A New Era of Trade

Estimated reading time: 2 minutes

Seventy years of trade-policy reform have substantially reduced tariffs, yet they remain an impediment to global trade.

Tariffs constitute a direct tax on traded goods. They can lead to higher prices for consumers or squeeze profits for producers. They raise the cost of conducting international trade, reducing import competition or weighing on export growth. Yet tariff elimination is controversial, because it increases the exposure of domestic industries that compete with imports to foreign competition.

Nevertheless, the new Trans-Pacific Partnership (TPP) Agreement will cut tariffs for its 12 member countries on more than USD500 billion of trade annually. The TPP aims to eliminate substantially all tariffs, subject to some exceptions and phase-out schedules, with no member able to increase existing customs duties or adopt new ones.

Some USD630 billion – about a third of annual trade among the TPP countries – remains subject to tariffs. Indeed, for Chile, Peru and Vietnam, more than 90 per cent of imports from other member countries face duties. Yet, once in force, the TPP will immediately liberalise up to 86 per cent of the trade currently subject to duties, with the vast majority of tariffs falling to zero.

Much trade between TPP members is already duty-free because of existing pacts such as the North American Free Trade Agreement (covering the US, Canada and Mexico), or the agreement between Australia and New Zealand. Several TPP countries also maintain bilateral agreements that have liberalised certain tariffs. And Singapore needed to make no new tariff concessions because all its trade with TPP partners is already duty-free.

The focus now is on liberalising the remaining duties. Even low tariffs can be a nuisance, creating an administrative burden that creates a hurdle to trade. And tariff peaks remain in sensitive sectors, such as apparel, sometimes adding 10 per cent or more to the cost of an imported product.

Tariff elimination may give exporters new opportunities even where current flows are not substantial. For example, once TPP is fully implemented, US exporters of motor vehicle products will enjoy duty-free access to the growing Vietnamese consumer market instead of facing a tariff rate of almost 25 per cent of their value.

The negotiators have had success in eliminating most of the remaining tariffs across the TPP region, which should help to expand trade meaningfully. Growth will come not only from increases in existing trade flows, but also from opening trade corridors that are currently inactive because of prohibitive tariffs.

However, tariffs are just one dimension of market openness. The main text of the TPP runs to roughly 600 pages plus hundreds more pages of schedules, side-letters and appendices. That size reflects the scope of the liberalisation. Tariff reductions will be complemented by liberalisation in other areas, such as services trade, customs administration, intellectual-property rights or regulatory matters.

The TPP is a living agreement, open to new members and able to address additional new trade issues as they emerge. It thus has the potential to adapt and may set standards that can be extended to other regions or eventually be applied globally.