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June 02, 2015
Supply chain impact of the TPP
By: Ops Rules Team

The Trans-Pacific Partnership (TPP) agreement outlined in late 2011 by the leaders of the nine countries – Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States aims to create comprehensive market access through elimination of tariffs and other barriers to goods and services trade and investment, facilitating the development of production and supply chains among TPP members, promoting trade and investment in innovative products and services, including related to the digital economy and green technologies, and to ensure a competitive business environment across the TPP region.

The agreement covers about 40 percent of the world’s economy. According to this fact sheet, as a group, TPP countries are the US’s 3rd largest goods export market and 4th largest services export market. US goods exports to the Asia-Pacific totaled $618 billion in 2009, 58 percent of total US goods exports to the world.

As you can see in the graph below, despite the TPP’s breadth there is meaningful impact only on a small number of products and partners because the US already has extensive agreements in place and there are few products with high tariffs.

From a supply chain perspective, what matters is the end to end cost and that is not always as obvious as it may seem. For instance, we recently discussed the exposure of supply chains to currency exchange volatility. Currency exchange is an issue that has come up in relation to the TPP as you will see below.

In addition, there are other factors such as difference in infrastructure that can create an advantage. A recent unintuitive example of trade between North America and Asia is the following analysis by The Australian Export Grains Innovation Centre, comparing the farm-to-market systems of Australian exporters and those of Canada. The report, The Puck Stops Here – Canada Challenges Australia’s Grain Supply Chains, shows that Canada is able to move grain to markets in Asia for about the same cost as Australian farmers, despite greater distances both in-country and on ship. This is because of its internal infrastructure, ability to offer just-in-time deliveries from the farm and overall efficiency.

The TPP recognizes that are other issues in trade that can impact the supply chain beyond tariffs and some of them such as intellectual property are addressed in the agreements. However, others, such as currency manipulation are not. Based on what has been made public, the main industries the TPP will impact are the following:

  • Auto makers – the agreement is going to eliminate tariffs on cars and trucks imported to the US. This will allow Japanese and other foreign companies to import more parts and cars that they produce in the US today because of the tariffs. Currently, there is a 25 percent tariff on light truck imports from Japan, but a zero-tariff policy on automobiles imported from the US to Japan. Automakers in the US are of course not happy with this and note that currency manipulation is a big issue in exporting to Japan. After 36 years of no tariffs on foreign automakers, 93 percent of the cars in Japan are local. Thus, US auto manufacturers have everything to lose and nothing to gain from loosening import policies from their Japanese competitors.

  • Shoe makers - [Name Redacted] supports the agreement because it would reduce the tariffs on the shoes they produce overseas and then ship to the US. (Right now 98 percent of shoes in the US are imported.) On the other hand, [Name Redacted] is requesting a gradual reduction in the tariffs to protect its 1400 manufacturing workers in New England.

  • US Agriculture – The analysis "Will the United States Benefit from the Trans-Pacific Partnership?," shows that the high tariffs are mostly in agricultural industries. High tariffs are currently applied on about 20 percent of the value of US agricultural exports to TPP countries. Agriculture, in turn, accounts for 7 percent of total US exports, and half of these are shipped to TPP countries. The prevalence of high agricultural tariffs is an ominous sign, given a history of exceptions and delays for trade liberalization in prior agreements. For example, under NAFTA, it took up to fifteen years to phase in tariff reductions for the most sensitive agricultural products.

  • Pharmaceuticals - The Intellectual Property (IP) provisions under consideration go well beyond the standards established by the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Under WTO rules, pharmaceutical companies can obtain 20-year patents for inventions that are new and non-obvious. But according to this Public Citizen report, the TPP will enable pharmaceutical companies to: 1) extend their patents beyond 20 years, 2) re-patent medicines that are already known and thus are not necessarily inventions, and 3) block the registration of generic products. These extended IP protections may result in a decline in generic competition and an increase in drug costs.

In addition, a freer and more even trade flow between Asia and North America would create more business and enable more efficient transportation. In addition freight ships should benefit from cheaper and easier access to ports which will also contribute to lower overhead.

Therefore, in order to prepare for the impact of TPP or even decide on a position, you need to look at the end to end supply chain impact based on all the factors that apply to your specific industry and supply chain.

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