1.1 TPP agreement from the Canadian perspective
The Trans-Pacific Partnership renamed as the Comprehensive and Progressive agreement for Transpacific Partnership (CPTPP) is a proposed free trade agreement involving 12 Asia-Pacific countries (Fergusson et al.
2016). The Trans-Pacific Partnership was developed from the Trans-Pacific Economic Partnership Agreement (P4) between Brunei, Chile, New Zealand and Singapore in 2006. The agreement contains aspects of the past trade agreements on agriculture, forestry, fisheries and industrial goods where tariff reductions and/or eliminations have been negotiated while incorporating new areas such as electronic commerce. There are currently 11 other countries involved in the partnership apart from Canada, and these are Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA and Vietnam. Decisions on membership are made by the existing members of the partnership. Besides the new trade agreements introduced by the TPP (CPTPP), these agreements will coexist with existing free trade agreements. TPP is a living agreement which makes it possible for membership to be expanded to include other countries. It also has an extensive coverage (Lakatos et al.
2016).
Canada has a number of free trade agreements with some TPP members, including the USA and Mexico under the NAFTA, as well as Chile and Peru under the Canada–Chile and Canada–Peru FTAs. The TPP agreement formulates new FTAs with seven Asian nations—Australia, Brunei, Dar-es-Salaam, Japan, Malaysia, New Zealand, Singapore and Vietnam. Canada’s bilateral trade is marginal with these seven partners except with Japan—the third largest economy in the world.
The agreement is expected to be a platform for future trade agreements which benefit the economies of participating countries by liberalizing trade and investment. The partnership also incorporates new areas and agreements that go beyond those existing in the World Trade Organisation (Fergusson et al.
2016). These agreements are different from the traditional trade agreements because they incorporate cooperation on difficult trade policy issues such as regulatory barriers which have been complex to tackle so far. TPP makes this possible (Lakatos et al.
2016). Different countries have market access for different goods and services. The negotiations were concluded in 2015, but the final agreement was signed in 2016.
Ratification would create the largest trade zone in the world, spanning four continents and 800 million people. Table
1 shows the GDP contribution of TPP member nations in 2013(27.5 Trillion USD), its scope accounts for 40% of the world’s economic output. The share of Canada’s trade with TPP countries other than the USA is 11%. Despite the presence of many barriers to trade, Canada’s exports to TPP countries averaged $366.1 billion CAD annually from 2012 to 2014. Industrial goods comprise the major portion of exports, i.e. $311.4 billion CAD, followed by agriculture and agri-food ($30.9) and forestry and wood products ($20.4).
Table 1
GDP of TPP member countries and Canada’s total trade with TPP countries (in million USD) in 2013.
Source: World Bank, Canadian Council of Chief Executives
1827 | Canada | – | |
1560 | Australia | 3451 | 0.51 |
16 | Brunei | 31 | 0.00 |
277 | Chile | 2555 | 0.38 |
4920 | Japan | 24,393 | 3.59 |
313 | Malaysia | 2962 | 0.44 |
1261 | Mexico | 32,113 | 4.73 |
185 | New Zealand | 910 | 0.13 |
202.3 | Peru | 3682 | 0.54 |
297.9 | Singapore | 2274 | 0.34 |
166,910 | USA | 606,022 | 89.29 |
171.4 | Vietnam | 2571 | 0.38 |
27,721.7 | Total | 678,690 | 100 |
TPP countries get duty-free access to 3.25 and 2.1% of Canada’s dairy and poultry market, respectively.
Over time, tariffs among members of the TPP would be eliminated for a number of products, thus lowering trade barriers significantly even for countries which apply high tariffs to particular products. It also seeks to enhance the development of supply chains which involve careful coordination of production decisions, rules on shipping, investment and the transfer of information among different countries. TPP incorporates social, labour and environmental standards such as standards that address illegal wildlife trafficking and logging and strengthen copyright terms which is likely to have an impact on trade and production chains (Lakatos et al.
