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December 17, 2017
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A trade pact that could reshape global supply chains

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The Trans-Pacific Partnership, if it takes effect, will bring big changes in trade not only for the 12 nations in pact, but for the rest of the world as well.

The Trans-Pacific Partnership (TPP) took a major step toward final approval in early October when 12 Pacific Rim nations reached agreement on the accord's provisions.

Because it is so enormous—it covers 40 percent of the world's gross domestic product—the TPP remains both controversial and a long way from implementation. It was a major issue in Canada's national elections in October, and it has become an important topic of discussion in the presidential race in the United States, where it must win approval from the U.S. Congress in the heat of the 2016 election campaign. Significant opposition to the pact exists in other nations as well. Yet there is also enormous pressure to enact the TPP. Already several nonmember states are asking to be included in the agreement.

Many of the TPP's details are not yet public; the secrecy of the negotiations is one reason that the agreement has become controversial. But should it take effect, a trade pact that includes a vast swath of the world economy, including two of the three largest economies in the world, the U.S. and Japan, is certain to have profound effects on global supply chains.

Until we know more, it is hard to predict just what those effects will be, but a few things seem if not certain, then very likely. Moody's Investors Service, for one, predicts that by reducing the cost of trade, the TPP will spur growth in all 12 member nations. (In addition to the U.S. and Japan, they include Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.)

Japan and the U.S., which already have a solid trade relationship, are likely to become even stronger partners, a development that could lead to a huge, beneficial impact on the electronics and automotive industries. Some of the smaller member economies expect the agreement will spur enormous growth in trade. A report in the Nikkei Asian Review says that manufacturers in Vietnam and Malaysia are already ramping up production capacity in preparation for the additional business they anticipate will result from the TPP. The pact also has significant implications for the elephant that is not in the room—China. Containing China, which is not a TPP member, is widely perceived as one of the major driving forces behind the TPP. Another Nikkei Asian Review report says that China will look toward Europe and Africa to build a "new Silk Road economic zone" in response to setbacks it may experience when business shifts to TPP members. Longer term, it is quite possible that China itself will either join the TPP or work toward a similar agreement for the Asia-Pacific region. Add in the Philippines, Thailand, South Korea, and Taiwan—all of which have indicated interest in such a deal—and the implications for global supply chains become as broad as the Pacific itself.

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