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Expert view - Asia (including Japan)

Edmund Goh

Ready for take-off?

Edmund Goh, a fixed income fund manager at Aberdeen Asset Management, considers what it would mean if the Trans-Pacific Partnership finally became a reality in 2016

After more than five years of tough negotiations the Trans-Pacific Partnership (TPP) could finally become reality. Comprising 12 countries, which together account for 40% of the global economy, the TPP would be the largest free trade agreement in more than two decades.

As well as eliminating tariffs on traditional products such as manufactured goods, TPP’s ground-breaking achievement will be more rigorous minimum requirements on environmental and labour practices that, significantly, will be universally applied to all members. Nevertheless, this landmark of international diplomacy should not be considered a done deal – there are significant domestic legislative hurdles to overcome as well as issues around high-profile omissions.

Download Aberdeen's infographic - 'Asia by the numbers'

"When consumers and investors think of Asia, they think of populous economies that are both sophisticated and well-established. But what about the surrounding boom of lesser-known economies? Asia isn’t just China and India: the rest of the continent is coming up in the world too, seeking to overtake other economies in a matter of years ..."

Go to 'Asia by the numbers'

Win-win situation?

With lower barriers to trade complemented by more liberal cross-border investment policies, TPP will allow its members to trade what they are most effective and efficient at producing. Students of economics will be familiar with Ricardo’s theory of comparative advantage – if countries specialise in producing goods where they have a lower opportunity cost, consumers should pay less.

Trade liberalisation is an effective way of helping developing countries become richer. Emerging countries such as Vietnam look set to become TPP’s biggest winners, with some estimates predicting that, under the agreement, Vietnamese gross domestic product could expand an additional 10% by 2025. At the other end of the spectrum, the staunchest advocates of the agreement are multinational US firms who can expect lower costs and better margins.

Yet, already it appears that not everyone is happy with TPP. A particularly thorny issue relates to pharmaceutical drugs and the protection sought by US pharma giants against cheaper alternatives – thus driving prices higher elsewhere, including in poorer member states.

Some of the most vocal opponents to TPP are in the US. Mooting TPP as another ‘NAFTA’ – the North American Free Trade Agreement created in the early 1990s between Canada, the US and Mexico, which critics contend led to the destruction of several thousand manufacturing jobs within the US – they argue that swathes of job losses in the US manufacturing sector look all but inevitable. With the influence that certain US trade unions wield, they could provide a formidable opposition.

Missing players

With all factors considered, TPP may well prove to be its own worst enemy. The glaring omission of China, the world’s most populous country and second largest economy, could be viewed as an organisational own-goal. China is a global trade star player and excluding it could well be to the detriment of the TPP’s overall success.

Then there is the absence of India, which by 2028 is expected to boast a larger population than even China. Though in the short term such absences may benefit TPP, further down the line their exclusion may prevent the agreement from reaching its full potential.

Such an obvious economic setback has led many to question the true motivation for TPP. As well as its economic benefits, critics have argued this agreement will be just as important in a geopolitical context. Many US politicians would welcome the opportunity to derail Chinese ascendancy in the region.

Debate surrounding the merits and drawbacks of the TPP could still be premature. Until the agreement has been approved and ratified by each of the 12 nations’ respective governments, TPP will not come into existence. While for some nations, approval of TPP is almost guaranteed, in the US, this is by no means a foregone conclusion.

On the right, Republican frontrunner Donald Trump has vociferously spoken out against the agreement. Meanwhile the Democrats’ likely candidate, Hillary Clinton, has raised concerns, particularly in the context of US job losses. In the high-stakes battle to win votes, the agreement’s divisiveness could make it a no-go area for now.

Back to basics

Though uncertainties do still exist, the TPP is a proposal that promises much for its signatories. Yet China and India's omission, as well as stiff opposition in the US, means the agreement should still be viewed as a work-in-progress that will take time to be implemented in its optimal form.

From a practical investment perspective, the benefits to any country being part of the agreement will accrue over the long term. Though the TPP will undoubtedly shift the economic goal posts, amid the clamour of its long-awaited arrival, investors will do well to stay focused on a country’s fundamentals and remember the basics.

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