2016). Some of the agreements of the TPP by the Canadian government are for the elimination of tariffs on products such as pork, fruits, canola, machinery and minerals; increased mobility of high skilled and business workers; increased import of foreign car parts and the compensation of losses faced by farmers under the TPP through a series of multibillion dollar programmes such as quota protection, modernizing equipment and marketing assistance.
Throughout the implementation of the Trans-Pacific Partnership and the Canadian-EU Trade Agreement, the government of Canada has introduced a number of initiatives for producers and processors. For instance, the income guarantee programme, quota value guarantee programme, market development initiative and processor modernization programme have been introduced by the government to support supply-managed producers and processors. These initiatives are to provide income protection for producers, promote marketing of top quality goods and encourage competitiveness and growth.
Rules, custom procedures and technical standards put in place by the TPP decreases production cost for farmers and also makes it easier for countries to transact business among each other. By being a part of the TPP negotiations, Canada can put forth proposals that will be in their best interest and therefore influence the rules that govern trade relationships (Dawson and Bartucci
2013). Generally, the TPP agreements lead to better trade which results in greater competition, efficiency in productivity, lower prices, restraining inflation and making diverse goods and services available to consumers. Overall, Canada will benefit from improved market access for food, meat, fish, alcohol products, industrial products, metals and minerals and also the services sectors. This occurs through the strengthening of partnership with existing trade partners and access to markets in Asia. Besides expansion, Canada will benefit from trade and investment diversification, since most of its exports are skewed towards the USA and scarcely any to countries such as Mexico, Peru and Chile. This expansion and diversification in trade and investment will lead to an increase in the market presence in these and other countries such as Australia, New Zealand and Vietnam and result in the growth in Canada’s exports. TPP is expected to cover approximately 80% of Canada’s exports after all the partners come on board. Participating in this partnership is important for Canada because most of the TPP members are wealthy growing economies with younger population who would be interested in purchasing goods and services that Canada can offer such as financial services, energy, education and technology. TPP will increase Canada’s integration with other fast growing Asian markets and economies. TPP is likely to reduce risk and uncertainty for exporters and investors in the long run (Dawson and Bartucci
2013).
Canada benefits from the TPP agreement in numerous ways. Canada is expected to have a country-specific quota in Japan for wheat which starts at 40,000 tonnes and increases to 53,000 tonnes within 6 years. It will also have access to a TPP-wide quota for food barley starting from 25,000 to 65,000 tonnes within 8 years. The TPP agreement will lead to a reduction or elimination of existing taxes on processed food and non-alcoholic beverages (maple syrup, baked goods, sugar and chocolate confectionery) in countries such as Japan and Vietnam where Canada’s export of these products face high tariffs. This will be highly beneficial to the Canadian economy since the agricultural and agri-food industry is a key processing sub-sector which contributed approximately $27.7 billion to the country’s economy in 2013 (Global Affairs Canada, Govt. of Canada).
Within 2 years (2012–2014), Canada’s export of canola oil to TPP countries, largely to Japan, totalled $1.8 billion annually. In the same period, Canada’s export of processed food and non-alcoholic beverages to TPP countries was, on average, $7.3 billion annually.
The TPP agreement will improve the market access opportunities for the wines and spirits sector in Canada through the removal of tariffs in countries such as Japan, Vietnam, Australia and New Zealand. In Vietnam and Australia, duties up to 55 and 5%, respectively, on whisky will be eliminated within 12 years of the agreement coming into force. Streamlined processes at the border and trade facilitating rules such as the elimination of tariffs up to 16.8% on sweetened dried cranberries in Japan could lead to an increase in Canadian exports. The market access for fish and seafood such as frozen snow crab, herring roe, lobster, shrimps, scallops, mussels and salmon will also be improved with the elimination of tariffs in Japan, Malaysia and Vietnam.
