From: Daniel Schwanen
To: Canadians concerned about international trade
Date: January 4, 2019
Re: Welcome to the CPTPP - Year 2
The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) came into effect last Sunday, December 30, when a first round of tariff cuts took place between the six countries that first ratified the agreement: Australia, Canada, Japan, Mexico, New Zealand, and Singapore.
Year Two of the agreement actually started just two days later, on January 1 – the first day of the calendar year after the year in which it came into force. This means that a second round of tariff cuts took effect on that day (Except for Japan, where the second round will take effect on April 1.)
Vietnam has also ratified, which brings the deal into force in that country this week. At that point, Vietnam will join Year Two in progress – that is, it will implement two years of tariff reductions at once.
Four signatories have yet to ratify the pact: Chile and Peru are expected to do so soon, while Malaysia’s relatively new government is examining CPTPP afresh, in light of other trade partnerships it is also contemplating. Malaysian business groups, worried about competition from Vietnam, have urged the government to ratify. Brunei, surrounded on land by Malaysia, may await that nation’s decision before going ahead.
Tariffs will continue to fall each year, on a schedule that depends on the country and type of product, until all tariffs are gone in 2032, except for certain agricultural commodities that will still be subject to tariffs above a certain duty-free quota. Indeed, in such cases, such as for milk imports into Canada, the full duty-free quota may not be available for up to 20 years. But for the vast majority of goods, tariff elimination will happen much earlier.
Along with the expected entry into force of the EU-Japan Economic Partnership Agreement in February, the CPTPP’s coming into effect is a significant bulwark against the further spread of barriers to trade. New barriers imposed by WTO members between October 2017 and October 2018 have affected US$588 billion of annual international trade, a seven-fold increase compared with the previous 12 months. Most come from Donald Trump’s war on China and on steel and aluminum imports from many nations, but protectionism is also trending in other countries.
For Canada, the economics of the CPTPP without the United States are very different than those of the Trans-Pacific Partnership initially envisaged with the United States, prior to the US withdrawal two years ago.
With the US out, Canadian producers will have a definite advantage over their US competitors in markets with which the US does not have a free trade agreement, namely Japan, Vietnam, New Zealand, as well as Malaysia and Brunei if they decide to ratify. They will also be able to compete more effectively in markets with which the US already has an FTA in place but Canada does not, namely Australia and Singapore. In total, the CPTPP will eliminate or reduce barriers, including regulatory barriers, on some $18 billion of Canadian merchandise and commercial services exports to these markets, supporting their further expansion.
To be sure, competition in the Canadian market will also intensify, notably as a result of the phase-out over four years of tariffs on autos with only 45 percent CPTPP content, and auto parts with between 35 and 45 percent CPTPP content. Canadian producers will also face more competition in countries with which we already have free trade agreements but to which some other CPTPP countries will now have duty-free access, namely Mexico and Peru (Chile already had bilateral agreements with all other CPTPP countries). But there will also be more opportunities with new regional rules of origin to efficiently combine inputs or integrate value chains from these and other CPTPP economies. Overall, Canada will do better within the CPTPP than if it had not entered into the agreement.
More importantly perhaps, with new partners likely to join in the near future, the CPTPP is an important step toward putting Canadian business on a more secure footing in a still rapidly growing Asian market, and toward maintaining as open a global trading system as possible. For these reasons, Canadians should avidly support this, in its second year within a week.
Daniel Schwanen is Vice-President Research at the C.D. Howe Institute
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
