What it means
A trade agreement is a treaty in which countries agree to lower the taxes and barriers on goods and services crossing their borders. The TPP aimed to go further than most, covering tariffs, rules on intellectual property, labour standards, environmental commitments, state-owned enterprises and electronic commerce.
Supporters saw it as a way to write modern trade rules across a group of economies. The agreement was signed in early 2016 by twelve countries, including the United States, Japan, Canada, Australia, Mexico and Vietnam.
It needed ratification, meaning approval by each country's legislature, before taking effect. In January 2017 the United States announced its withdrawal, which meant the original deal could not come into force as written.
The other eleven countries kept working. They renegotiated a version called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, which was concluded in 2018 and came into force later that year for the first countries to ratify.
It kept most of the original text while suspending a small number of provisions that mainly mattered to the United States. For businesses, the main benefits of such agreements are lower tariffs, simpler customs procedures and clearer rules, which reduce costs and uncertainty.
Exporters may gain access to new markets, and importers may pay less for inputs. The gains depend on the sector, the rules of origin, which determine whether a product qualifies for the lower tariff, and how fast tariffs are phased out.
There are also criticisms and risks. Opponents have raised concerns about the effect on jobs in industries exposed to imports, about drug and copyright rules, and about the way investors can bring disputes against governments.
Economists generally find that trade agreements raise overall trade and income, but the benefits and costs are unevenly spread. Because the situation has changed since 2016, anyone relying on the agreement for planning should check the current membership and tariff schedules directly with official sources.
Rules and phase-in dates can also change as new members join.
In practice
Real-world examples.
Example
A New Zealand dairy exporter sells cheese to a partner market where it previously faced a tariff of 20%. A lower tariff lets it cut its price by about 5% and still earn the same margin. The exporter hires extra staff to meet higher expected demand.
Example
A Vietnamese garment maker uses fabric from partner countries and sells clothing abroad. Rules of origin decide whether the clothing qualifies for lower tariffs. The company reviews its supply chain to make sure enough of the inputs come from member countries.
Example
A Canadian software firm uses the e-commerce chapter, which limits requirements to store data locally, to expand into several Asian markets. It avoids the cost of building a data centre in each country. Its legal team checks the rules before signing each new contract.
Formula
Calculation
Annual tariff saving = import value x (old tariff rate - new tariff rate)
Suppose a Canadian importer buys $10,000,000 a year of goods from a partner country, and the tariff falls from 8% to 0% under a trade agreement of this kind. Annual tariff saving = 10,000,000 x (0.08 - 0.00) = $800,000. If the importer passes on half of the saving to its customers, it keeps 800,000 x 0.50 = $400,000 as extra margin.Case study
Seen in the real world.
Kestrel Bay Timber is a fictional wood-products exporter, and this case is illustrative. It sold about $20,000,000 of timber each year to a country that charged a 6% tariff. When a trade agreement phased the tariff down to zero over five years, the company's finance team modelled the effect on prices, volumes and margins.
The model showed that if it kept prices unchanged the company would gain $1,200,000 a year, but competitors in the same market also benefited. In this illustrative story, the firm cut prices by 2% to defend its market share and still increased profit by about $800,000 a year. The lesson is that tariff savings are shared between exporters and customers.
Watch out
Common mistakes.
- Assuming the original TPP is in force. The United States withdrew in 2017, and the deal as signed never took effect.
- Confusing the TPP with the CPTPP. The CPTPP is the successor agreement among the remaining members, with some provisions suspended.
- Assuming every product gets lower tariffs immediately. Phase-in periods and rules of origin decide when and whether a product benefits.
Questions
People also ask.
Which countries signed the original TPP?
Twelve countries signed in 2016, including the United States, Japan, Canada, Australia, Mexico, Vietnam, Singapore and Chile.
What happened to the US?
The United States withdrew in January 2017 and did not ratify, so the original agreement could not enter into force.
How do I check the current rules?
Consult the official trade ministry or the CPTPP member governments' publications for the latest membership and tariff schedules.
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