The TPP agreement improves Canada’s industrial trade to Australia, Japan, New Zealand and Malaysia. The industries include those of wood and related products, industrial goods, metals and minerals, chemicals and plastics, ICT and life science products, machines and equipment and cosmetics. For instance, the two way investment between Canada and Australia was valued at $30.3 billion in 2014. In the automobile industry, TPP provides access into new markets where free trade agreements did not exist for Canada. This will be made possible through the elimination of tariffs for all vehicles and vehicle parts into TPP market and also through better access for Canadian automotive exports to Vietnam and Malaysia. The integration between the Canadian and the North American auto industry is also protected and strengthened as a result of the agreement. Examples of Canadian metals and minerals that will benefit from tariff elimination are aluminium products, iron and steel, petroleum products. Also, plastic bags, plates, pipes and sheets are examples of Canadian exports of chemicals and plastics that will benefit from tariff elimination. Tariffs up to approximately 17, 4 and 20%, respectively, in Vietnam, Japan and Malaysia will be eliminated upon the TPP agreement coming into force.
New opportunities for Canada’s aerospace sector will be enhanced through the TPP agreement by providing considerable certainty for the exports of aerospace-related goods and services. This would be achieved through the implementation of rules that promote non-discrimination and transparency in government procedures and also demonstrate Canada’s production realities and methods. These agreements will further promote transparent cross-border trade services as well as temporary entry of business persons which will improve the market access for professional services, research and development, environmental, construction and transportation services. New commitments have been assured for particular high skilled professionals and technicians from Australia, Brunei, Peru, Chile and Mexico. Under the TPP agreement, tariff elimination on industrial machinery such as compressors and pumps, agricultural machinery, such as harvesters and movers, and construction equipment, such as lifting, loading, handling, moving and grading machinery, will generate export opportunities for high-quality Canadian machinery.
In addition to these benefits, the TPP provides commitments that go further than trade agreements made by the World Trade Organisation and Canada’s free trade agreements with several members of the TPP agreement, such as, market access for environmental services in Vietnam and Malaysia. Canada also benefits from voluntary deliberations of mutual recognition agreements between its authorities and their counterparts in TPP countries and from the access to free data which is made available through the transparent framework of the TPP. Discrimination against Canadian service suppliers is diminished or eliminated in TPP markets making it easier for them to provide their services freely in different countries.
The agreement promotes the participation of Canadian financial companies in the TPP market which increases the potential for growth in the financial sector. This is due to the fact that the agreement protects existing investments, deals with discriminatory barriers to entry into the market, encourages competition and communication among financial regulators, creates transparency in regulatory regimes and enables policymakers to protect the interests of consumers of financial services. Canada will therefore gain from improved investment protection, protection against expropriation and violation of minimum standards of treatment and enhanced ability to transfer funds abroad. It is worth noting that Canada’s existing policies for protecting and sustaining the country’s cultural context are protected under the TPP. It is expected that TPP member countries which includes Canada will have their GDP increase by 0.4–10% by 2030 after implementation of the TPP. This increase will be due to tariff cuts in goods and services (Lakatos et al.
2016). It could result in annual income gains of $9.9 billion and increased exports of $15.7 billion for Canada (Dawson and Bartucci
2013).
On 23 January 2017, Donald Trump signed a presidential memorandum confirming the US withdrawal from the Trans-Pacific Partnership. Canada’s potential economic gains from the TPP agreement depend on the participation of the USA—under the TPP agreement. There are a number of issues that would potentially influence Canada’s existing economic ties with the USA when the TPP agreement comes into force.
Most importantly, Canada already has preferential market access to the USA and Mexico under NAFTA. Liberalization of the US and Mexican markets for other TPP members would erode the preferences that Canada currently enjoys under the NAFTA, resulting in a displacement of Canada’s exports to the USA and Mexico. Canada’s preference in the US market would be partially offset by the gains from the new FTA countries under the TPP agreement; however, the importance and size of the US market for Canada’s trade might not be significant enough to offset the losses in the US market.
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Similarly, Canada’s trade with new FTA partners under the TPP would likely displace US and Mexican exports to Canada. As a result, Canada’s bilateral trade with existing FTA partner countries is expected to decline under the TPP agreement. Net Canadian exports to the existing FTA partner countries would drop by US $1.5 billion, largely due to an erosion of NAFTA preferences in the USA and Mexico, while imports from these partner countries will also decline by US $4.3 billion (Global Affairs Canada
2016). The sector that will be affected the most is the automotive sector. With more than 80% of Canadian automotive production exported to the USA, Canadian automotive production will experience a decline. Overall, Canadian exports of automotive products to the USA are projected to decline by US $3.6 billion, or a 4.7% decline in total Canadian automotive product exports to the USA (Global Affairs Canada
2016).
