The many hidden costs of joining the TPP

These protesters greeted the arrival of US President Barack Obama in November, 2012, and opposition to the Trans Pacific Partnership (TPP) has not weakened since then. (Bangkok Post photo)

The Trans-Pacific Partnership Agreement (TPP), comprising 12 nations, was finally signed in early February after more than 19 rounds of tough negotiations in a span of over five years. As it is expected to start operating about two years from now, there is widespread speculation as to how the TPP would affect Thailand. While the overall impact is ambiguous at this stage, the present assessment shows some interesting facts about Thailand's trade prospects post-TPP.

Thailand's total trade with the present TPP countries has increased over time and has reached US$176 billion (37% of Thailand's total trade) per year, of which $92.2 billion is exports and $83.7 billion is imports, giving Thailand a trade surplus with TPP countries in 2014.

Although TPP countries constitute 36% of global GDP, Thailand already enjoys free trade agreements (FTAs) with nine countries of the current 12 TPP signatories (the US, Canada and Mexico are the exceptions). These nine countries together account for more than 70% (about $65 billion in 2014) of Thailand's total exports with the present TPP countries. In addition, all the TPP countries are already members of the World Trade Organisation (WTO), so TPP countries that Thailand does not have an FTA with already cannot raise their average bound tariff on Thailand's exports above 3.5% and 6.7%, respectively, even if Thailand stays out of the TPP.

Ready for TPP: Economy czar Somkid 'ready to sign'

What is intriguing about the joining or the non-joining of Thailand is how much it gains or loses in a post-TPP scenario. The estimation is based on the World Integrated Trade Solutions (Wits) simulation model, which assesses the impact of tariff cuts within the TPP bloc on exports and imports of member countries as well as excluded countries.

Assuming that implementation of the TPP will bring down the tariffs between TPP countries to zero, the simulation gives an assessment of two possible outcomes for Thailand.

The Wits model reveals that if Thailand joins the TPP bloc, Thailand's exports would rise by around $2.8 billion annually as against the rise in annual imports by $4.3 billion with the TPP countries leaving a net annual worsening in its balance of trade of $1.5 billion.

If Thailand remains out of the present TPP, the model shows that even if all tariffs are eliminated between the present TPP signatories (which the TPP does not do), Thailand's exports would decline by $396 million annually with the TPP countries, making a decline in the trade surplus with TPP countries from the existing $8.4 billion to an $8 billion surplus.

However, this does not take into account the "yarn forward rule of origin" in the TPP, which requires thread and fabric to come from TPP countries in order for finished clothing exports to get lower tariffs into the US and therefore restricts the amount that existing TPP countries can increase their exports of clothing to the US.

The yarn forward rules mean that in practice Vietnam and Malaysia's textiles and clothing manufacturers will have to use the more expensive US yarn (compared to the cheaper Chinese yarn) for their clothes to count as "made in Vietnam/Malaysia" to get the lower US tariffs under the TPP and by the time they use the more expensive US thread, even with zero tariffs, the Vietnamese/Malaysian clothing will be more expensive than Chinese clothing, made in China, with the cheaper Chinese thread which pays the US tariffs. So this is why it's not expected that Vietnam/Malaysia will be able to significantly increase their textile/clothing exports under the TPP, so they won't be stealing much market share in the US from any Thai exporters, etc.

Since Thailand's trade balance is worse if it were to join the TPP, compared to if it stays out of the trade partnership, it is not clear where Thailand can benefit from the TPP in a way that can compensate for the likely losses to Thailand from the other 24 chapters of the TPP. For example, the TPP's intellectual property chapter alone will keep the prices of medicines and textbooks high in Thailand for longer and increase the cost of inputs for Thailand's farmers and manufacturers.

Even with overly optimistic assumptions of the potential gains to Thailand (like assuming all the tariffs between TPP countries are removed and there is no yarn forward rule), if Thailand joins the TPP, its goods trade balance will worsen by $1.5 billion a year. Whereas if Thailand stays out of the TPP, its goods trade balance only worsens by $396 million a year, keeping its trade surplus with TPP countries, it would just fall from $8.4 billion a year to $8 billion a year (and this is also likely to be an overestimate of Thailand's losses as the existing TPP countries will not face zero tariffs on all their exports and will have to comply with rules of origin such as the yarn forward rule which reduces the ability to take advantage of the lower tariffs).

If Thailand joins the TPP, in the goods chapters (the chapters where Thailand should improve its trade balance by increasing its exports by more than its imports to have benefits to offset the costs of the other 24 TPP chapters it will actually be 3.8 times worse off than if it stayed out of the TPP, not to mention the costs for Thailand of the other 24 TPP chapters.

Data shows there are no trade balance export benefits to offset the problems for Thailand from all the other TPP chapters which are worse than the Thai-US FTA which the Thai National Human Rights Commission described the deal by stating "an FTA is like a tsunami that crashes to the shore without warning when one is not prepared to deal with it".

Note: All the numerical figures used in this article are based on the Smart simulation and ComTrade data of the Wits.

Pritish Kumar Sahu is a Senior Lecturer at Multimedia University, Malaysia. He holds a PhD in economics from Jawaharlal Nehru University, New Delhi and has worked on several trade agreement issues in recent years.