversion on Bangladesh due to TPP is uncertain. But the impact is certain. Mitigation of some of the shocks of TPP will depend on how the country prepares domestically and globally.
Published in The Daily Star on Monday, 26 October 2015.
Mitigating the implications of TPP
Dr Fahmida Khatun
The recently adopted mega trade deal, the Trans-Pacific Partnership (TPP) led by the USA, has received mixed reactions worldwide. For the 12 signatory countries, it will integrate trade among themselves. To them, this addresses the “21st century trade issues, such as intellectual property protections, digital trade rights and protections for investors”. Mooted in 2008, the deal was finally signed on October 5, 2015. Its members, the USA, Canada, Japan, Chile, Peru, New Zealand, Australia, Brunei, Malaysia, Vietnam and Singapore, cover 40 percent of global trade and one third of the global economy. After the Uruguay Round of the World Trade Organisation (WTO), TPP is the largest ever trade agreement among countries.
Through major steps towards trade liberalisation, the TPP countries “expect this historic agreement to promote economic growth, support higher-paying jobs; enhance innovation, productivity and competitiveness; raise living standards, reduce poverty in our countries; and to promote transparency, good governance, and strong labour and environmental protections.” Some estimates indicate huge benefits for these countries. For example, it can expand the economies of TPP members by $285 billion by 2025. Vietnam, Malaysia and New Zealand will benefit the highest in terms of their GDP growth. Production and export of electrical equipment, textiles, construction and machinery in Vietnam and Malaysia and transport equipment in Japan will be increased due to this deal.
The political economy of the TPP is deeper than mere trade liberalisation. The underlying objective also includes isolating China and creating more competition between the USA and China. As China created the Asian Infrastructure Investment Bank (AIIB), the urge of some bigger powers to unite against China became stronger. Because, through AIIB, China has exhibited its ability to influence the rules of investment finance in Asia.
For those outside the TPP, apprehensions have surfaced in a number of areas. Existing estimates are only preliminary in the absence of the details of the agreement. Still, it is huge. The Chinese economy will suffer a loss to the tune of $47 billion to $89 billion. India will lose out $2.7 billion in exports annually. Indian exports will face a diversion of about 1 percent.
Bangladesh worries about the possibility of trade diversion due to the TPP. Through extensive tariff elimination amongst themselves, the TPP countries will have advantage over non-TPP countries. Almost 80 percent of Bangladesh’s exports are readymade garments (RMG). The RMG sector is feared to be the direct victim of TPP. At present, Bangladesh – as a least developed country – gets duty free, quota free access to most developed country markets. But in the US market, Bangladesh pays about 16 percent duty on its RMG exports, while Vietnam pays only 8 percent as tariffs. With TPP in place, Vietnam will have even more preference in the US market compared to Bangladesh. Of course, the extent of the trade diversion is to be seen once the final concessions are provided. But worries remain. This is also true for other export items of Bangladesh, such as frozen food and agricultural products. Another area of loss is foreign investment. For investors, it will be profitable to invest in TPP member countries. They can have preferential access to export products to the TPP countries. For example, if investors wanted to invest in pharmaceuticals in Bangladesh to export to the global market, they will not find it attractive to invest in Bangladesh anymore.
Experts and exporters of Bangladesh expressed concerns on the potential negative impact of TPP. Some tried to put up a brave face by saying that there is nothing to worry as Bangladesh will not lose much. True, in the short run the impact will not be negative. Materialisation of benefits from TPP takes a long time, as countries have to prepare themselves to comply with various requirements of the trade agreement. Also, the trade deal is yet to be approved in the US Congress. And by the time countries actually start benefitting from TPP, the global trade landscape would already have changed. The tariff regime may come to an end. Well, this will mean that the Doha Round of trade negotiations of the World Trade Organisation has to be successfully completed by then. But after14 years, the Doha Round sees no sign of conclusion. This has led countries to fall back on bilateral free trade agreements (FTAs) and regional trade agreements (RTA). Bangladesh’s loss due to TPP can be mitigated through active participation in regional and free trade agreements. Bangladesh, as a member of more than 50 FTAs, can effectively utilise these platforms to benefit more from trade.
The apprehension of losing the export market to competing countries through TPP has led some in Bangladesh to consider joining the group. While TPP membership is open to interested countries, Bangladesh has to know the details of the agreement and their potential implications before joining the pact. The TPP sets high standards for trade and investment. Among them labour and environmental regulations and intellectual property rights protection are critical components of the agreement. Bangladesh will have to undertake major regulatory and economic reforms to meet those stringent requirements. The efficiency level has to be improved to compete in a tougher trade regime. Because more than tariffs, non-tariff measures will affect exports from Bangladesh. The magnitude of impact from trade diversion on Bangladesh due to TPP is uncertain. But the impact is certain. Mitigation of some of the shocks of TPP will depend on how the country prepares domestically and globally.
The writer is Research Director at the Centre for Policy Dialogue, currently a Visiting Scholar at the Centre for Study of Science, Technology & Policy, India.