Another important issue under the trade agreement is Rules of Origin (ROO). The ROO requirement is set at a lower rate in the TPP as compared to NAFTA rules.
2 Under NAFTA, the rules of origin threshold for preferential treatment for assembled vehicles is 62.5%, while under the TPP the threshold is 45%. This lower requirement has important consequences across countries. This means that, under the TPP, automakers have the possibility to source a greater proportion of auto parts from countries outside of the agreement than is currently the case under NAFTA. This is expected to translate into efficiency gains for Canadian automotive producers, but, on balance, would result in losses in both production and investment in the automotive industry (2% approx.). This is primarily driven by reduced US demand for Canadian automotive parts as US automotive producers are able to source more parts from non-TPP members, thereby displacing Canadian exports to the USA.
Furthermore, US commitments under the TPP for sugar and services are likely to provide new opportunities beyond NAFTA to expand Canadian exports to the US market. The professional services and exports of sugar products would increase considerably.
Given the size of the US economy, the USA plays a pivotal role among TPP members and their participation in the agreement is needed for the full benefit of the TPP agreement to be reached. To realize its full effect, the deal would have to be ratified by February 2018 by at least 6 countries with 85% of global economic output. The USA would need to be on board to meet the last condition. Some countries, including New Zealand, have suggested some sort of alternative deal may be possible without the USA. But Japan is not as hopeful.
Some studies have investigated the TPP impact on member and non-member countries; however, there are few studies focusing on Canada. World Bank (
2016) shows that the TPP agreement could raise member country GDP by an average of 1.1% by 2030 and increase trade by 11% over the same period. To the extent that the agreement has positive spillovers to non-members, and detrimental effects through trade diversion and preference erosion could be limited. World Bank (
2016) estimated the overall impact of the TPP on member and non-TPP member countries; however, they did not analyse the impact from a single country perspective in general and Canada in particular. Even though the study used a dynamic CGE model, the tariff reduction strategy is different from this study. Further, the selection of sectors is more appropriately addressed in the current study using the actual tariff reduction announcement in the agreement. Further, the study added another simulation exercise where the developing member countries experience input augmenting technical changes due to the likely development of production networks within the region. A descriptive study by Dawson and Bartucci (
2013) shows that annual income gains and increases in exports will be $9.9 billion and $15.7 billion for Canada. However, the TPP does not offer Canada strong market access gains in the short term; instead, the agreement is important for a series of strategic and defensive reasons. Global Affairs Canada (
2016) assesses the potential economic impact of the Trans-Pacific Partnership agreement (TPP) on the Canadian economy. They attempted two scenarios: the first had Canada joining the TPP as a member and the second, did not have Canada joining the TPP. The study shows a net advantage to Canada resulting from increased market access and greater regional economic integration with Asia-Pacific countries, if the nation joins TPP. If Canada chooses to remain outside the TPP agreement, this would present several risks to Canada’s economic well-being, which could lead to total GDP losses of approximately $5.3 billion. The study objective was quite different than the current study. Moreover, all the above studies considered the TPP agreement in its original form when the USA was one of the negotiating countries. There is no study which discussed the impact of TPP on Canada excluding USA, to the best of our knowledge.
Given this context, it is essential to study the TPP impact on the Canadian economy with and without the USA as a member. The study evaluates the economy wide impact of the TPP agreement on Canada and other member countries including the USA in terms of output growth, export, import, income and welfare. The study also attempted another similar exercise without the USA. Further, it attempts two different types of simulations including tariff reductions and technological upgradation.
The remainder of the paper is organized as follows.
Section
2 provides a description of the calibration of the global CGE model that was developed for the study. This includes the data and aggregation strategy. Section
3 explains the experimental design of the scenarios. The analysis of results of the study is presented in Sect.
4. Section
5 concludes the paper with policy recommendations.