Prime Minister Lee Hsien Loong stressed the importance of the Trans-Pacific Partnership during his recent US visit. But what is it, and why does it matter?
If you’ve been following the news, you may have heard Prime Minister Lee Hsien Loong emphasise the importance of something called the Trans-Pacific Partnership (TPP), during his visit to the United States.
Also this week, Republican Presidential candidate Donald Trump accused the TPP of allowing Singapore to steal jobs from Americans. His rival candidate, Ms. Hillary Clinton, was formerly in favour of it, but has also spoken out against the TPP.
If you’re wondering what the ruckus is about, here’s a quick explanation of why the TPP matters:
What is the TPP?
The Trans-Pacific Partnership is a trade agreement between 12 countries. These are:
- The United States of America
- New Zealand
At present, Singapore already has its own trade agreements with all of those countries, with the exception of Mexico and Canada. Should the TPP be passed however, the overall effect will strengthen Singapore’s economy. For example, if Japan begins to ship more cars to the United States due to the TPP, Singapore stands to profit from the increased use of our ports and shipping services.
What Does the TPP Do Exactly?
Every country has its own tariffs and laws when it comes to imports and exports. For example, it is much more expensive to buy tobacco in Singapore than in, say, Indonesia, because the government levies additional conditions to discourage smoking.
Some countries will raise high tariffs on products that they also produce. Australia, for example, is known for having high tariffs on certain agricultural products. This is because Australia also has a large agricultural industry, and they don’t want to damage local businesses by allowing the import of cheaper agricultural products.
(Politics is also involved. No political party wants to be seen as responsible for creating competition for local businesses).
The concept behind the TPP is to remove all these tariffs, and standardised the import / export laws for all the participating countries.
At present, if a Singaporean company wanted to sell its products in Canada, it would have to go through several hurdles. It would need to factor in the cost of any tariffs, regulations about whether its products meet Canada’s requirements (such as safety standards), and other factors like labour conditions (they may be required to hire a certain number of Canadians to do business there).
The inverse is also true: a Canadian firm wanting to expand into Singapore has to cross the same hurdles.
If we can standardised the trade rules between all the participating countries however, we will open a market of potential customers that is several hundred times bigger than our domestic market. Instead of selling to just five million odd Singaporeans, our businesses can easily reach out and sell to a market of several hundred million customers, from all 11 other TPP members.
As it stands, the TPP might eliminate some 18,000 tariffs.
The TPP Makes It Easy for Singaporean Business to Expand
There are significant perks which accompany the removal of trade barriers. It will be easier for businesses to attract foreign investors, international ties could be strengthened, and there are better prospects for Singaporeans to work overseas (when companies from abroad set up here, they will hire Singaporeans. And when you work for a foreign company, you have a greater opportunity to move and work elsewhere).
Because our businesses can sell to a customer base of several hundred million potential customers, from the United States to Mexico, it will be easier for our businesses to expand. That means higher employment figures, and better prospects for raising wages.
With regard to consumer spending, we’ll also have more competitively priced imports. With no tariffs on goods from Canada, for example, Canadian goods become more affordable.
Why All the Controversy?
There is a fear that cheap imports can hurt local businesses. For example, an electronics manufacturing firm in Singapore may not be happy at seeing a Peruvian competitor move into our local market, thanks to the lack of tariffs or customs barriers.
One of the main problems is that the TPP is a mix of developed countries, and emerging markets. In countries that are still developing, their weaker currency means the companies there are able to “price war” businesses in developed countries. Countries like the United States are worried that, because their businesses have products and services that are more highly priced than those in smaller economies, their businesses will suffer.
There is also worry about “off-shoring”, a process by which companies will set up abroad in order get access to cheaper labour. An American company could, thanks to the TPP, set up its manufacturing plants in Singapore, Malaysia, Mexico, or some other country where they would pay less for labour. This is why many of them accuse the TPP of “stealing jobs”.
Another worry is the application of copyright laws across all member states. Pharmaceutical companies, which have patents on the drugs they invent, want to be able to control the prices of those drugs. At present they can’t, because nothing stops, say, a Japanese pharmaceutical company from copying a drug designed and made by an American company.
But if pharmaceuticals companies can control drug prices, there is a worry they may jack up medical costs to the point where they are unaffordable.
There are just some of the worries involved. In general however, trade agreements like the TPP tend to cause controversy, especially among richer member states. There has long been a common perception that trade agreements are only beneficial to companies, which want to get access to cheaper suppliers and employees.
The TPP is Unlikely to Succeed at This Point
As both Hillary Clinton and Donald Trump have rejected the TPP, the odds are low that it will come to pass. President Barack Obama was in favour of it, but it seems he has run out of time to make it a reality.
The failure of the TPP will not be crushing to Singapore, but it would represent a missed opportunity for our businesses.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.