Trans-Pacific Partnership: Exit and Implications

On January 23, 2016, his third day in office, President Trump followed through on a campaign promise and signed an executive order to withdraw the U.S. from the free trade agreement known as the Trans-Pacific Partnership (TPP). The move underscores the new administration’s “America First” global view of trade. Now that the deal is off the table for the U.S., what does the future hold for U.S. manufacturers?

Background

In 2015, 12 nations representing roughly 40% of the world’s gross domestic product (GDP) reached the international trade agreement known as the TPP. The nations include:

• Australia
• Brunei
• Canada
• Chile
• Japan
• Malaysia
• Mexico
• New Zealand
• Peru
• Singapore
• United States
• Vietnam

The intent of the agreement was to even the economic playing field that China and India have long dominated in East Asia by eliminating tariffs between the countries for the trade of goods and services. While many manufacturers were wary of the TPP, fearing a threat to U.S. jobs, the National Association of Manufacturers announced its support of the agreement in early 2016.

However, the TPP, along with the North American Free Trade Agreement (NAFTA), became a hot button during the recent campaign with both parties’ presidential candidates opposing it. In his final weeks in office, then-President Obama dropped plans to seek ratification of the 5,000-page agreement. President Trump has announced plans to pursue bilateral trade agreements in place of the TPP. Still, with NAFTA set to be renegotiated, the future of U.S. manufacturing is in flux.

Implications of Non-Ratification

Because TPP was never ratified, it is impossible to state with certainty what effect, if any, it would have had on the industry.

While some manufacturers were wary of the TPP, fearing a threat to U.S. jobs, the National Association of Manufacturers announced its support of the agreement in early 2016, claiming that the TPP would open markets and put manufacturers in a better position to compete in an important region of the world.

Further, there is the question of who the TPP would have benefitted the most. Some opponents believed the income gains would only have benefited workers with higher incomes and were doubtful the benefits would “trickle down,” in the U.S. top-down-driven economy of the past several decades.

TPP proponents expected a strong boost in exports and economic growth—all leading to more jobs and prosperity for the countries that chose to ratify. The Obama administration claimed the TPP would increase U.S. competiveness in the Asia-Pacific region and support more than $2 trillion in the U.S. exports of goods and services annually. Conversely, the World Bank estimated that the partnership would have little impact on overall U.S. GDP (0.15 %, at best) because the two largest U.S. trading partners – Canada and Mexico – have already cut tariffs on U.S. goods as part of NAFTA.

According to a June 2016 report by the nonpartisan U.S. International Trade Commission (ITC), the U.S. trade balance with TPP countries was expected to increase over 15 years, but the overall trade deficit was unlikely to change very much. What’s more, the ITC report predicted the TPP would boost both U.S. agriculture and service industries, but hurt the manufacturing sector.

The Future for Manufacturing and Distribution

With or without TPP, the U.S. manufacturing sector must focus on jobs, job training, global issues (both from an import and export front), taxes and regulations.

President Trump has assembled more than 20 manufacturing executives to serve as an advisory group; the group meets with the President, Vice President Pence, Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross. The group has been divided into working groups and tasked with making recommendations for policies on taxes, trade and job creation.

Additionally, among the executive orders signed in the first 100 days of the Trump administration was the “Presidential Memorandum Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing.” This measure directs executive departments and agencies “to support the expansion of manufacturing in the U.S. through expedited reviews of and approvals for proposals to construct or expand manufacturing facilities and through reductions in regulatory burdens affecting domestic manufacturing.”

If enacted, this could be positive news for manufacturers seeking more favorable economic conditions for expansion. On the flip side, an increased emphasis on “Buy America” can be difficult to achieve in a global economy where supply chains are international.

Striking a balance between creating opportunities inside our own borders while continuing to take advantage of global commerce will be an ongoing challenge and one the Manufacturing Team at Smith and Howard will closely monitor. Please check back often for updates, or subscribe to our monthly Manufacturing Matters newsletter by clicking here.