Implications for Canada of the non-participation of the U.S. in the Trans-Pacific Partnership

Some economic studies predicted that continuing with the TPP11, with no U.S. Participation, would produce less positive economic results but still benefit the remaining countries. Canada would benefit most (second to Mexico) with TPP11, with a projected gain of 3.4 billion dollars, greater than the estimated 2.8 billion dollars in TPP12. With the TPP11, BC will be able to commerce with the other 8 countries and have many opportunities for expansion. BC can also analyze the benefits for trading and consider the positive ways to capture market shares from American competitors. Additionally, there is the opportunity to have a better deal with the UMSCA, looking for better negotiation terms that favor commercial relations. However, the macroeconomic context must be considered, for instance, the evolution of economic partnership, international evolution, and the risks derived from climate change.

BACKGROUND:

The Trans-Pacific Economic Cooperation Agreement (TPP12), is a commercial free trade pact, signed in February 2016 by 12 countries in Asia, America, and Oceania countries that border the Pacific. Since its integration and during its operation, these countries observed various economic benefits derived from the deal (SICE, 2019). In 2017, the U.S. withdrawal from TPP12 started speculations about implications and economic impacts on the remaining 11 countries. Although the TPP was expected to end, the remaining countries began the process of implementing the treaty without the U.S. In December 2018, the 11 members started the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, also known as TPP11). The TPP11 holds the same rules and market access outcomes and most of the provisions of the TPP (CAFTA, 2019). Until now, seven of the eleven countries have ratified the agreement: Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam.

DISCUSSION:

Some studies predicted that continuing with the TPP11 will produce positive economic results for the 11 remaining countries (Kawasaki, 2017; Dade et al., 2017; Petri and Plummer, 2016; Global Affairs Canada (2018)). Particularly, Dade et al. (2017) they use a special version of the standard GTAP Computable General Equilibrium Model (Attachment A). With this, they use integrated accounts to be able to analyze robustly a part of the economy. Researchers consider that sources of the impacts are tariff reduction supplemented by services liberalization and Foreign Direct Investment. They derivate the next results:

The model shows the possible economic benefit taking into consideration a set of rules for the supply and production of goods and services. In general, the 11 countries would generate 2.43% increase in intra-regional exports, it is a lesser increase that the expected with the participation of the U.S.. The total exports of the group to the world would be expanded by 0.23%. This scenario considers that companies outside the block will move their production to member countries to take the advantages of the agreement. It is estimated that the real GDP of the block would increase by 0.074%, which is equivalent to economic welfare benefits of $ 22 billion by 2035. It is important to consider that the U.S. loses by being out of TPP11. According to the model, the impact for the U.S. was +9 billion under TPP12 and is -4 billion under TPP11 (Dade et al., 2017).

The second country most benefited (after Mexico) by TPP11 is Canada, with a projected gain of $ 3.4 billion -greater than the estimated 2.8 billion dollars in TPP12- and an improvement in real GDP of 0.082% (greater than the 0.068% estimated in TPP12). The benefits would be derived from the agricultural and agri-food sectors, as it does not have to compete with the U.S. for the market. The most benefited sectors would be meat, fruits, exports of vegetables, canola, and processed products. While the sectors with moderate and negative impacts would be dairy and textiles. The automotive sector would remain neutral and dependent on the rules of origin still on negotiations with the U.S (Dade et al., 2017).

Particularly, the potential impacts on British Columbia (BC) export sectors of non-participation of the U.S. has areas of opportunities. From 2015 to 2017, BC Merchandised Exports to CPTPP Markets, mainly, metals and minerals, forestry, agricultural products, industrial machinery, fish and seafood, and chemicals and plastics. With TPP11 there are new markets open for exports from BC, because Canada has preferential access to half a billion consumers in the world with a list of tariff elimination in: the agricultural and agri-food, fish and seafood, industrial goods and forestry products, and value-added wood products. The Canadian Government scenarios show how these BC products could possibly benefit from improved access (Government of Canada, 2019).

Moreover, in 2018, the Top 10 Destination Countries for Goods Exports by BC included the U.S., Mainland China, Japan, South Korea, India, Taiwan, Netherlands, United Kingdom, Vietnam, and Indonesia. Of these 10, only Japan and Vietnam are part of the TPP11 (Government of British Columbia, 2019), to be able to commerce with the other 8 countries of TPP11 is a big area of opportunity for expansion. BC can analyze the benefits of trading and consider the positive ways to capture market shares from American competitors. Additionally, the Agreement between the U.S., Mexico, and Canada (UMSCA) is still in negotiations (Ciuriak, 2019). This opens more opportunities to continue with exports and imports with the U.S. with the future deal. Other advantages to BC are: temporary entry of highly skilled Canadian business professionals, reduced non-tariff barriers, and government procurement and investment (non-discriminatory rules for Canadian investors).

CONCLUSION/RECOMMEDATIONS:

Some economic studies predicted that continuing with the TPP11, with no U.S. Participation, would produce less positive economic results but still benefit the remaining countries. Canada would benefit most (Second to Mexico) with TPP11, with a projected gain of $ 3.4 billion (greater than the estimated 2.8 billion dollars in TPP12). With the TPP11, BC will be able to commerce with the other 8 countries and have many opportunities for expansion. BC can also analyze the benefits for trading and consider the positive ways to capture market shares from American competitors. Additionally, there is the opportunity to have a better deal with the UMSCA, looking for better negotiation terms that favor commercial relations. However, the macroeconomic context must be considered, for instance, the evolution of economic partnership, international evolution, and the risks derived from climate change.

ATTACHMENT

Modelling framework

The basis for the GTAP Computable General Equilibrium Model is the GTAP V9 database with a base year of 2011. This kind of model is being used to analyze the quantitative economic impact in macroeconomic research. In this case, Dade et al. (2017) adapted the model to incorporate Foreign Direct Investments (FDI) and evaluate on the production and demand side. The model integrates the next elements: i) standard national income and expenditure accounts; ii) data of the industry by sector, that represent 57 sectors, 43 of which are good; iii) productions functions for each sector with sector-specific inputs of capital, skilled and unskilled labour, and intermediate inputs; and, iv) a trade account of the international linkages and each sector of the economy. For the simulations, they adopted a 33 products groups aggregation: 11 agricultural and food sectors, 4 primary sectors, 10 industrial sectors, and 8 service sectors. Also, they used 40 economies and regions for the regional disaggregation.

Bibliography:

Dade, C., Ciuriak, D., Dadkhah, A., & Xiao, J. (2017). The Art of the Trade Deal: Quantifying the benefits of a TPP without the United States. Canada West Foundation Trade and Investment Centre.

SICE (2019) -Foreign Trade Information System- Organization of American States. Web Page: http://www.sice.oas.org/agreements_e.asp.

CAFTA (2017) -Canadian Agri-Food Trade Alliance-. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). downloaded from http://cafta.org/trade-agreements/cptpp/

Government of Canada (2019) Benefits of the CPTPP for British Columbia. From https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/regions/BC.aspx?lang=eng

Government of British Columbia (2019) Statistics. From: https://www2.gov.bc.ca/gov/content/data/statistics

Ciuriak, D. (2019) “How U.S. trade policy has changed under President Donald Trump – Perceptions from Canada”. Download from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3362910

Global Affairs Canada (2018) “Economic impact of Canada’s participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership”. Download from https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/impact-repercussions.aspx?lang=eng