Now that the trade ministers of the 12 countries negotiating the Transpacific Partnership (TPP) have finally come to an agreement in principle, it is a good time to provide a broad assessment of the agreement for the Canadian economy. Obviously, the devil is in the details and we will have to wait until the agreement is made available to the public in order to provide a more detailed assessment. Overall, I think that it is fair to conclude that the agreement should be positive for Canada, provided that the agreement is implemented in full, and is adequately enforced.
On the offensive side, the TPP does a number of things. First, it modernizes the North American Free Trade Agreement (NAFTA), which is now 20 years old. Many experts and business people had been asking for years for a revamp of the NAFTA. With the TPP, this should finally be the case. Although, many firms expanded their operations to become more regional as a result of the opportunities offered by the NATFA, the reality of global value (or production) chains is such that many firms, including small and medium-sized ones, can no longer limit their focus to the national or the regional level; they have to think more globally, either for their own production or that of their clients. The TPP should make it easier for Canadian firms to expand their value chains as well as to integrate themselves in those of their clients.
Second, the TPP opens up new markets for Canadian firms. Japan is the fourth largest economy in the world, after the United States, the EU and China. Malaysia and Vietnam are emerging economies that are increasingly integrated into Asia's manufacturing networks. As such, Canadian firms will be able to export more of their products and services to these countries, taking advantage of the region's relatively higher growth rate. It will also facilitate investment in these countries. For instance, if a Canadian mining company wants to invest in, let’s say, Malaysia, then the Canadian service providers that this company usually uses could accompany it in Malaysia.
Third, with respect to imports, the TPP will make it easier for Canadian companies to import components and equipment from Asian members of the TPP in order to improve their productivity and quality, thereby ensuring that they remain competitive not only on the Canadian or US market, but all over the world.
From a defensive perspective, the TPP is an agreement that Canada could not afford to pass on. Otherwise, Canadian firms would have found themselves at a competitive disadvantage in most TPP economies, including the United States. For example, a Japanese manufacturer like Toyota or Honda wanting to export a car to the United States could have it assembled in either Canada or Japan. Under TPP rules, the Japan-assembled car will be exported tariff-free to the United States. as long as it has at least 45 per cent of its content from within the TPP area (the remaining 65 per cent could technically come from China). For the Canada-assembled car, without the TPP, it could only enter the United States tariff-free if 62.5 per cent of its content is from the NAFTA region; otherwise, it has to have the tariff applied. So, if Canada had decided to remain outside the TPP, the Canadian plants operated by Honda, Toyota, GM, Ford and FCA would have been at risk of closure. The same logic applies to Canadian auto parts manufacturers.
In sum, at first glance, the TPP agreement should be good news for the Canadian economy in the future. At a minimum, it is an agreement that Canada could not afford to stay out of. At a maximum, it is an agreement that will allow Canadian firms to become more competitive both inside and outside the TPP, assuming that they take full advantage of what the TPP has to offer.